MagnumOne Realty

The main stream media continues to be rich with stories about the
struggling real estate market, here in the Sacramento area as well as
across the country.  They generally revolve around the increasing number
of foreclosures, the mortgage crisis and now some of the government
programs that may or may not be any help.  What I am not seeing is any
mention of short sales.  In June 2007 I published, “Short Sales: Road to
Riches?”  to answer some questions I was receiving at the time on my
website, www.jalone.com.



Today, the number of short sales in the Sacramento real estate market has
increased exponentially and I continue to get calls and emails asking what
they are, can we do one, and are they a good way to buy a house?



What is a short sale?

A short sale is when the lender on the property will accept less than the
full amount due on their loan when the property is sold.  Lenders will
accept a lower dollar amount to avoid the expense and time of a
foreclosure.  Generally a short sale occurs when the loans on a property
are greater than what the property can be sold for. The short sale is an
alternative for a home owner who no longer can afford to keep their
mortgage payments current and desires to avoid foreclosure or even
bankruptcy.



Is a short sale a way for me to sell my home?

The easy answer to this question is it depends on your individual
situation?  Here are the three primary criteria that would constitute
eligibility to seek a short sale to avoid foreclosure.



1.     The value of your home is less than what you owe.  This means if
you sold the house you could not get a price high enough to pay off the
combined mortgages.



2.     You cannot make the mortgage payments and are in default.
Generally lenders will not accept a short sale offer if the payments are
current.



3.     You must be experiencing a financial hardship and be able to
provide the lender with documentation that support your inability to make
payments or cover the short fall if the property was sold.  This means you
can’t have assets that could be converted to cash to pay the lender.  Some
examples of events that lead to financial hardship are loss of a job,
divorce, medical situations and death.  It can’t be that you have decided
to stop making payments because the house is no longer worth what you paid
for it.



If your situation matches the above criteria a short sale may be a good
option for you to avoid foreclosure and/or bankruptcy but there are other
considerations.



Before contacting a realtor to set up a short sale make sure you
understand what it may cost you, how it will affect your credit rating and
the tax consequences.

Lenders who are willing to accept a short sale offer will insist that the
seller, their borrower, not get any proceeds from the sale.  A title
company will prepare a draft closing statement as part of the short sale
presentation to the lender that shows all available proceeds from the sale
going to the lender and no cash for the borrower.  What this means is that
there are likely going to be some selling expenses that will need to be
paid for.  These may include pest inspections and repair, and other
maintenance repairs that need to be completed to satisfy the buyer.  Often
these can be avoided but now always.



A short sale will negatively impact your credit report.  Although there
are some industry professionals that say having a short sale on your
record is not as bad as a foreclosure they do agree that some creditors
looking at your report will not differentiate between the two.  Clearly it
will leave a large blemish.  The good news here is that as more and more
borrowers go through foreclosure and short sales the more common it will
be on credit reports and the impact less sever.



There may or may not be tax consequences as some lenders will issue you a
IRS form 1099 reporting the amount they forgave as income to you.  The
recently passed Mortgage Forgiveness Debt Relief Act of 2007 may protect
you from having to report forgiven mortgage debt as income but it is
always best to consult a tax accountant or attorney.



Should we buy a home listed as a short sale?

Don’t be scared off by a short sale property as they may turn out to be a
great deal for you.  But you should know a few things before deciding to
make a short sale purchase.



In a conventional home sale, you generally only need the seller’s
acceptance of your offer to go forward with the transaction.  With a short
sale the lender’s approval is also needed for the sale to close and this
can take up to six to eight weeks.  Yes, lenders are moving faster today
with short sales but there is still a process and most lenders won’t even
discuss a short sale until there is an offer to review.  What this means
is it could be two months before you know if your offer is going to be
accepted or worse not accepted.



Pending receipt of a complete short sale package the first thing a lender
will do is have the property appraised.  They are looking for market value
and you cannot expect them to settle for a fire sale price.  This is where
the listing agent can be a big help for the buyers as it will be their
analysis as why the offer is fair in light of current market dynamics that
goes to the lender.



Lenders will not approve any requests for repair or provide closing costs
to buyers.  From their perspective it is an “as is” sale.  Often in short
sales the sellers, who have been unable to make mortgage payments, have
not maintained the property and it may be in need of repair.  This may
mean a buyers request for repair will be declined by the seller because
they do not have the financial resources to comply and are not going to
receive any sale proceeds.



Bottom line, be prepared for short sales to take more time and know the
purchase will more than likely be “as is” with you making needed repairs
after the purchase is closed.



If you are going to make an offer on a short sale property there are some
items that can protect and provide you with some sense of how the
transaction is proceeding.



1.     Make sure your Realtor (now required in California) outlines the
short sale contingency terms and conditions.  This essentially sets the
time frame for approval by the lender which may or may not help.



2.     Be sure to include a provision in the contract that allows you to
withdraw at any time up until the lender approves the sale. This way you
can get out of the contract without penalty if it looks like the
transaction has little chance of closing.



3.     Request from the seller confirmation of submission of the short
sale package and confirmation that the lender has received the package.



4.     Even though the sale is more than likely going to be “as is” it is
essential for the buyer to conduct a home inspection.  You want to know
what you are buying and what repairs will need to be made.



5.     Make sure there is a pest report and understand the seller may not
be able to make Section 1 repairs resulting from wood destroying pests.



6.     Be sure to discuss issues and questions with your Realtor before
proceeding, preferably someone who has some experience with short sales. I
recommend only making a short sale purchase with a experienced and
knowledgeable agent. There is too much at risk for you and the listing
agent represents the seller's interests, not yours.



The answer to, is a buying a short sale property right for you depends on
your situation.  From a buyers perspective there have been some good deals
done but they take time, require a level of cooperation not normally found
between buyers and sellers, a good realtor willing to work hard and a
responsive lender.



A significant issue with short sales is you are dealing with a seller and
a lender and often when the transaction fails you are weeks and even
months into it before you end up walking away or the lender takes a
position you can’t live with.  If you are interested in pursuing short
sale acquisitions, talk it over with your Realtor and find out if your
objectives can be met. If you think it is a way to get a deal, I’d suggest
there are much easier ways.



Summary:  Short sales have arrived; they are more common today than at any
time in the past.  Banks are easier to work with on short sales than they
were six months ago and sellers who truly have a financial hardship should
consider a short sale as an option to avoiding foreclosure.  Buyers should
not avoid a short sale purchase but must understand it will take more time
before they have confirmation the sale will happen.  Now the mainstream
media needs to share this information with the public.

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