The Short Sale: Things You May Not Know
Homes in default are up 140 percent from 2006. One-third of all home loans that closed in 2006 were considered subprime loans - or loans given to buyers with a credit score of less than 680. The number of homes entering into foreclosure is expected to top one million this year, with 60 percent of those being subprime mortgages, according to Freddie Mac.
Yesterday at our sales meeting, a speaker from a title company gave us these facts and figures in an effort to help prepare real estate agents for what is expected to be a flood of short sales. Why would a lender forgive part of the homeowners debt through a short sale? Because on average, if a lender puts a home back on the market it will cost $62,000 for them to sell it. If a lender can stand a loss of just $10,000 they’re in. Further, many times a lender will offer the seller/homeowner CASH to leave the home in good condition - ranging from $1000 to more than $5000.
A pre-foreclosure sale (PFS) might be an option when a home is worth less than is owed and the homeonwer has demonstrated financial hardship (loss of job, flat out inability to pay because ARM went sky high, medical problem, etc.). But if a homeowner is in trouble, they’ll hae to submit all required documents proving this information within a very specific time-frame. If they’re an hour late, the short-sale (or pre-foreclosure sale) could be over before it even begins. Also for a PFS to work, if there is a second mortgage (a junior lender), they will have to be agreeable to accept little or nothing as a result of the short-sale.
Things You May Not Have Known
Everything is negotiable in a preforeclosure sale! You may be able to preserve your credit rating - or at least not take a nasty dive - if you negotiate it and if you’re NICE. The average drop due to a foreclosure is 250 points, the drop to a preforeclosure sale is 100 points. But if you negotiate how it will be reported, the credit score drop could be as little as 25 points.
If your home does go into a preforeclosure sale, it will have to be appraised. Ask the lender to pay for the appraisal - they generally will if you just ask. If you have an escrow account with the lender, be sure also to ask for a refund of your insurance and taxes that have been paid. Technically, that money should be yours so the mortgage holder should not hold it. If they resist, talk to a tax or real estate attorney so they can clearly explain your rights.
There may be tax implications if your home is sold as a short-sale. Uncle Sam considers the $20,000 in loan forgiveness as earnings, so you might owe taxes on the $20,000. Again, talk to a tax expert for advice about this.
Want to buy?
If you’re interested in buying a short-sale home, the Pensacola Real Estate News site has some great information. Karl quoted someone from the Active Rain community about short sales,
“Here in Florida many of us agents have been throwing cash and buyers at the short sales to no avail. There are not enough processors. What I am being told is that they cannot find enough “qualified” people to make decisions and that the board of director’s only meets once or twice a month to make these decisions.”
Do your homework before selling or buying a home through a short sale!
Most excellent photo from the Pensacola site.
