WHAT IS A "SHORT SALE" in REAL ESTATE?

You might have heard the term “Short Sale” from time to time. But what exactly is a “short sale?”

Bear with me, I’m going to get real basic here for awhile: First let’s define the term: “Short” from the phrase “Short Sale.”

When the value of a home becomes significantly less than the amount owed on the home, it is said to be “short.” That’s slang for less of the actual value. The home “falls short” in value.

For instance, the owner has evidently let himself get into a financial bind. Obviously he can’t wait the years it will take for inflation to bring the value back up to what it was when it was purchased. And, he can’t afford to make the scheduled house payments.

This is a term people call being “upside down.”

What happens? The borrower either has to sell the property or face foreclosure. All of this means the proceeds from the sale of the home will “fall short” of what is owed the financial institution.

Possibly the solution is to make a deal with the bank to accept less than the amount owed. Yes, banks can do that. Especially in today’s slow housing market.

The bank has two choices: Accept the “short sale” and take a loss, or allow the home to go to foreclosure. As explained in my previous blog, no one really likes foreclosures.

In a foreclosure, the bank is stuck with real estate owned (REO). The problem: If the bank now owns the home, it must continue upkeep of the home, pay utilities, pay taxes, and keep it secure from vandals.

In a true foreclosure, the borrower would normally take a heavier “hit” on their credit score. In this topsy-turvy housing market with record numbers of foreclosures happening, the foreclosure typically no longer holds such a threat to the credit score.

Today a short sale and foreclosure hold similar “hits” to the credit score. Which sounds strange to me, but I understand that’s the case.

In a “short sale” the bank and borrower agree to sell the property for less than what is owed on it. The bank agrees to “take a loss.” The bank agrees to allow the borrower to sell the property as a loss. But this does not absolve the borrower from his debt to the bank.

The borrower may agree to sign a note for the balance of the loan not recovered in the sale of the property. Not all borrowers or banks do this. Why would a borrower even want to do this?

THE SHORT SALE:
Short sales are not good for the neighbors. The home is now on the market for substantial lower price than the competing properties. (This brings down property values)

Let’s say the home has a mortgage on it for $300,000. The seller (who is also the borrower) puts the home on the market for $240,000. This results in a $60,000 short fall from the borrowed amount.

Suppose someone wants to buy the home at the short sale price. The seller then signs a contract with a buyer to purchase the home for $240,000. That’s not the end of it. The bank must now approve the proposed buyer and the sale amount.

HINT: In all “short sale” advertising you’ll see the terminology like: “subject to third party approval.”

Normally, the bank has “underwriters” (those are the hierarchy of people who must approve the amount of sale, and buyer). This underwriting may go through several “levels” of approval by the bank officers before the loan and buyer are approved. This delay can last for six months or more! Banks do not hurry this procedure.

Short sales are usually the LEAST EXPENSIVE WAY to buy a home. But it is also the most time-consuming, and even heart breaking. For example:

The bank “approves” the sale between the borrower and the buyer. A closing date is set for 45 days from the date of approval.

But it’s not over… If on day 44, someone else decides they like the “short sale” house they may put an offer on the home. The new buyer may make an offer to the seller for $250,000. Even though there’s a contract on the table for $240,000, the seller will likely present the new offer and throw out the $240,000 offer, EVEN UP TO THE TIME OF CLOSING, and kick the original buyer out of the picture.

Unfair? Not to the bank, seller, or new buyer. It’s just unfair to the original contract holder who’s losing a good buy on a home.

Buying a home on “short sale” can result in a MAJOR savings, but it can also be time consuming and very frustrating. If you decide to buy a “short sale” home, you need to be prepared for heartache and very long time delays by the bank.

As a result of today’s pretty bad housing market, the borrower may choose to just go into foreclosure, instead of hassling with bank in a “short sale” that may or may not go through. This is especially true today when the “hit” on the credit score is about the same. This happens more and more all the time. (And foreclosure also has its privileges.)

I’ll talk about the “foreclosure” process in another blog.

Good Luck!

FORECLOSURES -- maybe not

Foreclosure? Maybe not….

First of all, you just can’t imagine the angst involved with being in financial trouble. If you’ve never been there, you’re lucky, and probably can’t really relate. Also, if you’ve never been there, take a moment and put yourself in the shoes of those are in that situation. It’s a horrible feeling.

If you know someone who’s going through financial problems, help them! They probably see no hope. They see their world crashing down around them and they feel helpless to prevent it.

You don’t need to give them money. Give them hope. They feel so alone.

For those of you who are having problems with finances and your home loan, don’t let it get out of hand.

Don’t ignore the problem, that doesn’t help at all. It’s better to meet problems head on. The further you get behind, the harder it will be to overcome the situation. You CAN overcome it. It doesn’t seem like it now, but you CAN DO IT!

Contact your lender as soon as you realize there may be a problem. If you’ve already passed that point, contact the lender anyhow. The longer you wait, the worse it will become. They may have a solution for you; maybe a solution no one’s thought of yet.

When the lender sends you mail, OPEN IT! I know it may make your heart drop, but there may be a solution in there. Also, these letters may include some important notices and information about pending legal actions. Not knowing of an action is no excuse in court.

The lender does not want to foreclose on your property. (Sarcasm: )That’s all they need is another property to be responsible for, to pay the utilities on, to keep from being vandalized, etc. Many times they will work with you. Sometimes they’ll work out an equitable payment schedule to let you get back on track.

The lender will send you possible alternatives with their first notices. Consider them.

Find your loan and mortgage documents. READ THEM! Many times they’ll tell you of your rights, and give you information about what the lender can do if you don’t make your payments. Also, remember, especially in these times when there are so many foreclosures happening, the lender will most likely WANT to work with you and come up with a solution.

A while back, I was working with less than one possible foreclosure a month. Today I’m working with about five or more a week. So I know the lenders are being overwhelmed. Many of the lenders aren't even putting all of the foreclosures on the market, because there's so many it will drive prices realistically undown and hurt the normal home sales.

Get on the Internet and go to the Housing and Urban Development (HUD) web site. Learn about what foreclosure means, and what rights you have. Each state has different laws governing defaults on mortgages, so check out your state’s rules and regulations.

There are a lot of NEW ideas for preventing foreclosures available now that weren’t available just a year ago. Learn about them. Contact a HUD-approved counselor. They do have suggestions and ideas I’m sure you and your friends haven’t thought of. In fact, they have a whole “recovery” program set up now just to help you!

Above all… STAY AWAY FROM FORECLOSURE PREVENTION COMPANIES and those who have “schemes” that will help you. These will ¬not work. They can make your situation far worse for you and not only cause you to lose your home, but still have to pay for it after your home is gone. These are SCAMS! I don’t know of ANY that will work.

Find assets you don’t think you’ve got. Jewelry, cars; things you can sell. You may even cash in your life insurance policy. Take an extra job if you have to. Find all your resources and pool them to try to pay your loan. EVEN IF IT DOESN’T WORK, this will show the lender, you tried your best and will make sacrifices to stay in your home. This will go a long way to encourage the lender to help you even more. Remember, they WANT to help you.

In the past a lot of lenders wouldn’t work with you much. Many lenders were cold and heartless about what they considered as “deadbeats.” But in today’s times, most lenders will help you all they can. They understand the hard times we’re going through.

Remember, if you see a problem arising, contact your lender immediately. Get hold of a “HUD approved housing counseling agency” NOW!!! Call 800-569-4287

Just remember, you’re not alone. It may feel like it, but there are people out there who can help. Find someone you can talk to: your lender, a HUD approved counselor, your Realtor, are your best options.

Again, if you know someone who’s going through this situation, they need your encouragement. Talk to them in a frank, but in a friendly manner. Bounce ideas around. Make them feel good about themselves again.

Soon, I’ll talk about “short sales” – “deeds in lieu of foreclosure” – and other options.

How is the Real Estate Market These Days?

I get asked this question every day.

The answer depends on who’s asking; and what role they’re playing.

For the Buyer the market is FANTASTIC! Prices of homes are rock bottom and not expected to go much lower (in the current state of economy) and interest rates are also rock bottom.

It’s no longer LOCATION, LOCATION, LOCATION… it’s PRICE, PRICE, PRICE! You can go to any neighborhood and find a home. There are dozens available. For example, I have a home listed at $280,000, but right next door, a similar home is listed for $265,000. There are only minor differences: a corner lot and a larger square footage, etc.

For the Seller, the market STINKS!. There are over 2350 homes on the market right now in my small market area of Whatcom County. That’s a chunk! What that means is the competition is overwhelming! To sell a home the seller must cut his price dramatically. If not the home just gets stale on the market and just sits there, and sits there.

To make things worse, there are more and more foreclosures forcing the home prices down even more. This is true in every market niche’.

On some occasions the seller must bring money to the closing table. The buyer can usually demand a “typical” 10% discount in price, and likely get it. That is, if the seller must sell.

Another group for which the market STINKS is the “For Sale by Owner” (FSBO) market. The FSBO will probably not sell anything in this market. Why? Because FSBO’s always price their homes too high, therefore “out of the market.” They’ll suffer along for months before giving up.

About 90% of FSBO’s eventually use a Realtor. But by that time the seller is exhausted and has lost all patience. Also, most FSBO’s think their home is the ONLY home in the world and rarely do they lower their price to be “in the market.” (I’ll do more on FSBO’s another time.)

This is what’s known as a “Buyer’s Market.”

Although, few will admit it, the Banker also thinks the market STINKS! Why? Because they have a boat load of money to lend and very few people can qualify. The typical buyer must have a credit score of 700 or more to qualify for conventional mortgages.

The exception is FHA loans. Credit scores don’t really matter for FHA loans. The lenders do, however, look at other things, such a length of time on a job, etc.

The Banker is stuck. They have all this money to loan. They can’t make money unless they loan money. But, with the interest rates so low, all their profit is being eaten up by operating costs and taxes. Yes, even the bankers (although few will admit it) think this market STINKS!

As for the Realtor, it generally STINKS. Most Realtors still in the business have probably used up most of their savings and are working part-time jobs just to make end meet. But this may not be a bad thing.

It’s not really all that bad because it helps weed out the bad Realtors. Most of the Realtors who are currently left are pretty good (with some exceptions) and these are the one’s you should work with.

There are other actors who have roles to play in the Real Estate market: the Title & Escrow companies, the appraisers, and home inspectors, to name a few. Most of these have been thinned out by the Buyer’s Market as well. It’s a struggle for the fittest.

WHY is the market this way and when will it change?

The answer is people in general at this time, are afraid to make the commitment on a major purchase like a home. They have no clue what’s going to happen with their jobs and the economy. That’s the main reason the real estate market is stagnating. There’s a bunch of DORKS running the show in Washington DC. And have been for the last 8 years.

It’s my prediction that the Real Estate market will stay pretty well flounder until November.

In November the lunatics in Washington DC may be changed for a new set. Until that time the whole economy is being held hostage by a bunch of “theorists.”

Why do I say that? Because very few of the lunatics in Washington DC, from the President on down, have ever held a job outside of academia or the in private sector. They’ve never made a payroll . They are using their tenure in Washington as a “social experiment” practicing their “theories.” As you can tell, those “theories” just don’t work. They have no idea how it “really works” in the real world.

Those folk have no idea what makes our economy robust.

If they are re-elected in November, you can expect the market to really crash and burn. In fact, if there’s not a major turn-over in Washington, the private ownership of real estate may be in jeopardy. But, then again, that’s what many theorists want.

If there’s a major change in control of congress in November, you’ll see home prices start edging up as well as interest rates. Foreclosures will reduce and people won’t have to sell their house. That will reduce housing inventory. The Bond market will go down and the stock market start heading up. Recovery “MAY” start happening in February and March.

How’s the Real Estate Market? What’s your opinion?