Navigating the current world of short sales can be lengthy and intimidating. If done right, however, short sales can be a worthwhile way to get into – or out of – home ownership.
Below we capture helpful tips to maneuver in and around short sales, from whichever side you may be on. As always, all tips are for reference only. If considering a short sale, it’s imperative to have a team of professionals (Agent, CPA and an Attorney) to help you navigate.
short sale defined.
A short sale, simply defined, occurs when the owner of a mortgage (typically a bank) allows a homeowner to sell his or her home for less than – or “short of” – what is owed on the mortgage. As part of the deal, the lender forgives some, or all, of the debt.
why would a lender forgive the debt?
According to CoreLogic, a leader in industry analytics and business intelligence, lenders forgive debt to avoid foreclosure. Foreclosure is a more time consuming and costly process for both the bank and the homeowner, and banks typically incur on losses on foreclosures that are 10%-12% higher on average than that of short sales.
why would a homeowner agree to a short sale?
To get out of a burdensome loan that is causing financial hardship. Additionally, short sales do not typically inflict as much damage on an individual’s credit history as do foreclosures.
buyers: what you need to know.
there’s nothing “short” about a short sale.
If you are desiring a quick escrow, your best bet is to avoid a short sale, which can typically take anywhere from 2 to 10 months. Depending on the lender, there is the potential for heaps of paperwork and other obstacles which may get in the way of getting the deal approved.
you can get a deal.
The appeal of a short sale is that a buyer can get a price break – likely anywhere from 3% to 5%. However, you have to consider that the banks involved, and they want as much for the property as they can get. If you see an eye-popping short sale deal, there is a good chance it may not pass approval from the bank. The bank will hire an appraiser to value the property, and if priced too low, that “deal” will likely evaporate before your eyes.
do your homework.
You can avoid some of the hassles of a short sale by selecting properties that have previously been through the short sale process, but perhaps fallen out of escrow. In this scenario, the previous buyer will have likely shaken out the wrinkles and you may be able to anticipate smoother sailing. Alternatively, buyers will wan to avoid any short sale deals where the bank has not already approved an official short sale process.
sellers: what you need to know.
talk to the pros.
Select a licensed real estate agent who is either well-versed in the nuances of a short sale – or one who has a dedicated short sales support team to help navigate these complicated waters. Additionally, its nearly essential to speak with both a Certified Public Accountant and an Attorney to avoid any potential pitfalls.
understand the potential roadblocks.
Be prepared for the setbacks and limitations that may arise when you deal with a short sale. First of all, there’s always a chance the lender could sue a seller for the debt that it had been supposedly forgiven, unless there is written release. Secondly, the loan amount not paid back to the bank may be taxed, as the IRS may consider the forgiven debt to be “income.” And finally, if a 2nd or 3rd mortgage loan is involved, the holders of these additional loans may attempt to get their money back in civil court.
there is help.
The federal program HAFA, or the Home Affordable Foreclosure Alternatives, offers financial incentives and ways to streamline the short sale process. Potential benefits include up to $3,000 in relocation assistance and $1,500 for covering administrative and processing costs.
short sale scams.
As short sales soared so too have short sale scams. Here are some tips from the Department of Real Estate for protecting yourself, and your family:
- Short sale negotiators must be licensed real estate brokers – or working under the supervision of a licensed broker. CA lawyers acting as lawyers and investors acting on their own behalf may also negotiate short sales.
- If a real estate broker recommends a “short sale negotiator” (or something similar), ask for a printout of the person’s or company’s real estate license.
- Be wary if the real estate agent wants to collect an advance fee.
- Any payments must be disclosed and be a part of the escrow. Be suspicious if any fees are to be paid outside of escrow.
- Watch out if the buyer is a fictitious person or entity, or if the buyer is purchasing the property under a power-of-attorney or a LLC (limited liability company).
If you know of a fraudulent short sale, contact the Department of Real Estate’s enforcement division at 619.525.4192 or visit dre.ca.gov/cons_complaint.html
Thanks to Brian Olenik at Corinthian Title