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Short Sales & Short Tempers
By Lillian Walker of Exit Beach Cities Realty
Short Sales and Short Tempers, they were never intended or designed to go together. However, they inevitably go together in a real estate short sale. It's like a recipe: you take an anxious seller and add an anxious and excited buyer who both agree on price. Next you add an indifferent lender who's looking at forgiving debt in the thousands, and often times hundreds of thousands and what do you get? Short Tempers! That is the only thing that is short in a short sale, the tempers of the clients and their respective agents who tirelessly negotiate humor and cajole a lender who has to pick between two poisons: Foreclosure or Short selling a property. So what is a short sale? When you have a property, usually a home that is sold for less than what is owed on it; you are short proceeds to close the deal. The last time we had a recession in the 90's, if the shortage wasn't too great the seller would bring what was necessary to bridge the gap. For example, if a home sold for $500k and the home loan against it was $500k, then the seller would be short because the proceeds where not enough to cover the pay off of the home plus the closing costs which traditionally are 2%-3% of the sales price. Let's say the closing costs where $15,000 the seller would have brought in $15,000 to sell his house. When I had clients who had 30k, 40k or more in debt I would then turn to the lender and ask them to forgive the difference since it was the only way to close the deal and avoid having the bank take the home by foreclosure. However, in our current market place and since the mortgage crisis of 2006, it seems that the average homeowner who found either they were behind on their payments and had to get out from under the pain of the insurmountable debt all sought to short sale their home and get the lender to forgive however much they were short. This time around, lenders have been facing shortages in the hundred's of thousands. Much of it due to homeowners purchasing with 100% financing and therefore having no equity. There are many critical elements both a homeowner and their agent need to know if short selling is the preferred option. First of all there are two types of loans. Non recourse vs. recourse loans.
Non Recourse loans are purchase money loans. This is the initial loan you obtained to purchase the home. Whether 3% down or 0% down, it makes no difference. Whether you got a regular first loan 30 year fixed through Fannie Mae, Freddie Mac, FHA, VA or a private money lender- the bottom line is it's the first loan on the property used to purchase and acquire the property. Secondly, a recourse loan is any loan you get after you own the property. Whether you refi to get the initial rate down, take cash out, reduce your term, increase your term, replace the initial loan to a different lender none of this makes any difference. The bottom line is you now own the home and are "refinancing it". If you paid cash for the home when you purchased it, and then refinanced to take cash out to fix it up, it is a recourse loan because it is not a purchase money loan. Another thing to keep in mind are Home Equity Line of Credits also known as HELOC's if taken after the time of purchase are considered recourse loans. What this means to you as a homeowner: if you have a recourse loan and the lender has reason to believe or suspects you may have further assets which may be liquidated in order to repay whatever deficiency they took at the time of either a short sale or when they foreclosed on you, they have the right to seek a deficiency judgment against you. Third, they are not required to forgive any debt. This is a concession you are requesting and they can opt to approve it or not. Lenders are seeking to minimize their losses just as you would if you had loaned someone money secured by a home.
Keep in mind the banks are accountable to their stock holders. Most folks don't think about the fact if they have a 401k or pension fund the likelihood is pretty great that a significant chunk is invested in mortgage back securities. You might say, but I have my money invested in insurance! Well where do you think insurance money invest their money? If you are thinking mortgages and mortgage back securities, you are absolutely right! So in reality we are all taking this loss together and that explains why many retirement accounts, pension funds and 401'ks, Seps etcetera have all taken a significant hit. Lastly, have your agent request the lender give you a release of any right to seek a deficiency judgment against you. Why leave the door open? You sure don't want them knocking on your door again about that house you sold!
If you think you can't afford to keep your house, the sooner you list it for sale the better. A good agent will ask you for your most recent mortgage statement(s) to determine if you are going to be short to close and therefore need to short sale your home. If you wait until the Notice of Trustee Sale Auction you may loose the house. The rules are constantly changing. Just this afternoon one of my agents called to my attention Wachovia announced they will no longer postpone Trustee Sale Auctions, that means they will move foreword with the foreclosure. We just got a short sale closed with Wachovia last week lucky for us and our client.
I contacted the Manager for all of Southern California Short Sales and REO's Ted Blaisdell and he confirmed this is true. I'll right another article on the "WHY" of this and the logic behind it. I just asked him for an interview to discuss this and further educate the public so we can help the greatest amount of people out there and in the long term also help them re establish and cure their credit.
So stay tuned....... |
CAR LEGAL UPDATE VIDEOS:SHORT SALES
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Will enough short sales collectively lower the average value of all Real Estate?
CONTRIBUTOR'S REPLY
Only if there are a lot in a particular market place with comparable properties. Fannie Mae and Freddie requires appraisers to keep within +/-20% of interior square footage, +/-30% for Lot square footage and the properties must be like for like. Single family residences that are 1 story with same bedroom count +/- 1 and bath.
Thanks for reading my article and do forward or tell a friend!
Thank you for sharing this information on short sales, Lillian.
Our son purchased a home on short sale as an investment. Hopefully it will work out.
Best wishes.
Frederick
Secondly, a recourse loan is any loan you get after you own the property. I tried to do a short sale on a home and I was told that because I had a recourse loan (Home Equity Line of Credit loan) that I would have to pay capital gains to the government. Is this true?
CONTRIBUTOR'S REPLY
That's a question you must ask your CPA.
Great job Lillian. Thank you. This is great information that all of us should be aware of.
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