Short Sale vs. Foreclosure

Q: What is the difference between a short sale and a foreclosure?

A: A short sale involves the sale of an “under water” property, whereby the proceeds of the home sale will be LESS than the total mortgage balance and the owner cannot afford to pay the balance of the debts against the property. Purchasing such a property requires that the bank agree to accept less than the amount owed on the property, releasing the lien on the property. According to realtor.org, ” A short sale is a sales transaction in which the seller’s mortgage lender agrees to accept a payoff of less than the balance due on the loan”

Houselogic.com explains foreclosure as “The process whereby a lender, such as a bank, seeks to repossess a property where the owner has failed to comply with the terms of the mortgage or promissory note, such as not making a payment. Once the property has been foreclosed, the bank can then sell the house, using the money to pay its costs.”

AOL Real Estate offers an explanation to help distinguish one from the other, in that,  “Short sales can also be referred to as ‘pre-foreclosure sales’ which, as the name implies, precedes the home being officially repossessed or foreclosed on by the lender. That is, the property is sold much earlier than the months it typically takes to reach foreclosure, allowing all parties to move on from the transaction sooner.”

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What to Do when Faced with a Short Sale

If you have to sell, but you owe more money than your home is worth, it’s important to get every possible dollar from the sale.  Thankfully, the experts at HouseLogic.com put together their tips to help underwater sellers navigate the short sale process in order to get the best price.

Ways Sellers Can Compete with Foreclosures

The number of home purchases involving foreclosed properties or short sales is more significant now than ever before.  However, for many would-be sellers, the idea of competing with the ridiculously low-priced house down the street somehow doesn’t sound all that encouraging.  MSN recently offered some advice to the non-distressed, above-water sellers on ways that they can compete with foreclosures.

1. Sell sooner rather than later.

We’re not suggesting that you should sell ASAP if you’re unsure about it, or if you really don’t have to.  But if you are planning on selling soon, or if you need to sell, now is the time to make your move.

“Sure, the slowdown in foreclosure activity could mean less competition now. But you should account for a boomerang effect: The number of foreclosures is expected to skyrocket later this year.”

2. Get your story out

In many parts of the country, foreclosure purchases and short sales comprise 20% to more than half of all home sales.

“If you are a long-term homeowner who has kept up on your mortgage payments, you must deliver that message. This is your key advantage over a lower-priced foreclosure, especially in light of the robo-signing mess. Buyers will know from whom they are buying the home —no title issues here. You can get this point out tactfully in your ads with phrases such as ‘long-term ownership’ and ‘been in the family for decades.'”

3. Do your homework.

Informed buyers (read: serious buyers) will come prepared with a list of comparable properties which will include any active listings or sales (standard, foreclosure, and short sales alike) in your neighborhood.  Sellers may want to, “Provide your own market analysis, which can help highlight the challenges facing foreclosed properties.”

Your market analysis, according to MSN, should include two parts: “The first report should be of comparable homes sold in the past few months, with foreclosures broken out separately…The second should detail homes on the market now. This will help you frame the decision on favorable terms: Buyers should consider homes like yours instead of foreclosures.”

4. Price aggressively without undercutting foreclosures.

Listen up: “The aim is to sell your home, maybe with a small gain. Forget about making a killing. Few homeowners who are current on their mortgage can match a foreclosure price.

However, buyers are still looking for a good deal.  MSN advises sellers to, “Look at what other nondistressed properties are selling for in your neighborhood and set your price below them. Drive home the point that the price is the price — with foreclosures, a bank can take a better offer until the day of the closing.”

5. Burst those foreclosure fantasies.

Most buyers are not completely aware of what it takes to buy a foreclosed home. Frequently, “Individual buyers don’t stand a chance because they compete with investors who are ready to pay cash. If buyers or agents don’t know this, enlighten them. There is a significant percentage of buyers (who) could not buy a foreclosure if they wanted to.”

Short Sale 101: HAFA

One option for sellers facing a short sale situation is the Home Affordable Foreclosure Alternatives (HAFA) program.

“What is HAFA?”

HAFA is a government sponsored program that sets certain standards for the short sale process and provides financial incentives to lenders that participate.

“What are the requirements for HAFA?”

According to MakingHomeAffordable.gov, you must meet the following in order to be eligible:

  1. You live in the home or have lived there in the last 12 months.
  2. You have a documented financial hardship.
  3. You have not purchased a new house within the last 12 months.
  4. Your first mortgage is less than $729,750.
  5. You obtained your mortgage on or before January 1, 2009.
  6. You must not have been convicted within the last 10 years of felony larceny, theft, fraud or forgery, money laundering or tax evasion, in connection with a mortgage or real estate transaction.

In addition, California Real Estate magazine reports that to qualify for HAFA, you must also meet these conditions:

  1. The mortgage must be delinquent or near default
  2. The total monthly payment on the mortgage (including principal, interest, property taxes, hazard and flood insurance, condominium association fees, as applicable, and any escrow payment shortage amounts subject to a repayment plan) must be more than 31% of the gross income of all borrowers on that mortgage.
  3. The loan servicer must have already considered the borrower for a HAMP loan modification, and the borrower doesn’t qualify for a trial period plan, did not successfully complete a trial period plan, is delinquent on a HAMP modification by missing at least 2 consecutive payments, or has requested a short sale or a deed-in-lieu.

Unfortunately, there is a long list of eligibility requirements for HAFA .   It’s important to keep in mind also that loan servicers will also have their own written guidelines which will allow them to accept or deny HAFA applications based on such factors as severity of loss involved, local market conditions, the timing of pending foreclosure actions, and borrower’ motivation and cooperation.

For more information about HAFA, as well as other programs, please visit www.makinghomeaffordable.gov/programs/exit-gracefully/Pages/hafa.aspx.

Short Sale: 101

The latest edition of the CAR’s bi-monthly magazine, California Real Estate, is focused entirely on understanding the short sale process.  One article in particular, “Anatomy of a Short Sale,” did an excellent job of breaking it down.  

“With nearly 1 out of every 3 homeowners nationwide owning homes that are worth less than their mortgages, the number of short sales tatewide is expected to increase as owners and banks seek a solution to the underwater market dilemma.”

Navigating a short sale  can be daunting and time-consuming process.  As a seller, the right agent–one with exceptional negotiation skills, who is overly-attentive to paperwork, and whose patience never seems to end–can make a WORLD of difference.

Experts in the short sale process advise that it would be wise for sellers to seek a Realtor with short sale training, “on the issues, options, and solutions involved in handling these transactions, which are changing from minute to minute in today’s economy.”

Step 1: Is a short sale right for you?

The 1st step in the process is determining whether or not a short sale is even the best option available.  Sellers should speak with a CPA or attorney BEFORE listing their home with an agent to determine the right course of action for their particular situation.

Step 2: Who is the lender?

The process for a conventional short sale will be different at every bank, while FHA loans will use the same guidelines every time.  Negotiating a short sale with Wells Fargo will be different from Bank of America, or Citibank.

“Sellers may also qualify for the Home Affordable Foreclosure Alternatives (HAFA) program, a government-sponsored program that sets certain standards for the short sale process and provides financial incentives to lenders that participate. Requirements, however, are numerous. If a seller does not qualify for the HAFA program, short sale terms can still be negotiated with the lender outside of HAFA.”

Step 3:  Offer and Approval

In a short sale situation, the short sale involves the seller’s lender approving a loan payoff that is less than the balance owed.  Once the seller is presented with an offer that they subsequently accept, the offer and other paperwork–i.e. documentation of the seller’s financial hardship, status of their finances–are submitted to the lender to review.

“Unfortunately, that first offer is usually a teaser…The agent is forced to do this in order to find out what offer the bank will accept. If the bank counters with a price that’s higher than the buyer can afford, the agent will have to go through the process again, resubmitting all the paperwork with a new offer.”

As a Seller:

It is up to your agent to make sure that the bank receives all of your documents for submission.  Time is of the essence, and delaying at any point could seriously impact your short sale eligibility.  Ultimately, the sooner that you contact agents regarding a short sale situation, the better your position will be.

As a Buyer:

Waiting for a decision from the bank on a short sale can take a lot of time.  It’s not uncommon for buyers to continue seeing other properties even after the contract has been entered into.  In the interest of protecting the buyer,  the standard short sale contract will have a 45-day commitment clause, which allows the buyer to walk if, after 45 days, they see other opportunities.

You can find this month’s edition of California Real Estate in full here.