Short Sales Getting a Bad Rap?
Written by: Michelle Berry
For the most part short sales transactions have had a pretty bad rep, and maybe that was warranted for a while. I mean really, who wants to wait six months for a bank to issue an approval? The sellers are stressed, and often waited too long to put their home on the market, triggering a notice of default and the subsequent auction date to contend with. And the neighbors are miffed because short sales are seen as the biggest offenders in bringing property values down both in physical condition and price. For the most part, even we real estate brokers saw our short sale listings as a figurative albatross around our neck.
But short sales are just like the rest of the real estate market in that they are constantly changing and evolving. The banks have closed enough short sales now to realize that they are actually more profitable than originally expected, so they are revamping and tightening up their processes to cut down on the time needed to issue an approval. Bank of America has moved to the front of the line as far as short approval time now that they have moved short sales onboard www.Equator.com alongside their foreclosure listings.
Real estate firms and their brokers are also gaining a better understanding of short sales, in how they impact not only their sellers but the market as a whole. They are devising strategies to not only lessen the chances of cash at closing and promissory notes, but also to lessen the hit to property value as well. Most firms, like Knipe Realty NW, have in-house negotiators that focus on the tedious tasks involved, freeing up brokers to do what they do best…sell homes.
The most notable change is in the homes themselves. Sellers are coming to grips with their financial situation sooner and are putting their homes on the market before they are in an advanced state of distress. They are working cooperatively with their brokers to present the home as well as possible, thus presenting a home in good condition, typically at a great price.
So buyers no longer need to be quite so wary of short sales. They are becoming routine now for the banks and brokers alike meaning that it’s worthwhile to throw your hat into the ring and see if you can’t land a nice home at an even nicer price.
Short Sale FAQ’s:
What is a short sale? A short sale is when a seller owes more than the home is worth and needs to obtain the mortgage holder’s approval to accept less than owed to settle the debt. The main difference from foreclosed homes is that the seller still retains title, not the bank.
Why should I sell my house short and not just give it back to the bank? Simply, the bank doesn’t want your house. The latest from BofA is that they recover more on the dollar through short sales then foreclosure sales. It’s not so readily apparent in the Portland area, but banks have record numbers of foreclosed properties on their books. Properties that need maintenance, taxes paid, etc. More importantly, the impact to your credit will be less than if you allow the bank to foreclose. And looking down the line, those that have done all they can to settle their debt as opposed to walking away from it have a much stronger stance should banks decide to start pursuing deficiencies.
Will the bank pursue the deficiency? Every approval letter states that the mortgage holder retains the right to pursue the deficiency (or the difference between what is owed and what is paid to satisfy the debt). It is this negotiator’s opinion, and let me emphasize opinion, that if the seller has been denied a loan modification and forced by life circumstances to sell their home short, they will be the last to be pursued for deficiency, if pursued at all. And if they are pursued, they have a much stronger case than their neighbor who just walked away from their home and let the bank take it back.
If I sell my house short, will I have to sign a promissory note? Not necessarily. Most often promissory notes come from the second mortgage, and most often in the instance where the second mortgage was a line of credit that was used for cash and wasn’t original purchase funds. We have had success in negotiating cash at closing and promissory notes both either completely out of the deal or to a minimum. We have seen promissory notes on less than a quarter of our short sale transactions.
What impact will a short sale have on my credit? This is a tough question, as often sellers are financially distressed across the board, not with just their mortgage payment. Our advice is to always make your mortgage payments as long as you can, as late payments will hurt your credit every single month and possibly affect your ability to lease or rent housing after your home sells. But, a short sale is reported as “settled for less than owed” on your credit report, not as a repo or foreclosure, and the process of rebuilding credit can be started much sooner. This is significant in that the hit to your score is in the neighborhood of 100-150 points whereas a foreclosure can be in excess of 200 points. This is said with caution, as most people in this situation are also struggling to make payments on other debts. The best strategy is to take care of anything that requires your credit (i.e. – car financing, school loans, obtaining a lease, etc.) before you stop making payments and complete you short sale.
Will I really get $3000 in HAFA benefits if I sell my house short? Just like loan modifications, most short sales don’t qualify. At the time of this writing, Fannie Mae and Freddie Mac backed loans are excluded from any HAFA benefits, which make up about 90% of the mortgages out there. There are other requirements to qualify as well, but that’ll have to be another article!