Short Sales 

Selling a property at a price less than is owed on the mortgage for the property.  The property is being "sold short" or for less money than the remaining balance amount of all the (mortgages and other Liens) and the seller usually does not have funds available to pay the deficiency. To do a short sale you must have a licensed Realtor such as myself, a letter describing the reason for the default or hardship letter and a buyer.  In additon, in order to accept the short sale offer from a new buyer, the financial institution may require the home owner or seller sign a promissory note or contribute cash back to the mortgage holder.

Pre-Foreclosure:

A "Pre-foreclosure" typically occurs when the seller is not current on the payment of the encumbrances on the property and the encumbrance holder has provided notice of possible foreclosure proceedings (Lis Pendens) or, has already begun foreclosure proceedings. If you do receive a notice of "Lis Pendens" contact an attorney and me a Realtor to help you initiate a short sale and hopefully stop the foreclosure.

Financial institutions would rather not foreclose on a property and take it back because it costs them approximately $60,000 to do a foreclosure. Further, they are in the money business and would rather not be in the real estate business as owners of real estate, that is why it is advisable to talk to them and your realtor to determine your best course of action. If you do go through a foreclosure the financial institution holding the mortgage can file a deficiency judgement against the home owner for the amount of money lost.  This deficiency judgement can be enforced up to twenty years after the foreclosure.

Another factor to investigate is the type of loans on the property, Recourse or Non Recourse Loans?  With a recourse loan, If the lender grants a short sale or goes into a foreclosure, the lender can still seek a deficiency judgement after the sale. In other words, the lender may seize other assets belonging to the defaulting homeowner to cover the lender's loss. Most Home Equity Lines of credit (HELOC)  or a form of second mortgage are Recourse loans.  With a non-recourse loan, the lender's only option is to foreclose on the property and may not seek a deficiency judgement. Allegedly most First mortgages in the State of Florida are Non Recourse loans.

Further, the financial institution can send a 1099 to the IRS for the amount of money they lost which will be phantom income to the former home owner who could be liable for taxes on that amount. For a short period ending at the end of December 2012 due to the Mortgage Forgiveness Debt Relief Act of 2007, this "phantom income" may not be subject to tax on primary residences.   

Owners of property that are "underwater" on their property (the present value of the property is under the total amount of all mortgages and liens  owed), often get into this type situation because of a drop in property value due to economic reasons and or having more than one mortgage. 

Loan Modification:

Individuals that are up to date on their payments can sell the property short in an effort to get out from under the mortgages however, it is strongly recommended that before proceeding to sell the property contact  me as your realtor and the financial institution that holds the mortgage. The financial institution may be able to help you keep the home by renegotiating your mortgage by doing a loan modification such as the (HAMP) Home Affordable Modification Program. Further, they may advise you of some other alternatives such as the (HAFA) Home Affordable Foreclosure Alternative. The HAFA program may prevent a deficiency from being filed against you. Working with the financial institution you may be able to keep the home, salvage your credit rating and soften any phantom income. For active duty military with orders to transfer, there is the (HAP) Homeowners Assistance Program funded by the Army Corp of Engineers for all branches of the military including the U.S. Coast Guard. It is a form of short sale with the major difference being the Army Corp of Engineers can become the buyer of the home and then resells it. To be eligible for the HAP program today you must have had a home under contract before July of the year 2006 and have orders to transfer to another assignment.  The Corp of engineers will pay off a portion of the balance of the mortgage not covered by a buyers purchase price of either cash or financed.  As a realtor I can help you review your solutions, please call me. 

Recently I had the opportunity to view a bank proposal to renegotiate a customers loan by doing a loan modification. The Bank lowered the interest only loan rate to 3.50% for the first year with .25% increases per year every year after that with a maximum interest of 7.50%. In addition, the bank forgave past due late fees and had the loan convert after ten years, to a  loan covering principle and interest if the customer agreed to accept the new agreement. Further, the loan was extended to another 30 years after the prospect had already made 5 years of payments. 

This is only one example of how lenders are attempting to work with customers that are in danger of losing their homes because of changes in their economic situation and or increases in interest rates with homes that are often underwater. If this loan modification does not help the borrower the only other recourse is to sell the home short.To do a short sale you must first, have a licensed realtor who will put the home on the MLS Multiple Listing Service to promote the sale of the home, write any offers on legal contracts and submit to the mortgage holders.  Second, you must have a qualified buyer that has cash or can get a loan and third, a written hardship letter stating the reason for the default (loss of job, divorce, major illness, interest rates that have adjusted too high) and submit the letter to the mortgage holders.

Foreclosure:

Individuals that are missing or behind on mortgage payments need also to contact their mortgage holder before attempting to sell the home or worse case abandon it.  In this situation you may be in eminent danger of losing the home back to the financial institution "forclosure" and ruining your credit rating.  Even though you may lose the home to foreclosure, working with the financial institution and your realtor you may be able to salvage your credit and soften any phantom income. In addition the mortgage holder may offer you "Cash for Keys" as an incentive for you to move out, giving them the keys so they can foreclose on the property and resell it.  If the only solution is to sell the home I can help you, please contact me. 

Strategic Default:

The decision by a borrower to stop making payments (i.e. to default) on a debt despite having the financial ability to make the payments. This is particularly associated with residential and commercial mortgages, in which case it usually occurs after a substantial drop in the houses price such that the debt owed is considerably greater that the value of the property.  The property has negative equity or is "underwater" and is expected to remain so for the foreseeable future.  Such borrowers are often called "walkaways."  In this type situation the mortgage holder will foreclose on the property unless a short sale can be negotiated before the foreclosure is processed. "Trailing Homes," a recent situation where a home owner attempts to purchase another home and is unable to sell their present home that has a mortgage that is underwater. Their present home is the trailing home that they will attempt to keep and rent because they cannot sell it for a decent price because of fallen home values. Some lenders are taking a close look at these situations and may request the borrower on a new loan that has a trailing home, put additional money covering PITI on the first home mortgage in escrow and possibly additional monies in escrow to cover PITI on the new loan. The financial institutions are finding especially if the home owner has no experience in renting property, there may be a long vacancy which is an additional debit for the homeowner that they may not be able to cover. Further,  financial institutions holding mortgages on property are finding a situation called a "Buy and Bail"  where the mortgagee is up to date on their present mortgage and attempt to buy another home.  Some buyers with mortgages underwater are buying other property, sometimes very similar to their existing property at prices substantially below the price they originally paid for their present residence. Once they close on the new property they stop making payments on the original property and bail out of the original mortgage and go into foreclosure.  Some Banks doing Federally insured loans such as VA or FHA loans may require a new mortage applicant with any existing mortgaged property or trailing home  set aside liquid assets of up to six months to cover the PITI on the original and new mortgage before they will approve the new mortgage. The banks rational is if the borrower bails on the old mortgage, they have a foreclosure on their credit, may be issued a 1099 for phantom income whose taxes will be due the IRS and most probably subject to a deficiency judgment that can be enforced up to twenty years.  Actions that can all put a strain on the mortagees ability to continue to perform on the new mortgage and possibly causing another short sale or foreclosure. 

 

Impact on Credit Scores: 

Short Sales, Strategic Default, Foreclosures and Deed in Lieu of Foreclosure all have an impact on your credit score.  Short Sales allegedly have less of an impact on scores than Foreclosures which can be the worst.  The waiting period before you can qualify for any type conventional financing is a little less with a short sale.  Doing a short sale you can try to qualify for another loan after 2 years, foreclosures and deed in lieu you would have to wait 3 years before trying to qualify. If you foreclose on a property FNMA  may prevent you from getting a loan on one of their properties for up to seven years. 

Short Sales are not recommended to be purchased by first time buyers, especially buyers that must be moved into a home within one or two months and are financing a loan to make the purchase.  Most short sales will not pass inspection for a loan especially a federally insured loan such as FHA or VA. 

Buyers of Short Sales:

Major problems for a buyer purchasing a short sale. 

Short sales are really not for first time buyers and should especially be avoided by first time buyers  needing financing or must be moved into the home within a few months.

Many financial institutions or encumbrance holders take three to six months or longer just to decide on an offer.....after acceptance of an offer by the actual seller and buyer. Some Financial institutions holding the mortgage on a short sale will continue to accept other offers and eventually take the highest offer and leave all the remaining offers behind. 

Properties are usually sold "as is" and the mortgage holder will not make any repairs which may eliminate some buyers doing federally insured loans such as FHA or VA. Many short sales will not pass appraisel and inspection on Federally insured loans and unless the encumbrance holder, seller or financial institution is willing to make the needed repairs, buyers financing the property will be unable to obtain a loan and purchase the property.

Some properties have been vandalized, have missing appliances, utilities are off and may not be in a condition to be activated to conduct a comprehensive home inspection, especially if electrical wiring has been ripped out or plumbing fixtures are missing.  

Most short sales are purchased by investors for cash and are willing to take them "as is".  Attempting to finance a short sale you will be competing with cash investors willing to wait and pay their own closing costs.   

Because of rising home values, encumbrance holders are now asking prospective buyers of shorts sales for more money.  Encumbrance holders have final approval even though a prospective buyer may have a signed contract from the seller, the encumbrance holder or Bank that has the mortgage drives the transaction.  If the prospective buyer is not willing to accept the increased price, the property goes back on the market into the MLS as a preforeclosure usually with the new increased price.  Unless you as a buyer have cash, don't need to be in a home on a quick schedule and can obtain financing above asking prices on short sales, short sales should be left to the purchase by investors or individuals that can obtain  higher loan financing.

Advantages for a buyer purchasing a short sale. 

Great opportunity for investors who can wait for a decision, have cash and will purchase the property "as is".

You could obtain a good property at a fairly low price. 

If you do find a property that is in good shape and will pass inspection and appraisel, the property could be a real bargain and can be flipped for more money.  

Most Financial institutions are more willing to do a short sale rather than foreclose on a property.

Many buyers drop out of the offer because of the long decision time, this could speed up the process on other remaining offers or the next offer submitted. 

You can continue to shop other properties while your offer is being considered, if you find something better and providing their is no acceptance, you could drop out and make an offer on the new property.

If you pay cash you may be able to close faster and if you are handy and able to make your own repairs, save a lot of money. 

In summary the process for a seller to sell a home short is as follows:

Loan Modification- work with the mortgage holders and your Realtor.

Short Sale-work with a Realtor and the mortgage holders.

Pre-foreclosure-work with a Realtor and mortgage holders to postpone 

Foreclosure- work with an attorney, Realtor and mortgage holders.

There are many short sale properties on the market and allegedly more coming in the future.  The financial institutions have to speed up the decision making process, many are trying and hopefully in the near future they will be able to keep up with the increased demand. Having recently obtained the Loss Mitigation Certificate (LMC) I have extensive additional  training in both listing, buying short sales and have completed many short sale transactions. Further, I have access to all short sales available in the Jacksonville market and can make them available to a prospect that is interested in purchasing one or a number of these properties. Contact me at 904-608-5681 or e-mail: tomsells@bellsouth.net  if you want more information or help in purchasing or selling one of these properties.

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