foreclose

A Few Things That Can Screw Up A Short Sale

Aside from the normal list of problems that a home can encounter through the Escrow process, there are a few things that happen that are specific to Short Sales that can kill the deal. I’ve outlined 5 that I have come across and a little bit about each experience.

Failure to Provide Documentation

Your REALTOR®’s job is to help you sell your home before it forecloses. This means marketing it well, pricing it right, attracting an offer, then submitting the offer to the lender. The process for each lender is different, but similar. There is one consistent factor that will slow down a short sale every time and that is the failure of the Seller to provide their REALTOR® with the documentation that your lender requires in a timely fashion. Every day you wait to provide that information is another day closer to foreclosure. When your REALTOR® asks you for documentation, make sure you provide it as quickly as possible.

Bad Broker Price Opinion (BPO)

One of the first actions that the lender takes on your house is ordering a Broker Price Opinion on the property to get a bottom line number from which negotiations can be based. BPO agents are many, and as expected, when you’re dealing with a lender who doesn’t know the market, you’re also dealing with a lender who doesn’t know that the BPO agent they’ve hired to provide the price opinion may also not know that market. If the BPO comes in at a price that your REALTOR® knows is invalid, or off-base, it places more of a burden on them to provide substantial data to prove that the offer that you’ve received is a fair market value offer. If you can’t prove that, then the buyer will need to increase their price, or you’ll be looking for a new buyer, and that eats up valuable time.

Poor Pricing Strategy

Your REALTOR® should have a pretty firm grip on the market where your property is located. This will enable him or her to develop a pricing strategy within the given time frame to lead the market in aggressive yet fair market pricing in order to attract an offer as quickly as possible. You’re selling short, so price is of little or no concern to you, as you won’t be seeing any of the proceeds. Your goal is to get out of the house as soon as possible. Follow your REALTOR®’s advice on pricing and price adjustments, provided he or she knows what’s going on. If they don’t, move quickly to find someone who is qualified.

Slow Response Times

In a real estate transaction, there are literally a dozen people involved in the process. In a short sale transaction, there are even more people involved. In fact, the people at the bank are probably the most likely to delay the process, and that’s pretty much a guarantee. It’s important that you have someone on your side who is quick about getting the information that you were quick to provide to the lender. It’s also important that your REALTOR® have the experience to orchestrate most of the transaction, including being involved in the buyer’s side of the transaction. Buyer’s lenders are the second most liable party in the loss of time throughout the transaction. Some of these you’ll have no control over.

Mortgage Insurance

If you don’t have mortgage insurance on your note, it’s possible that the investor who purchased your note took out a policy without you knowing. This is perfectly fine for them, but once the loan servicing company (the company that you send your payment to) approves the information that they have received from you and your REALTOR®, it’s time for them to submit the file to the investor. If the investor took out a policy on his or her investment, then they will have to deal with the approval of the mortgage insurance company, and that can be difficult, but possible. Many times MI companies will ask you to sign a personal guarantee to pay back a portion of the deficiency (what you’ll still owe after selling) instead of releasing you completely. I work hard to make sure this does not happen. After all, you’re selling your home for less than it’s worth, and you’re doing so because you don’t have any money.

In a real estate transaction, there are literally hundreds of things that can stop everyone in their tracks. The five short sale obstacles that I’ve offered you here today are some of the most common hiccups I’ve experienced.

A Short Sale Will Save Your Credit

When you cannot pay your mortgage because it is out of your reach due to adjusting rates, pay reductions, job loss, etc., then it’s likely you have been inadvertently placed on a track that will lead to foreclosure.

Foreclosure occurs when the bank takes your home back because you went too long without paying them. They do this because their money is tied up in your home, and you’re no longer profitable for them. The last thing a bank wants is to own your home. What they want is steady cashflow because they make money when they lend your cash to other banks. If they don’t get paid, they take your house, then they auction it off, and then they come after you for the difference.

The Auction

When the home is sold at auction, it brings less than market value, typically. This means that there’s a deficiency that you are responsible for. That’s the amount that you still owe on the mortgage above and beyond what the home brings at auction. Ultimately, this could lead to a law suit, a judgment against you, and some sort of lien or wage garnishment. Either way, the bank will come after you.

In the process, you lose. Your credit is destroyed, and you’ll be unable to borrow money for five to seven years. This is a bad thing.

The Short Sale

If you are headed down the road to foreclosure, consider attempting to sell the home before the foreclosure happens. In the housing industry, this is called a short sale, because you’re going to be asking the bank to accept less for the home than you owe. You’ll be short the extra cash. IT DOES NOT MEAN IT HAPPENS FAST. “Short” does not refer to the amount of time it takes to get approval from your lender to do this.

Why Sell Short?

Why the hell not? You’re going to foreclose, which is horrible for your credit, so why not attempt to reduce your deficiency by selling the home before the bank gets its hands on it. The lender is going to sell the home for less than market value, and there are attorney’s fees attached to it which means your liability after all is said and done will be greater than if you had a a REALTOR, someone like myself, list your home, market it, and get it sold for as much as possible.

We Don’t Choose Between Foreclosure and Short Sale

100% of the homes that are foreclosed upon have a mortgage. ALL homes that are headed towards foreclosure can be sold short of what is owed. When we speak of Short Sales, we aren’t comparing them to a Foreclosure and then choosing the best option. If you don’t pay your mortgage, you are on a time line of foreclosure.

A recent caller to the Dave Ramsey show had the idea that a “Short Sale” was a process applied to a financial hardship that was different than foreclosure. Here’s the difference. A foreclosure is the result of complacency. Don’t pay your bill, and your bank will boot you out of your house. A short sale is what you do to prevent a foreclosure, if you are unable to pay your bills.

A Short Sale Will Not Hurt as Much

It’s true. If your home is worth less than you owe, whether you can afford the payments or not, if you have to sell it, you have to sell it for less than is owed. If you don’t have the money to cover the difference, you will be required to get approval from your lender to release the home to a new owner. YOU HAVE A MORAL OBLIGATION TO PAY YOUR MORTGAGE PAYMENT. Walking away from the house is a breach of contract. Asking the bank to allow you to sell for less is not. The consequences to your credit, and your tax bill when you ask your lender to forgive you of the remaining balance after you have an offer on your house for less than you owe will make the difference between having a foreclosure on your record, with an inability to borrow for up to 5-7 years, and the ability to borrow within 2 years.

Don’t be a fool. If you’re headed towards foreclosure, try to sell short before the auction date. Your outcome will be much better.