Short sales, pre-foreclosure sale opportunities
Monday, June 9th, 2008Homeowners who have equity in the house should make every attempt to sell the home before letting it go to foreclosure. A pre-foreclosure sale is where a notice of default has been filed, but the house remains the property of the homeowner. If the homeowner sells the house, that owner will be responsible for paying off the lender(s) completely, including any back payments and late fees.
Once a home goes to foreclosure and is sold at auction or otherwise, the homeowner is much less likely to recover some equity than if the owner were to list and sell the home at a price geared to attract a buyer. While such a sale may be relatively close to market value, it may provide an excellent opportunity for a purchaser.
A home listed in pre-foreclosure may represent a bargain in a neighborhood where foreclosures are rare. In addition, the process for purchasing a home, pre-foreclosure, is far less complicated than with another means for selling a distressed property, the short sale.
A short sale is where the lender agrees to take less than the full amount owed on the property. In this case, the owner will receive no equity from the property, but will avoid the more damaging credit consequences of foreclosure.
In some cases, owners who seek a short sale may be current on their loan payments but need to sell the home due to job relocation, divorce or other reasons and, but owe more than they will net from the house. If the amount from an anticipated sale will not cover the mortgage balance plus closing costs and the seller is unable to make up the difference, a short sale is needed.
What if the seller has other assets or strong income, but simply doesn’t want to cover the shortage from sources outside of the transaction? Don’t expect to get approval of a short sale in that case. There is an important tax issue to understand in connection with a short sale. Until recently, any mortgage debt discharged (forgiven) by a lender was considered taxable income.
However, the Mortgage Forgiveness Debt Relief Act of 2007 provides a temporary rule for discharges that occurred after January 1, 2007 through 2009 on debt on a residence. The special rule applies to discharges on up to $2 million in indebtedness, so long as the debt was incurred in the acquisition, construction or substantial improvement of a principal residence. That means discharges of debt on vacation or other second homes, on home equity debt, or on cash-out refinancings (if the purpose was not for home improvement) don’t qualify for the special treatment. Because there are several wrinkles to this law, you should consult a tax attorney to discuss how you might be affected.
Why buy a short sale property? Purchasers of short sale properties often find a home in better condition than a foreclosed property, which may be the only other option in the neighborhood and can sometimes get a bargain.
However, a short sale purchaser must be patient, prepared for a process that may be protracted, and, depending on the lender, possibly last months. What is the first step in offering your home as a short sale? Write a letter to you mortgage lender(s), giving your Realtor (who should be knowledgable about short sales) permission to speak with them about your property and loan. Ultimately, the lender will seek to determine the current market value of the home to explore if it would make more financial sense to foreclose. Unfortunately, they typically will not start this analysis process until a contract is ratified and they have done a CMA (Comparative Market Analysis) and have verified that the seller does not have funds to cover the shortage.
Eventually, the lender will want to detailed financial information and a letter explaining the financial hardship that makes the loan impossible to pay back in its entirety. Short sales should be an alternative to foreclosure that lenders welcome, but, in practice, not always. Lenders do not like losing money and they are not in the business of caring about a borrower’s personal hardships or the vagaries of the real estate market. And they do not like “rescuing” a borrower who made a bad decision. Stories abound where lenders rejected short sale offers only to sell the property in foreclosure for even less, and after having incurred additional costs to boot. The people who are making these decisions are rarely local.
If their analysis suggests that there might be a higher offer out there, they will reject the transaction. If the market continues to slump, they have gambled and lost, and the foreclosure sale will offer them no alternatives. Further, lenders have not been staffed adequately to deal with the avalanche of distressed properties, have been unrealistic about the state of home values and have had officials who were fearful of taking responsibility for signing off on money-losing transactions (once the properties went to foreclosure, the “market” was to blame). Consider the reality—they are losing money on these transactions. To hire and train more people to help them “lose” this money faster makes little economic sense to them. This is also why we still hear of lenders trying to hold up potential purchasers for more money or scuttling reasonable deals.
How long can a home be listed as a short sale before the lender forecloses? It depends on the state. State laws vary as to the length of time it takes for the foreclosure process to run its course and that it likely to be the determining factor.
So if you are seeking to sell your home as a short sale or offering to buy a home listed as a short sale, prepare for a long slog with the lender. In the end, you may succeed. Your odds are probably about 50/50. If you do succeed, it will have been worth the effort and aggravation. © 2007, Real Estate Information Services, Capitol Assets, Choice Real Estate, Inc. & Choice Finance®
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