What is a Short Sale?

By Marki Lemons

The turbulence felt in the real estate market is worse than any trip aboard a Boeing 747. Numerous real estate practitioners love the industry and will find a way to stay in real estate. In order to make money in real estate today you must deal with foreclosures in some capacity. There was a time not long ago when foreclosures only affected the economically challenged. Today everyone is affected: the poor, the middle class, and the affluent.

Since the real estate market has taken a down turn, a lot of area homeowners have found themselves in a position where they owe more than their home is worth. As long as you don’t need to sell your home and as long as you can afford the payments, your best bet is to hold on and do nothing. Eventually the market will rise and your home value will recoup.

But what if your client has to sell? What if they are faced with a job loss or relocation, divorce, illness, rising taxes, unheard of assessments or financial hardship? What happens if they can no longer make their mortgage payments? Is foreclosure their only option?

Many homeowners are approaching their mortgage holder and requesting that they accept less than what is owed. This is generally called a short sale.

What is a Short Sale?
A short sale occurs when a lender is willing to accept less than the full mortgage pay off. The lender agrees to an amount that is less than the outstanding mortgage (by reducing the payoff letter) and allows the borrower’s debt to be forgiven.
A property is a candidate for a short sale when all liens, plus costs of sale, exceed the market value. Liens include mortgage liens, mechanics liens, tax liens, unpaid judgments, and unpaid HOA fees.

A short sale is a form of pre-foreclosure sale in which the mortgagee agrees to accept less than the loan amount to avoid foreclosure. The good news is that the lender pays the closing cost, commissions, title fees, and repair costs. The seller gets the home sold, the loan satisfied, avoids foreclosure and spares them some points on their credit.

What are the Borrower’s Options When They Cannot Pay Their Mortgage?
If your client finds themselves in this unfortunate situation they have twelve options.

Contact their lender: Homeowners facing financial difficulties often make the mistake of avoiding their lender, which is exactly the wrong thing to do. If they are unable to make their mortgage payments, contact their lender as soon as possible and explain their situation. They need to find out what options are available through their lender.

Contact family members and friends: Ask for help from your family and friends. Don’t let pride stand in the way. If you were in a position to assist a family member or friend who was facing a similar situation, how would you feel if they didn’t ask you for help?

Reinstate the mortgage: If homeowners expect their financial situation to improve they may ask the lender to work with them through this temporary set back. If the homeowner can come up with enough cash to bring their mortgage payments up to date, the lender will probably agree to hold off on foreclosure proceedings. This is commonly called a “work out agreement”.

Negotiate forbearance: Forbearance allows payments to stop temporarily or be reduced for a specific length of time. The lender may grant forbearance of principal, interest or both. The borrower will be responsible for repayment of accrued interest charges. Sometimes the borrower can make interest-only payments, or the interest will be added on to the principal. The key is to contact your lender right away. Even if the homeowner thinks it is too late, it’s never too late to ask!

Refinance the loan and consolidate the debt: With a good credit history, one may be able to consolidate their debt with a loan that requires a total monthly payment of less than what the homeowner is paying on all their loans put together. Be careful with this approach because it may only be making matters worse.

Sell the house: If there is equity in the house, consider selling the home and finding more affordable accommodations for the homeowner. Selling the home is what 90 percent of those who are facing financial adversity really need to do, but unless they act quickly, they may run out of time.

Negotiate a short sale: Lenders typically want to avoid foreclosing, because of the costs associated with it. Most lenders are open to negotiating a short-pay on the loan. This isn’t something homeowners should attempt alone. They need to talk with a knowledgeable Realtor.

Consider a sale and leaseback: This is when the homeowner sells the home and then rents it back from the new owner. A real estate investor might be interested in such a creative solution. It can be a win/win. The investor gets a nice property with a tenant already in place; and the homeowner reduces their payments. Be careful of scams from tricky investors that could make matters worse.

Give the deed in lieu of foreclosure: Homeowners may be able to offer the lender the deed in exchange for them not foreclosing on them. Homeowners lose their house and their equity, but retain their credit rating. In a market with declining values it is unlikely that the lender will accept a deed in lieu of foreclosure.

File for bankruptcy: Bankruptcy is rarely the best choice. In most cases, it simply buys some time, but it does not stop foreclosure. Bankruptcy is catastrophic to ones credit and is costly.

Foreclosure: This is, by far, the worst option for most people because of its wide ranging effects emotionally, financially, and credit wise. With foreclosure the home is lost, and any equity they may have built up. The homeowner will probably not be able to buy another home for years to come and their credit will be ruined for years. There is even the chance of a deficiency judgment. This is when the homeowner stills owe what the lender lost.

Do nothing: Many borrowers do nothing and end up in foreclosure or bankruptcy. Most people stay in denial far too long and lose the opportunity to salvage their financial situation. Doing nothing is not an option. Homeowners shouldn’t wait until it’s too late to get helped.

Is a Short Sale the Best Option?
If your client’s financial situation is unlikely to improve in six to twelve months, a short sale may be the best option.
None of the above should be considered legal or tax advice. Always, consult with the appropriate professionals.

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Marki Lemons, CRB, CRS, ABR, ABRM, CRMS, MBA is a Certified Residential Broker, Loan Originator, and Instructor. For more information, visit here website at www.ShortSaleResultsNow.com to view and purchase here Short Sale Results Now course. Education is the key and you should learn from the best.