Posts Tagged ‘Short (finance)’

What is a short sale? Five things you need to know.

| Greg Wang

What is a short sale? Five things you need to know. Is a foreclosure staring you in the face? For many Americans faced with foreclosure and, possibly, bankruptcy, a better option is often a short sale. Short sales, which are up 10 percent from the same period last year, according to RealtyTrac, are becoming an […]

What is a short sale? Five things you need to know.

Is a foreclosure staring you in the face? For many Americans faced with foreclosure and, possibly, bankruptcy, a better option is often a short sale. Short sales, which are up 10 percent from the same period last year, according to RealtyTrac, are becoming an increasingly popular way to deal with homes and homeowners burdened with too much debt. However, many homeowners still aren’t clear what a short sale is and whether it is the best solution for them. Here are five things you need to know about short sales: 

A brand-new $1.1 million, 5,200 square foot home in Davie, Fla., is offered for short sale in this 2010 file photo. Often, lenders will agree to take a loss on a short sale because they would lose even more in a foreclosure. (J Pat Carter/AP/File)

1. What is a short sale?

Very simply, a short sale is when a lender agrees to take less than what he’s owed and allows homeowners to sell their property because they are facing financial hardship. Typically, the homeowner’s mortgage is worth more than his home and he’s having trouble making payments. So the homeowner sells the home and the bank marks down the value of the mortgage to the sales price, leaving the homeowner free and clear.

Lenders agree to do this because it makes financial sense for them. According to recent statistics, homes offered as short sales are bought for roughly 20 percent below their market value as opposed to 39 percent under market value for foreclosed homes. Lenders also save on costly foreclosure and maintenance procedures. Thus, the short sale is typically a better option for the lender as well as the seller.

2. How do short sales compare to foreclosures?

A foreclosure can be extremely damaging to an individual’s credit report and it can have long-term effects on anyone seeking credit. So, for several years after foreclosure, former homeowners can find themselves denied credit – or paying much higher rates to finance a car and other large items. A borrower would also have to answer yes on an employment application if she ever had a foreclosure. She could be denied employment.

And forget about taking out a mortgage to buy a home. In most cases, a lender won’t even consider you until five to seven years have passed, although lending guidelines are changing every day. A negative credit report can even make it more difficult to rent an apartment.

Short sales, by contrast, do far less damage to your credit report. Also, if a borrower has a home equity line of credit attached to their property, the rights to collect on that do not cease to exist.  They will remain open and sought. If borrowers reside in a recourse state (most Americans do), the lender also has a legal right to seek recourse against them. Foreclosure will sink a credit rating nearly as much as bankruptcy does.

3. How do short sales compare to bankruptcy?

When faced with foreclosure, some individuals turn to bankruptcy instead. In some cases, filing for bankruptcy can be less damaging to your credit profile than having a foreclosure on your record. Filing for bankruptcy will consolidate your debt and can wipe out your liabilities. But it will not prevent an eventual foreclosure if the bank has already started the process. A bankruptcy only delays a foreclosure. The property will eventually foreclose, which will also affect neighboring values by up to 28 percent.

However, if your home is the only debt that is creating your financial hardship, a short sale is probably your best alternative to bankruptcy. That’s because a short sale will be reported as a “settled debt” versus having to go the route of bankruptcy or foreclosure, which is far less damaging on one’s credit report. Although you can conduct a short sale while in bankruptcy, it requires strategy and a plan. It is best to consult with a knowledgeable bankruptcy attorney and short sale real estate agent before making any decisions.

4. Are you qualified for a short sale?

One reason homeowners resist short sales is because they don’t understand if they qualify for the process. Though each short sale is unique, homeowners generally must show legitimate hardship. Common reasons include: death, divorce, loss of job, relocation, etc. Anytime a property is inevitably headed towards foreclosure, a borrower qualifies for a short sale.

Short sales are a way to mitigate the lender’s loss. They’re not a consumer bailout. Nevertheless, the consumer participating in a short sale will more than likely be able to walk away from all his debt and start over.

If you should happen to find yourself underwater, owing more on your home than the home is worth, find a proper real estate agent who is knowledgeable about short sales and has a proven track record. They are different than the average transaction, and it is important that you do your own research.

5. Consider all the benefits

One of the major benefits of a short sale is that it ends the financial and emotional nightmare quickly. After the homeowner accepts a contract, it usually takes no more than 120 days (and often much less time) for the sale to close. Losing one’s home is a painful process, but a short sale can help families reduce their frustration and their time in financial limbo. It can also help maintain their credit and allow them to move forward with their lives. As long as the housing crisis continues, short sales will continue to grow in popularity. Homeowners need to become educated and empowered to undertake the process.

Source: Mike Cuevas, a national short sale Realtor trainer and a partner of Exit Realty, a residential real estate firm in Chicago that also specializes in Short Sale nationally.

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“Should I Stay or Should I Go?”

| Greg Wang

In 1981, English punk rock band The Clash wrote “Should I Stay or Should I Go?” about the rocky personal relationships between members of the band when facing the dilemma of sticking together or breaking up. The lyrics could not be more appropriate for homeowners buried in a mountain of negative equity and wondering what […]

In 1981, English punk rock band The Clash wrote “Should I Stay or Should I Go?” about the rocky personal relationships between members of the band when facing the dilemma of sticking together or breaking up. The lyrics could not be more appropriate for homeowners buried in a mountain of negative equity and wondering what to do. After all “if I go there will be trouble and if I stay it would be double.”

The first step in answering this question is to find out if you qualify for a modification or if you can refinance using the HARP program to take advantage of today’s low interest rates. The process of getting a modification can be very frustrating.  It’s “always tease, tease, tease, you’re happy when I am on my knees.” It not only takes a while to get approved, you must keep in mind that the lender does not have a legal obligation to offer or approve a loan modification. It is important to note that they may dual track your file, which means that while they are considering the modification they are moving forward with the foreclosure. Sometimes they “set you free” and foreclose in the middle of your modification application.

Let’s say you get a modification. I have a Client who was approved for what at first appeared to me to be an unbelievable loan modification. The modification did not lower the principle but did lower the interest rate to just 2 percent and locked that in for 30 years! This reduced their payment to the same amount that they would pay to rent a similar property. As such, it certainly seemed reasonable to stay – they get to keep their credit intact and remain owners, while paying no more than they would in rent anyway. Plus the payment remains fixed for 30 years, while rents would increase. But that analysis is incomplete. The question that remains is their status when they might want or need to sell, and when do they break even given the substantial negative equity that would remain?

Life events like divorce, death, job loss, job transfer, and others happen. Also sometimes folks just want to relocate. Based on our analysis, and assuming long-term home price appreciation rates, these folks would need to stay until 2026 to simply BREAK EVEN vs. paying rent. Worse, unless they use the rent savings to pay down principal, they’ll be stuck upside down in the property, and unable to sell without bank approval of a short sale until 2033. So whether or not it is a good deal for them depends a lot on how long they plan to stay.

For most of my Clients, the best financial decision appears to be to try to short sell their current home, or if necessary let the bank foreclose. If they then rent for 2 to 3 years they should be able to qualify again to buy. Assuming interest rates don’t skyrocket, or some other major change doesn’t occur, this will save them over $100,000, and give them the flexibility to move if needed without being stuck in their current prison of debt until 2033.

Unfortunately, few homeowners facing this decision have the financial skills to really analyze the various scenarios, and few will consult a qualified accountant or other professional to do it for them.

This analysis is different for every homeowner facing this question. How far under water they are, and the terms of the loan modification are clearly important. It also requires some assumptions about price appreciation, rent inflation, and future interest rates. And importantly, it requires some serious thought as to how long they plan to stay, and perhaps some soul searching on the moral implications of walking away.

Bottom line, this question can be answered only by the homeowner based on their current situation and what is best for them. Would you stay or would you go now?

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A Wachovia Short Sale is the New Real Estate Heaven

| Greg Wang

Wachovia Short Sales Are Far More Superior than Any Other Short Sales As a Real Estate Broker in the trenches who hears and experiences a lot of short sales horror stories each and everyday, when we closed our first Wachovia short sale, we thought we all had died and gone to Real Estate Heaven. When the manager […]

Wachovia Short Sales Are Far More Superior than Any Other Short Sales

As a Real Estate Broker in the trenches who hears and experiences a lot of short sales horror stories each and everyday, when we closed our first Wachovia short sale, we thought we all had died and gone to Real Estate Heaven. When the manager of the short sale department for Wachovia first came to my office to talk to me about Wachovia’s short sale program. It was hard for me to believe his pitch because it sounded way too good to be true.

The truth is Wachovia takes the pain out of short sales for everyone involved in the transaction. Wacovia is a portfolio lender, meaning it made its own loans and is responsible for deciding whether to approve a short sale. Other banks such as Bank of America, CitiMortgage, Chase or Wells Fargo generally have to submit the file to their investors for approval. Depending on the guidelines those investors follow, the process can be complex, lengthy and or produce ridiculous demands that cause short sales to be rejected. Not so with Wachovia!

How Banks Other than Wachovia Handle Short Sales

First, to truly appreciate a Wachovia short sale, it helps to look at the short sale process adopted by most major banks. Once you realize what hell those banks put a seller and buyer through, you’ll understand why Wachovia is special.

Here are some of the problems with other short sale banks:

  • The worst problem is it takes too long. Buyers get tired of waiting for short sale approval and cancel their purchase because banks can’t process their short sales fast enough. It can take a minimum of 6 weeks to 6 months or longer to get short sale approval.
  • Banks require a ton of paperwork from the sellers. They generally want their last 2 years of tax returns, W2s, payroll stubs, completed financial statement, bank statements, hardship letter, in addition to a slew of documentation from the listing agent.
  • Some banks demand seller contributions, even on California purchase-money loans. Purchase money loans in California are typically exempt from a deficiency judgment in the event of a foreclosure, but to grant a short sale, the banks may demand money from the seller.
  • Often, when there are two short sale loans, the two banks fight over how much the second bank will receive. Some second lenders try to push sellers to commit short sale mortgage fraud. It’s a nasty situation all the way around!
  • By the time the short sale finally closes, the sellers often feel broken down, beat up and battered. They wonder why they even tried to do the right thing by choosing a short sale over a foreclosure. And even after closing, sometimes the bank’s departments are so confused that the short sale department forgets to notify the foreclosure department that the transaction has closed, and the bank files foreclosure anyway.

How Wachovia Handles a Short Sale

With Wachovia, it’s like opening the door at the train station in Venice and discovering the Grand Canal is at your feet, looking just like a picture postcard. Like Dorothy in Wizard of Oz, leaving her black-and-white world and entering the colorful Land of Oz. It’s like eating chocolate for breakfast.

Before rendering an opinion on the short sale, Wachovia asks for basically 3 things:

  • The buyer’s and seller’s signed purchase offer.
  • The buyer’s preapproval letter and proof of funds.
  • The seller’s listing agreement.

A representative from Wachovia will either call or visit the seller at home to discuss the seller’s financial situation and appraise the home. If there are two short sale lenders, Wachovia knows how much the second lender is likely to accept and offers that sum to the lender. A HUD statement is then delivered to Wachovia by the Title Company, and a decision is rendered, generally within a few weeks.

In certain situations, Wachovia will offer the seller a cash bonus to assist with moving expenses. All short sale banks should approve short sales like Wachovia and when they do the entire Real Estate Community will all feel like they have all died and gone to Real Estate Heaven! 🙂

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