Explaining short sales and foreclosure again
A lot of readers don't understand what short sales and foreclosures are. I am getting comments and emails. This is foreclosure and short sale 101. Skip it if you know this stuff and have no advice fot those who don't.
Tim responded to Monday’s post. He is in a situation that has become more common since the sub-prime meltdown in the summer of 2007:
One of the problems we are facing is, when we tried to sell it, we asked if we could just pay off the difference to our mortgage holder, that was unsuccessful as they tried to push us into a short sale, which I didn't understand because we're current on our mortgage. We tried to take out a personal loan, however the amount was too much and exceeded personal loan limits. We've tried to refinance to make the mortgage lower - so we would actually want to keep it and maybe break even or make money off of the house (with the rental), but we cant refinance since the value has dropped so much we'd have to finance more than 100%, and banks just dont do that now-a-days. What does a person do!?Tim
First a few definitions:
Who:
Mortgage holder or lender is the entity that is owned the amount of the mortgage.
Seller is the owner of the house.
A short sale means that the seller does not have enough money to pay off the existing loan on the property at the point of sale. (Example, the seller owes $350,000, but the sale will yield $320,000) This is sometimes called “upside down.”
The seller is short because the mortgage holder will get less than the mortgage amount when the property is sold. The seller is “short of cash” to cover the debt. In this case, the mortgage holder has a say in how much of a loss they are willing to take.
If a seller can pay the entire mortgage amount, plus whatever closing costs are attached to the sale, then the seller is not short. The seller may have lost equity, but not more than the amount still owed.
A seller can be short, but not in foreclosure. That seller has been paying the mortgage monthly, but cannot pay off the whole mortgage and closing costs upon sale.
A seller can also be in foreclosure without being short. That seller can sell the house for more than the debt, but has fallen behind on the payments.
What’s Tim to do?
In many cases, the mortgage holder would rather have you keep the house rather than sell it short (Because they take a loss in that case.) So try to refinance through your current lender. Since you have been paying all along, you are a good risk for a restructured loan.
Then there is selling short. Then there is renting.
Are there any veterans of the mortgage meltdown who have succeeded in keeping their houses or at least coming out whole? What should Tim do?
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Short sales and houses in the foreclosure process have many pitfalls and are not for amateurs! I think they could be good for investors but not for buyers looking for a residence. The process is long and the pitfalls are often hidden. You may not even get that good of a deal.
The best deal for those looking for a primary residence is a house already owned by the bank. The price will be low. You may have to do some work on the property. Bring in experts to give you reliable quotes. Be prepared to have an inspection that you can't really negotiate with, though you *can* ask for a credit to be applied to closing costs and pre-pays (insurances and pre-paid interest). Also be prepared to find that the property has one or more title defects relating to undischarged past mortgages. There may be a water department lien if the previous owner ran out without paying their bill.
You really must have a real estate attorney working on your behalf in this instance. They will scour the purchase and sale agreement and protect your interests there and also deal with title issues.
I have a client buying a bank owned property and we're working our way through some of these issues but they will get a very good deal, $130,000 below tax assessment, with about $50,000 worth of work to do, $15,000 right now and the rest can be done over time.
Rona,
Just to clarify, many lenders are requiring you to be behind in payments before they will consider accepting a short sale, if they are not behind I have seen the lender requiring the seller to hold an unsecured note for the difference after closing. It get's really tricky when there is a second mortgage or HELOC too.
We do quite a bit of foreclosure work both for buyers and representing the REO departments. We deal with both buyers and agents that have no clue quite often. In the end, the buyer loses the deal because the agent or attorney didn't know that you can't really change the P&S and that when the bank says that they need the P&S and addendum back in 48 hrs, they mean it.
The best advice is to work with an agent and attorney that is familiar with how these deals work. Even better work with someone that has purchased one for themselves.
After a grueling attempt at a short sale, all I can advise is stay away. If you are still lured and don't heed the original advice, here are some things to look out for:
1) 4-6 month wait for bank response, even longer when 2 mortgages are involved
2) Lots of lawyer time((depending on seller's lawyer, watchout for time consuming P&S agreements while both parties try to minimize their risk)
3) Liens (this is usually involved with the P&S problems above, but typically, when someone is in a short sale situation, they are not doing great financially, contractor liens, or municipal liens are quite common)
4) Inspections- typically done at your own cost and required to be accepted before bank will sign off. This gives you a little less hand as you are already invested for $500-$900 before bank decides to negotiate
5) Look for bank to counter and cause problems with closing, just when you think it's a done deal. This is where they know they have you hooked on a deal, although at this stage in the foreclosure game, don't be afraid to play hard-ball..the banks want these things off their books NOW!!
6) In the winter months, make sure you agree on who is taking care of the heating, as it can be quite costly and can be a disaster if pipes freeze.
7) Be prepared to wait & agonize to the point of disbelief..in short, you better be getting a darn good deal...
what if there is a property tax lien on the house. Who is required to pay.
Tax liens are paid before the mortgage balance is paid. So, upon sale, the taxes are paid, then the lender is paid.
P.S. that's why many lenders pay taxes out of escrows; they want to avoid tax liens!
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