Short Sales One Way to Avoid a Foreclosure

(LONG VALLEY, N.J.)  Sept. 30, 2011 — People sell their homes for a variety of reasons. Among the toughest situations is the person who is behind or struggling with payments because of job loss, divorce or other problems. While the popular wisdom is that people can just abandon a home, walking away will lead to a foreclosure that sparks devastating long- and short-term financial, tax and legal implications for the former property owner.

An experienced seller’s agent can help you avoid such a desperate move. Among the options is a “short sale.” In a short sale, the bank allows you to sell your home for less than what you owe. The bank forgives the difference and you walk away with a smaller impact on your credit than you would with a foreclosure and nobody is chasing you for damages.

When I first started encountering short sales, the banks were the biggest problem. Bankers had no idea how to handle short-sales. Files were missing, banks had no system for tracking documents and everything was hand-written. It was a mess and nothing was consistent. In those early days, I had one bank approve a $250,000 loss in three weeks and another take more than a year to decide on a loss of $50,000.

Things have gotten better and banks now have standardized the process. A short sale can happen in 90 days from application to closing. These transactions, however, aren’t the norm and require an experienced attorney and Realtor to negotiate with the lenders. You also can’t get away with accepting any offer. Banks bring in an appraiser to make sure the home sells within an acceptable range of market value.

Even the federal government has gotten into the short-sale act. The Home Affordable Modification Program (HAFA) was created last year to help homeowners who apply for but do not qualify for a loan modification. The rules are:

  •  The property is your principal residence;
  • The mortgage on it was originated before Jan. 1, 2009;
  • The mortgage is owned or guaranteed by Fannie Mae or Freddie Mac;
  • You are delinquent in your payments or default is foreseeable;
  • You can demonstrate hardship;
  • Your total monthly housing payment exceeds 31 percent of your gross income;
  • The unpaid principal does not exceed $729,750.

Talk to an experienced real estate agent about selling your home as a short sale. It’s not the best way to sell a home, but it’s better than a foreclosure.

By the way, the government considers any debt you don’t pay as income. Expect a 1099 IRS form from the bank for the amount of the shortfall that is forgiven. More information about that is here.

Buyers know there still are bargains to be found among short sales. They need flexibility because there’s no guaranteed closing date and they must be willing to accept some up-front expenses such as attorney’s fees, home inspections and so forth. Buyers need to make a reasonable offer because of the banks are using appraisers now.

The good news is that the majority of homes have been well maintained and there aren’t many surprises. That’s because, unlike a foreclosure, the seller usually occupies the property until the closing and agrees to maintain it.

As with the seller, buyers need an experienced real estate agent to properly represent them. And the HAFA rules, while mostly aimed at the seller, also impact the buyer:

  •  Buyers must present documentation of funds or a pre-approval letter from a lender. The seller will need to present this to his or her lender within three days of receiving the offer.
  • Lenders must approve or deny the offer for the home within 10 business days.
  • Settlement must take place within a reasonable period, but the lender cannot require a closing earlier than 45 days from the date of the sales contract unless the homeowner agrees.
  • If you buy property under this act, you can’t sell it again for 90 days.
  • Sellers can’t sell the property to a relative or anyone else with whom they have a close personal or business relationship.

Buying and selling real estate is complicated in the best of conditions. Short sales make the waters muddier. You’ll need an experienced agent, like those on the Holmquist Team, to guide you through the process.

By the way, you have nothing to gain by paying a third party to supply you with lists of foreclosures or so-called pre-foreclosures. Homes that are foreclosed and homes where the seller wants to sell short will be listed on the Multiple Listing Service when they are available. Your agent will watch for them and alert you. Those third-party sites just take your money.

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