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I get lots of calls every day asking me how the foreclosure/short sale process works. So, I thought it might be good to start a thread on this subject.
Here's something I wrote that explains short sales and foreclosures:
What is a short sale? How does a short sale work?
A short sale is when the homeowner falls behind on their mortgage payments and needs to sell the home but can't because they are upside down on their mortgage, meaning that they owe more on the home than it is worth. At this point, the bank tells the homeowner that they need to list their home with a Realtor to begin the short sale process. The Realtor then determines the market value of the home and lists it at or around that price. Until the Realtor can bring a sales contract for that property to the bank, they really don't want to be contacted. Once a sales contract is written and submitted to the bank, the bank often takes 90 days or more to respond and in some cases it can take over six months to hear a response from the bank. Often, when the bank does respond, they will respond with a counter offer that is WAY above the listing price, and therefore is too high for the present market. The bank is crunching numbers on how much is owed and how much it WAS worth, but in the current real estate market the home values are declining and the banks don't always have a handle on what the real estate market is doing in our particular area. Some short sales have a payoff negotiated, but in many cases the bank's loss mitigation department doesn't even being evaluation until they get the first offer. The process is always long and drawn out and you don't necessarily get a good deal. Sometimes, waiting out a short sale is beneficial but usually it's such a headache that it's better to wait until the home is in full foreclosure. Because of this bad reputation that short sales have, sometimes a property listing can be tricky - it might say that the home is in "pre-foreclosure" or that the listing is "contingent on lender approval".
Don't be totally close-minded to the idea of a short sale; just be mindful, do research and ask lots of questions before submitting an offer. The easiest question to ask is, "has the bank negotiated a payout?" If the answer to that question is "yes", then the process should be easier and quicker than a typical short sale. Another thing to check out is how many mortgages there are on the property, which is public record. Keep in mind that for your offer to be accepted, ALL of the involved mortgage companies must approve. That can mean more time and more hassle.
A final note about short sales is that if you are using a Realtor who has never successfully negotiated a short sale before, it may be even more difficult to get the property closed. Dealing with banks and mortgage companies is a lot different than dealing with the average homeowner. There are different forms to fill out, special hoops to jump through and extra communication that needs to happen. Consider choosing a Realtor who has extensive experience in these areas.
What is a foreclosure? How does a foreclosure work?
If you are thinking of buying a foreclosure property, that's an entirely different situation. A home that is in foreclosure is a home that the bank has taken over completely. The homeowner is not the homeowner anymore and therefore does not have an interest in the property at all. The price that the home is listed at is approved by the bank and therefore will sell at or near that price. In some cases, the bank MIGHT accept slightly less than the list price but more frequently, the property will actually sell for a slightly higher price due to multiple offers being submitted. The banks will always take the highest and best offer that is submitted rather than the first offer that is submitted. Foreclosures, or bank owned properties often are on a price reduction schedule that will reduce the price little by little until a strong offer comes in on it. The amount of time that you will wait is negligible; usually about the same amount of time that it would take if you were submitting an offer on an owner occupied home. In most cases, banks will want to close within 30 days so they can turn their inventory as quickly as possible.
People often ask me how the banks arrive at the price that they list it at. I get questions like, "how does the bank even know what the property is worth if they're out in California? They don't know our market." "Do they even know that there are holes in the walls or the carpet is stained?" The answer is yes, yes and yes. The bank gets a full report on each property and pictures. We do what is called a BPO or Broker's Price Opinion.
Here's the formula that they follow: If the home is in an urban area you can search for comparable homes within a one mile radius of the subject property, if the area is suburban you can go out 5 miles and rural you can go out 10 miles. The closer the comp the better. Next they will let me go back in time 6 months in sales from today's date. Some banks are only allowing me to go back 3 months or less because the market is changing so rapidly. For comps in the final report, the banks will only look at three active property comparisons and three sold comparisons. They do not look at any pending properties. Then we look at square footage of the home. We take the living square footage under A/C and multiply by 20%. We take 20% off the square footage and add 20% to the square footage to get a bracketed size. For instance if the living square footage of a home is 1500 sq ft. I would add 300 sq ft and subtract 300 sq ft. So, the home that I would look for would be between 1200-1800 sq ft. Then next thing is age. They like the homes within five years +/- on the age. So, if the home was built in 1995, I would search for homes built from 1990-2000. In some cases they will let us go 10 years on either side. They also prefer us to stay with the same number of bedrooms and bathrooms. If the home has a pool, they would want us to use other homes with pools for comparison or put in adjustment for a pool.
I also want to point out that they will get a BPO from the list agent and then the banks also pay for at least one Realtor that is independent of the sale to do a BPO. Then they compare the two. If the prices that were arrived at are wildly different then they would question both Realtor's about their BPO's. Both Realtors are required to submit photos of the home so the bank can view them. They typically want photos of any damage, all mechanicals and appliances, the water heater, electrical panel, four photos of every room, the pool area (if there is one), and a street view of both directions. We also fill out a page of positive and negative features of the property. And at the end of the report we will give our opinion on a list price for the home to get it sold in 30 days. So, there you have it that's how we arrive at a price for the bank.
Here are a few points to keep in mind. Usually foreclosures do close pretty quickly. If you are submitting a cash offer they will want to close in 14 days. If it's financing, usually 30 days is acceptable.
Most of the time banks will pay for title and they will select the title company. This is because they want to keep tabs on all of the property they handle and it is much easier to do this if they are all at one title company.
If there are several offers on a home the bank will often come back and ask each buyer for their highest & best offer. Sometimes they will require you to sign a form notifying you that you are in a multiple offer situation. This is not always set in stone and they don't have to do highest & best. Another question I get is,"Can you disclose any of the offers?". The answer is no. The other buyers will not know what you offered and you will not know what another buyer has offered. Your Realtor can run comps for you to determine what a reasonable offer might be.
Many people don't realize that it's not just the price that banks consider. There are several things that you can do to make your offer more attractive to the banks. We list a lot of foreclosed property so we are pretty familiar with the procedure.
Here's one tip: For the closing date make it 7-10 days before the end of the month. The banks want their property closed out and off the books before the end of the month. If the offer is written 7-10 days before the end of the month it gives time for any issues that might arise to get resolved and the property to close before month's end. An offer written this way would generally be more attractive to a bank. If two offers are close in price the bank would probably choose the offer written like this. There's several other things but that's one of the big one's.
The asset managers are very busy in the last two weeks of the month closing out that months inventory. Typically the response time will be longer if you are submitting an offer at the end of the month. Many of the new foreclosures come on in the first two weeks of the month after the asset managers have closed their properties for the previous month.
All foreclosures are sold "as is". An "as is" contract reads, "as is" with right to inspect and you will fill out how many days you have to inspect the home and cancel the contract if you find any issues. The banks always sell their property "as is" because they have never lived in the property and therefore are not aware of any issues there might be with the home. You will also not receive a sellers' disclosure, which is a typical document in a owner occupied home. This again, is because the bank has not lived in the home. There may or may not be issues with the home but I always advise my buyers to hire a home inspector to check the home over, even if it's brand new.
Once you submit your contract and it it accepted, the bank will almost certainly send another contract out that overrides the first contract. Please read this contract carefully because most of the verbiage will be different than the original contract you signed and this contract and addendum's will override anything in the original contract. Some banks will not allow a cancellation of contract if you find something wrong with the home. It would state this in their contract. Often the addendum are 5-30 pages long. Many of the longer contracts are with Fannie Mae, Freddie Mac and HUD. HUD usually will not let investors bid on their homes until the home has been on the market for 10 days. This gives an owner occupant a chance to offer on the home without the competition of an investor. So, many of the HUD homes sell to owner occupants for this reason.
Hope this helps clarify some of the questions and mystery behind the short sale and foreclosure process
Excellent post! Very informative! You have a tremendous grasp of the whole process! With all the information you provide, I have to ask, why would anyone go to another agent in South West Florida! You should offer a masters program in how to be the best real estate agent in a troubled market! Not only should buyers be contacting you, but any bank or mortgate company that wants to sell a property in the area should be breaking down the door of your office!
Ok, guys you're making me blush Thanks for the compliments though! I did put a lot of thought into it and as you can see by the edited time at the bottom of the post, it kept changing it as more things came to mind. Anyway, thanks and I'm open to any questions someone might have about the process.
how do you pronounce that room you keep a car In ??
Well, I suppose it depends on were you are from. For instance, if you're from the UK it would be GA-rage but if you're from over here it would be GU-rage. Hope this helps
Very informative post! I have been following these threads for a while as my husband and I want to move to Florida within the next few years, and have always found SoFlGal's posts to be excellent. We will be sure to look you up when we make the move!
Trying to figure out how to post something that I formated. Apparently it doesn't like it. I guess it's set up not to accept formatting. In any event, I got it figured out. It's not as pretty as my little spreadsheet but it will do the trick.
So, here I'm showing you what a short sale or foreclosure means to you. As you can see a foreclosure is much more damaging to your credit, security clearance (if you have one), future loan applications, etc. So, folks if you are trying to decide which s the better option a short sale is almost always the best choice.
I often get asked how I know if the homeowner will qualify for a short sale. Here's the answer-why can't/aren't you paying the mortgage anymore? If your answer is because you think you paid to much for it in the beginning and if you're going to pay that kind of money then you want to be living in the big two story home up the street. Or maybe you wanted to buy another vehicle so you decided not to make your mortgage payments. Then you probably won't qualify.
If your answer is that your husband lost his job so your income has greatly decreased or your child got sick and you have mounting medical bills. Then, yes you'd probably qualify for a short sale. Keep in mind that if you do a short sale everything has to be documented we have to put together a short sale package and submit it to the bank.
Every mortgage company has slightly different requirements but they typically all ask for some of the same things.
The best way to find out exactly what the bank's requirements are for a short sale package is to ask.
You first get an authorization to release information, which allows your Realtor to access the account. Once authorized your Realtor would ask for the loss mitigation department and request their requirements for a short sale. Some banks will actually require you to use their authorization document, but it isn't very common.
Typically, a package consists of the following:
- Authorization to release information
- An agreement of sale to purchase the property
- HUD 1 settlement statement estimate of closing costs
- Pay stubs
- Bank statements
- Budget sheet, including income and expenses
- Past two years tax returns
- Recent pay stubs
- Letter of financial hardship
Some mortgage companies will fax you exactly what their requirements are. Some will even include worksheets to fill in and sign. Either way, it is best to have the homeowner get the above documents to you as soon as possible because they may be requested later on.
Every mortgage company will have different requirements for a short sale, so each package will be different. Asking the negotiator assigned to the account is the best way to find out.
Upon completing the foreclosure or short sale, the lender with the deficiency will issue a Form 1099-C, Cancellation of Debt to both the home owner and the IRS. In past years, the amount of canceled debt would give rise to what is sometimes referred to as "phantom income". This phantom income would be taxable as ordinary income and would result in tax that had to be paid by the home owner. However, having never taken actual receipt of any cash, often the home owner would be unable to pay the tax this phantom income produced.
Fortunately, Congress addressed this very issue in The Mortgage Forgiveness Debt Relief Act of 2007. The bill; H.R. 3648, was passed by Congress and was signed by President George W. Bush in December of 2007. The bill, grants relief to homeowners that have been given relief from mortgage debt through a foreclosure, short sale or other similar agreement with the lender. Generally, eligible debt is what is referred to as acquisition indebtedness. Acquisition indebtedness is defined as debt incurred to acquire, construct or rehabilitate a residence. However, refinanced debt will qualify, so long as the debt does not exceed the original amount and home equity debt will qualify so long as the funds were used to improve the taxpayer's home. No relief is available for cash-outs. The forgiven mortgage debt must have been secured by the residence and no more than $2 million of mortgage debt is eligible for the exclusion ($1 million of mortgage debt for a married person filing separately). The relief applies to qualified debt forgiven between January 1st 2007 and December 31st 2012.
For those who have lost their homes either through foreclosure or a short sale scenario these relief provisions are welcome news. However, it is important to remember that these provisions only apply to principle residence loans that were used to acquire, construct or rehabilitate a principle residence. Those who have used loan proceeds for other purposes may still be facing a taxable income situation. If you have experienced or are facing foreclosure or short sale scenarios on rental, business or investment properties are likewise at risk as these provisions will not apply. In these situations it is imperative that you have a competent tax professional to assist you with your tax planning and preparation. You may still be able to obtain relief under other provisions such as the establishment of insolvency. However, navigating specific tax laws in these areas can be tricky.
This is how these are treated if you have a foreclosure: Issue: Future Fannie Mae Loan – Primary Residence (Effective May 21, 2008)
A homeowner who loses a home to foreclosure is ineligible for a Fannie Mae backed mortgage for a period of 5 years.
Issue: Future Fannie Mae Loan – Non Primary Residence (Effective May 21, 2008)
An investor who allows a property to go to foreclosure is ineligible for a Fannie Mae backed investment mortgage for a period of 7 years.
Issue: Future Loan with any Mortgage Company
On any future 1003 Application (Standard Loan Application), a prospective borrower will have to answer YES to question C, in Section VIII, that asks, “Have you had property foreclosed upon, or given title or deed in lieu thereof?” This will affect all future rates.
Issue: Credit Score
Score may be lowered anywhere from 150 to over 300 points. Typically, this will affect score for over 3 years.
Issue: Credit History
Foreclosure will remain as a public record on a person’s credit history for 10 years or more.
Issue: Security Clearances
Foreclosure is the most challenging issue against a security clearance, outside of a conviction for a serious misdemeanor or felony. If a client has a foreclosure, and is a police officer, in the military, a government employee, a security officer, or any position that requires a security clearance, in almost all cases, clearance will be revoked and position will be terminated.
Issue: Current Employment
Employers have the right, and are actively and regularly checking the credit of all employees who are in sensitive positions. A foreclosure, in many cases, is grounds for immediate reassignment or termination.
Issue: Future Employment
Many employers are requiring credit checks on all job applicants. A foreclosure is one of the most detrimental credit items an applicant can have, and, in most cases, will challenge employment.
Issue: Deficiency Judgment
In 100% of foreclosures (except in those states where there is no deficiency) the bank has the right to pursue a deficiency judgment.
Issue: Deficiency Judgment Amount
In a foreclosure, the home will have to go through an REO process if it does not sell at auction. In most cases, this will result in a lower sales price, and a longer time to sell in, a declining market. This will result in a higher possible deficiency judgment.
Here are the same issues and how they are treated if you do a short sale:
Issue: Future Fannie Mae Loan – Primary Residence (Effective May 21, 2008)
A homeowner who successfully negotiates and closes a short sale will be eligible for a Fannie Mae backed mortgage after only 2 years.
Issue: Future Fannie Mae Loan – Non Primary Residence (Effective May 21, 2008)
An investor who successfully negotiates and closes a short sale will be eligible for a Fannie Mae backed investment mortgage after only 2 years.
Issue: Future Loan with any Mortgage Company
There is no similar declaration, or question regarding a short sale.
Issue: Credit Score
Only late payments on mortgage will show, and after sale, mortgage will be reported as paid or negotiated. This will lower the score as little as 50 points, if all other payments are being made. A short sale’s effect can be as brief as 12 to 18 months.
Issue:Credit History
A short sale is not reported on a credit history. There is no specific reporting item for “short sale.” The loan is typically reported as “Paid in full, settled.”
Issue: Security Clearances
A short sale, on its own, does not challenge most security clearances.
Issue:Current Employment
A short sale is not reported on a credit report, and is, therefore, not a challenge to employment.
Issue: Future Employment
A short sale is not reported on a credit report, and is, therefore, not a challenge to employment.
Issue:Deficiency Judgment
In some successful short sales, it is possible to convince the lender to give up the right to pursue a deficiency judgment against the homeowner.
Issue:Deficiency Judgment Amount
In a properly managed short sale, the home is sold at a price that should be close to market value, and, in almost all cases, will be better than an REO sale, resulting in a lower deficiency amount.
Last edited by SoFLGal; 05-14-2009 at 09:37 PM..
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Thanks for the compliments though! I did put a lot of thought into it and as you can see by the edited time at the bottom of the post, it kept changing it as more things came to mind. Anyway, thanks and I'm open to any questions someone might have about the process.
