Short Sale Real Estate Transaction - Is It A Cure For Sellers Caught in The Real Estate Bubble

• http://marinrealestatebubble.blogspot.com/2007/05/some-short-sales.html
  • Examples of short sale listings in Marin, Novato, Fairfax

• SF Chronicle Article About Short Sales
  • Short sales occur when a lender allows a homeowner in default to sell a house for less than the total value of the loan. In most cases, the lender then forgives the remaining portion of the debt.
  • "There are a barrage of options," Lon Parmelly says. "There's loan modification – changing the terms of the loan, usually by adding the missed payments to the balance of the loan, then stretching the loan to 30 or 40 years. There's also the possibility of adjusting the interest rate down."
  • Lenders know that repossessing the home (probably with a declining value) will cost them tens of thousands of dollars to maintain, refurbish, market and sell, with no guarantees that it will recoup the same amount as short sale.
  • Short sale risk: Lenders may be too busy to respond to the short sale offer. Foreclosure can happen if the lender doesn't take, or is too busy to consider, the short sale bait
    • Matthews put an offer on the short sale of a Rincon Hill condo on behalf of a client and waited three weeks for an answer. "I called the lender over and over," he says. "There was no way to get ahold of a human being. Later, I heard that they never got around to looking at the offer. The condo went into foreclosure and was auctioned off."
  • Oakland has the 22nd-highest foreclosure rate in the nation, with 1 foreclosure for every 146 households – almost double the national average.
  • Problem for the seller: Short sales do have one downside for sellers: Lenders claim whatever debt they've forgiven as a loss on their taxes and issue a 1099 form to the seller for the amount. "It's taxed as earned income," says Parmelly, adding that, depending on the loss and the seller's tax bracket, it could amount to a significant increase in taxes.

• Solano County had the highest foreclosure rate in the state in January 2007 Source
  • Forbearance - lender postpones or reduces your payment for a certain period, such as three to 12 months. Then the unpaid amount, called the arrearage, could be added to the monthly payment and paid off within a few years. Or the arrearage could be added to principal and repaid when property is sold or refinanced.
  • Loan Modification - lender changes terms of the loan to reduce your monthly payment. The lender might reduce the interest rate, lengthen the number of years remaining on the loan or switch your payments to interest-only.
    • "Loan modifications don't happen that often," Jack Guttentag, professor of finance, says. "Paradoxically, lenders are more apt to be understanding and interested in a workout when the borrower has no equity than when he does."
• Short sale - the owner sells the home and remits the net proceeds to the lender as payment in full, even if it is less than the loan balance.
  • Steve Elias, a bankruptcy attorney in Lake County, says he has heard recently from borrowers who thought they were doing short sales but had to sign a new loan to pay off their first loan.
  • Short sale may not happen "when there is negative equity in the house and the borrower has the capacity to pay but doesn't want to."
• deed in lieu of foreclosure - the borrower voluntarily turns the deed over to the lender as payment in full and the lender cancels the debt.
  • Although cheaper than foreclosure, some lenders prefer to go through foreclosure, because it cancels all liens
• Foreclosure
  • California "homeowners were a median five months behind on their payments when the lender started the default process."
  • Homeowner then has 117 days to catch up

• Short Sales Not Pretty
  • A "short sale" refers to a situation where the seller lacks sufficient equity to close the sale. When this occurs, the seller must contribute additional funds or ask the lender to reduce the loan amount in order to close the sale.
  • Ways sellers handle being "upside down" (owing more than the house will sell for)
    • The owner may try to sell the property without representation. In a depressed market with lots of houses on market, small chance of success.
  • Foreclosure
  • Short sale - It's extremely difficult to persuade lenders to reduce their loan balance to close the transaction or that they should be responsible for paying the closing costs. Their typical reaction is, "We'll just foreclose on the property."
    • To have any chance talking a lender into a short sale, it is critical to have hard statistical data, including how much inventory is on the market, how much the inventory has increased or decreased in the last six months, as well as whether prices are increasing, decreasing or staying flat.

• Short sales expected to rise - Sept 2006 - http://www.inman.com/hstory.aspx?ID=56710
  • 1. Before taking any listing, check the existing loan balances.
    • Sellers may forget to disclose delinquent property taxes, home equity line of credit, or a second mortgage
  • 2. Check the seller's loan documents for prepayment penalties.
    • typical prepayment penalty is six months of interest, or more
  • 3. Tax liens are the kiss of death
    • the IRS literally takes months to release a tax lien.
  • Short sales are difficult to negotiate with lenders

• Short Sale Trauma Drama
  • Real Estate agent talking about southern California short sale
  • A short sale settlement will allow this owner to sell the property for less than the mortgage balance(s). He is prepared to take the income tax hit on the "gain" for debt forgiveness and the ding on his credit report for the sake of saving his family and his sanity.... In this example they are $85K upside down
    • A Short Sale occurs when a homeowner owes more on their property than the property is worth, and the bank is willing to accept less.
  • 1. The escrow officer handling this transaction has already taken on 5 other short sale transactions this month. Her company is offering a large short sale class to agents next month and the event is already booked.
  • 2. I understand Countrywide is in the process of hiring 50 new people in their loss mitigation department,
  • 3. Short sale contingencies in San Diego MLS listings have risen substantially in the past two months.
  • Answer 5/8/2007 from North Bay Realtor
    • North Bay, about an hour north of San Francisco. Foreclosures are up about 30% since 2005, and short sales account for close to 40% of the available homes currently listed on the MLS. I'm actively handling short sales and clients in default, representing about 20% of my total client base and inventory.

• Short sale in San Francisco Condo
  • Price is determined by abilty to pay. Ability to pay was artificially boosted over the last 5 years by the collapse in lending standards. When lending standards tighten that ability will go away and prices will have to fall to what people are able to pay under the new standards.

• Bakersfield Short Sale

• Wary lenders watch for short sale collusion between investors and borrowers

Short Sales Are Not A Slam Dunk Lenders only will approve a short sale as a last resort. The circumstances that would lead a lender to resort a short sale for a property are directly related to the property's value as it relates to the amount owed to the bank. If a property was purchased in an inflated market that has experienced a severe downturn, the home may have decreased in value and the loan maybe "upside down"—more is owed than it is worth. The lender may consider a short sale. The same holds true if a property was refinanced at 100 percent plus leaving the property without equity. Another circumstance where a bank may consider a short sale would be in the case of a deteriorating property with would require extensive repairs to make it marketable. Lenders also require borrowers to show hardship before they will approve a short sale. These can include financial hardship bought on by: catastrophic illness, death or divorce of a spouse, employment loss or incarceration of the borrower or borrower financial insolvency without any realistic chance of improving in the near future. Cash Only A short sale is always a "cash only" sale, which will keep many investors away. Also, it is an "arm's length sale", meaning you cannot purchase a home of a relative. If you do you are open to a lawsuit and the sale being reversed.

From Bay Area Housing Bubble Wiki