Realty World Alliance Real Estate Blog

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.

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?

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!

Your have found the home of your dreams, started packing all your things and have mentally moved in when suddenly a challenge arises that could put a serious wrench in the home buying process. In today’s market, finding the home is only the start of a transaction that can have many stumbling blocks along the way.
Here are the top 10 deal breakers buyers and sellers encounter that can impact the sale of a home:
1. Fixtures and Personal Property Pitfalls
I can’t tell you how many times I have seen deals fall apart because of disagreements over silly stuff like who gets the fireplace screen, the wall sconces or the appliances. For some buyers and sellers it can be difficult to distinguish between personal property and fixtures that come with the house. I once had a seller try to take a dish washer, like the buyer wouldn’t notice?
How to avoid it- Disputes over fixtures and personal property are common. It is important to educate yourself about the difference between attached appliances and personal property but there are times when the lines get blurred. Wall mounted flat screen TVs are frequently an issue. If something is really special to a homeowner, my recommendation to the sellers is to remove the item before you put the house on the market. Have a beloved chandelier? Replace it before you start showing the home with an acceptable alternative. If this isn’t possible, exclude it in MLS listing along with frequently confused items like that flat screen TV, and make sure it is excluded at the time the offer is written as well. Buyers should have their Agent investigate and include any items in the offer that are important to them.
2. The dreaded ex-wife/husband
There may be many reasons to dread an ex, but when it comes to selling a property, it can impact the sale of a home. Over the last 25 years I often see situations where the owners got divorced but he/she didn’t sign off. Finding this out late in the process can be problematic, especially when one of the parties no longer has a financial interest in selling the home. This scenario along with other clouds on the title can take time to clear. Bank owned properties often come with title issues such as unpaid garbage fines or back HOA dues that can impact your closing.
How to avoid it: Get a preliminary title report as soon as possible and if you are a seller be sure to disclose to your Agent up front if there are any potential claims on the title.
3. Buyers Buying “Stuff”
Your are a first time home buyers and you are moving into your new home. You don’t have a washer and dryer of your own and the local appliance store is offering a smoking deal – get a store credit card, and save 15% on the purchase of your new appliances! Sound like a steal? It might just kill your deal.
Time and again I counsel buyers not to make any major purchases before close of escrow such as a new car or major appliances, and time and again, some appliance store has a great “deal” that kills the deal. Any major purchase can impact your credit, and it can also impact your loan being funded too.
How to avoid it: If you are a buyers wait on appliance purchases, new car purchases, furniture and more until the loan has been funded and the escrow is closed. Put all  those credit cards away until the paperwork is recorded.
4. Failure To Disclose
“But Greg, I didn’t know I had to disclose that the hill behind the house next door came down last spring. It didn’t impact my part of the hill.” I have had to fight with sellers to get them to disclose certain facts about their home, but it is almost always better to over share when it comes to disclosure. Inevitably, a neighbor is going to tell the prospective buyer about the sliding hill, the formerly moldy basement or about the meth lab around the corner.
How to avoid it: When in doubt, disclose, disclose, disclose. Did I forge to mention disclose? Problems always seem much bigger when they are uncovered by a buyer after they are in contract.
5. Appraisal Nightmares
We went through a period of time when appraisals always magically came in at the offer price. For the most part, those good old times are gone. Appraisals are common deal breakers, and in many transactions, you don’t just have one. Review appraisals of the first appraisal are commonplace these days.
How to avoid it: Make sure the lender has a qualified appraiser. When possible, have your Agent accompany the appraiser on the inspection. Be prepared in advance that the purchase price may have to be renegotiated or a higher down payment may need to be brought in if the appraisal comes in low.
6. Who Owns What?
You as a buyer think you are getting a 10,000 square foot lot, only to find out that the fence is built on the next door neighbor’s property. Or the seller think they own the driveway, but it is really an easement on property owned by the cranky old neighbor next door. Lot lines, shared driveways, and fences are common stumbling blocks in a transaction.
How to avoid it: Review the preliminary title report with your Agent carefully. Legal descriptions aren’t always easy to read, but take the time and effort to do so carefully. Have a title officer walk you through the title report to explain anything unusual. If needed you should go to the city/county authorities to review the items on file. If you are concerned about the lot boundaries, hire a Civil Engineer or a Surveyor to perform a survey. While surveys can be costly, not knowing the actual boundaries can be costlier. If you are only concerned about one side of the property have the Surveyor perform a partial survey for just the side in question.
7. No permits
In many areas, unpermitted additions or remodels have become serious deal killers. Many cities and towns have implemented pre-sale inspections to fill their dwindling coffers.
How to avoid it: If city/town inspections are required, get them in advance, correct any required issues, and get your clearance. Some municipalities don’t operate on the swiftest timeline, so start as early as you can.
8. Unexpected inspection findings
I have worked with an inspector that other agents called the deal killer and honestly, he was. But he was also a lawsuit saver. When you are paying hundreds of thousands if not multiple millions of dollars for a house, you should know what you are buying. I call inspection periods the second negotiation phase of the deal. Inspections are common deal breakers when agreement cannot be reached over repairs. I remember I once almost lost a deal when the home inspection uncovered numerous foundation cracks in the crawl space. Amazingly enough, I was able to hold it together, the price was renegotiated and we were able to close the deal.
How to avoid it: If you are a seller get inspections before the property is actively on the market. Buyers will probably still get their own, but at least you can resolve serious problems that may send a buyer running in advance. Repairs almost always cost a seller less if the buyer knows about it before they write their offer.
9. The lender changed the rules
This may be hard to imagine, but sometimes you are ready to rock and roll, you got your loan pre-approved, not just pre-qualified, you are in contract and everything looks great until- poof- the lender changes the rules. Suddenly you can’t meet the lender documentation requirements. This would have been helpful to know in advance.
How to avoid it: Unfortunately, there is not much that can be done to avoid it other than working with a reputable mortgage broker or lender with a solid record of closing transactions. If you are the buyer, I highly recommend that you leave your loan contingency in place until the loan is funded. If market conditions don’t permit this, make sure you are aware of the ramifications if the loan doesn’t fund.
10. The bank doesn’t care
If the property being purchased is a short sale, the bank is pretty much in charge and they simply don’t care about your timeline. I have heard of people celebrating two and three year anniversaries of working on a short sale. Although most banks have made tremendous efforts to improve and streamline the short sale process when it comes to short sale timelines, anything goes, or better yet- who knows?!
How to avoid it:The best way to save a deal when a bank is involved is to make sure you as the buyer have appropriate expectations about the process. Work with an Agent who has experience with short sale transactions and learn about all the pitfalls of working with a bank. You might also want to read my other blog that I posted 3 weeks ago 5 Most Common Complaints of Short Sale and REO Buyers ( and How To Avoid them ).
One of the best ways to avoid killing a deal- Work with an experienced and reputable agent to help guide you through the process of the entire home buying/selling process to make sure you are properly prepped goes a long way to holding deals together.
Happy Buying and Selling in 2011!