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Henry B. Nathan at United Realty Group Inc. is a Florida licensed real estate agent and mortgage broker. This website presents general information about Short Sale and foreclosure, as well as search tools to allow you the viewing of most listings of South Florida Short Sales, Foreclosures and opportunities.
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A short sale is a real estate sale where the mortgage lenders agree to accept a loss on the repayment of their loan.
This happens when the owner is not able to continue making his monthly payments and has to sell, but finds out that prices have dropped so much that instead of having an equity in his property, he actually owes more money than its total value.
When he will sell, he will of course have to come up with the cash to pay off the difference, but he doesn't have this cash. It is at this time that he contacts his lender and offers to find a buyer at the highest possible price, so that the bank can get rid of the problem, even at the cost of a loss; the alternative being a foreclosure that will possibly cause larger losses.
Desperate homeowners initiate short sales procedures to avoid foreclosure, which is very damaging to their credit.
Buyers look for short sales because they are one way of getting a home at a deep
From FloridaRealtors.org – July 28, 2010
Foreclosure vs. short sale: pros and cons
With today’s reduced property values and increased unemployment, it’s tempting for some homeowners to just throw their hands up in defeat, allow the bank to take their home in foreclosure and rid themselves of the monthly mortgage burden.
Even suffering through the paperwork and stress of a short sale may seem too much for an overwhelmed borrower to handle.
But Florida homeowners should be aware of unique rules in the state that make the benefits of a short sale typically outweigh the ease of walking away in a foreclosure.
“I want to be very clear on this, short sales are a better solution than a foreclosure, even when all the options in a situation where you lose your house are not great,” said Mark Greene, owner and president of Short Sale Operations LLC in North Palm Beach.
The biggest difference between Florida and many other states when it comes to losing a home is the deficiency judgment. While some states ban lenders from collecting the remainder owed on a loan after a foreclosure or short sale is completed, Florida law allows banks to go after borrowers for up to 20 years.
That can lead to a garnishment of wages long after the home is gone. In a short sale, where the bank agrees to take a lesser amount for the home than what is owed on a loan, lenders sometimes are willing to write off the deficiency on the front end.
Greene said in 90 percent of the cases he handles, the bank has waived its right to seek a deficiency.
That was the case with Jupiter resident Kathryn Lorello, who in 2008 found herself in a home she couldn’t afford. Following a divorce, and with three children, Lorello bought a $408,000 home that she lived in comfortably for a year.
But then she lost her job as a manager of a real estate company. She remembers the day the bank served the notice of foreclosure.
“I cried my eyes out,” Lorello said. “That’s when I panicked because I really didn’t want it to happen.”
Lorello got advice from Greene on doing a short sale. Her bank, Wells Fargo, waived its right to seek a deficiency even though it ended up taking $200,000 less than what was owed on the loan.
Also, if a bank refuses to waive the deficiency in a short sale, it still would have to go back to court to seek a judgment.
In a foreclosure, at the end of the proceeding, a deficiency judgment is automatically awarded by the courts and the bank is free to seek a claim.
“In the past, people just wanted to move from the property and get on with their lives and didn’t understand what the lenders’ rights were in terms of pursuing a deficiency claim,” said Paul Baltrun, director of loss mitigation at the LaBovick & La-Bovick law firm.
“I think people are more aware now about what can happen after the fact and that their nightmare can continue.” Another consideration is the effect of a foreclosure or short sale on credit.
According to the Fair Isaac Corp., which developed the widely used measurement of credit risk called a FICO score, the negative effect of a foreclosure is only marginally worse than a short sale.
But in Florida, a deficiency judgment from a foreclosure is likely to have a much larger impact that will prohibit your ability to buy another home for many years.
Daniel Poulos, a mortgage broker with Elite Lending in North Palm Beach who has studied the effect of foreclosures and short sales on credit, said unless a borrower pays off the deficiency, it may be 20 years before someone is eligible for another mortgage.
“That’s the kind of information that’s not getting out in Florida,” Poulos said. There are a few situations where some experts believe it is better for someone to go to foreclosure rather than do a short sale.
To do a short sale, a borrower must give all of his or her financial information to the bank before it will decide whether to allow the short sale. The idea is that if a person can afford to pay the mortgage, the short sale may be denied.
“Now the lender knows everything about your finances and they can better decide whether they will go after you or not,” said Jon Maddux, CEO of YouWalkAway.com, a company that advises people on strategic defaults.
If a lender doesn’t know your finances, Maddux argues, it reduces the chances it will go after you following a foreclosure.
“You might fly under the radar,” he said. “With the millions of people going through this, they are probably going to go after the low-hanging fruit.”
From a buyer's point of view, it is essential to have some understanding of the whole process, to avoid a waste of time and even of money, by pursuing hopeless cases.
All short sales do not stand the same chance of getting the bank or banks' approval. Many of them will never complete, and some will need much more work to get to the closing table than others.
A buyer can save much frustration and time by focusing on deals with a real possibility of completion.
How can this be done?
His real estate agent is a precious source of information. He can research who is the listing agent, what he has done so far, how efficiently he is handling the case. At the same time, an analysis of every situation is important.
For instance, depending on the amount of losses that the bank would have to incur, the existence of a second mortgage or line of equity, the taxes owed, the condominium fees owed, other liens that have been placed on the property for different reasons, all these are factors that, at one time, will have to be addressed, negotiated and solved.
Lenders are not, in general, very well organized and proficient at these negotiations. They have lately tended to become more reasonable and efficient and short sales often complete in a shorter turnaround time than one or two years ago.
We see every day cases where the sellers and their agents list a property as a short sale even though they haven't even started talking to their lender. The asking price can be a completely tentative figure, that doesn’t reflect what the bank would eventually agree upon. They are just trying to "hook" a buyer to show an offer to their lender.
And I don’t think that it’s always a good idea to be this kind of buyer. Why? Because instead of taking advantage of a great buyers' market, you, the buyer are wasting your time and missing on many other great deals, while waiting for months and months on a frustrating transaction that has a good chance of never completing.
Why can a short sale fail?
First of all, there are the "upside down" or "underwater" sellers who owe more on their loan than what their home is worth. But they are still expected to make their monthly payments. They are stuck and must wait until their home price eventually picks up enough to at least cover their debt. If they still want to sell now, they must take money out of their savings, or retirement accounts, to pay off the difference.
But very often, this seller cannot come up with this cash. It is at this point that the lender must start to worry. The lender or lenders have then two choices:
a) Agree to a short sale and forgive the deficiency or shortage of funds
b) Foreclosure on the property and resell it.
However there are other elements that can determine their action. In many cases, the lenders have mortgage insurance covering part of their losses, but this will usually happen only if they foreclose on the property. It will be a good reason for a lender to refuse a short sale at less than a certain price, if he would incur a lesser loss by foreclosing.
Then there are the second or third mortgage holders.
These are second or third in line to be paid if there is any money left after paying off the first mortgage. Usually they are offered a low amount by the first mortgage holder, but in some cases they might just choose to nix the short sale and force a foreclosure.
Therefore, if I am a buyer, and before getting into a short sale offer, I would make sure that:
a) The seller has already initiated the approval process with the lender. Actually we call that "submission of the short sale package" to the lender. These submissions must include a "letter of hardship" explaining why the seller is requesting the short-sale. For example: has he lost his job? Is he going through some extenuating circumstances, disease, family problems? Can’t he cash into his savings to pay the debt?
b) How many banks are involved? If two lenders must approve a deal, it becomes harder.
c) What about unpaid property taxes? It’s common to see two or more years of unpaid bills.
d) In condominiums, I have seen apartments' owners who haven’t paid their fees for two years and more. Condo associations can force a foreclosure if they are not paid off.
e) Other types of liens, often originated from contractors, upgrades in the property, could add up to the debt and their holders can also make the deal impossible if they can’t be satisfied at least in part.
f) Has the seller stopped paying his mortgage already? How long?
g) Who is the listing broker? Does he have experience in short sales? Can he respond to your agent's questions? If a deal is going to happen there must be a listing agent working hard and calling the bank every day until he gets a response. I have seen plenty of cases where these listing agents didn’t even know what I was talking about when I asked about details. Is the listing broker really motivated to make the short sale happen? Remember that many lenders reduce commissions to listing agents in such degree that these could become less than motivated
h) What is the total of the debts compared to the market value of the property? The gap is sometimes so wide that it is just too hard to make it happen.
i) Have foreclosure proceedings been initiated? If foreclosure is looming, and less than a couple of month away, chances are that all your short sale work will be wiped out by a foreclosure.
If a buyer would ask me, as a realtor, my advice on a short sale
This would be my answer:
1) Get yourself a good agent who knows about short sales and is willing to give you a full service. It is not a guarantee, but it's the best first step that you can take. If he keeps telling you: "Let's just make an offer" on every short sale prospect that has an attractive price, you might be in for a lot of frustrations.
2) Work with our agent on making an offer close to the present market values. If you really like the property and you feel that it is a great opportunity, you run the risk of another person making a more serious effort with an offer higher than yours. Lowballing per-se is not a system, and it can make you lose great deals. Remember that you are not alone and that there are lots of eyes monitoring the MLS and other search tools every day. If it's a hot property, chances are that it has drawn somebody else's attention. Whatever you do, be reasonable in your offer. Banks commonly base their approval criteria on comparable and actual sale prices during the last few months. Remember that this incredible market will last for only a limited time.
2) Many banks do not counter offer. They just reject or ignore the offer. It often happens that they would suggest the price level at which they will approve it, but that is not the norm.
3) Don’t forget that every case is unique. It will happen that, at the last moment, you could get additional amounts to pay. Perhaps higher costs for the bank, unexpected liens, association fees, would arise at the last moment and you would have to negotiate up the price again if they affect too much the lender's bottom line loss.4) If you intend to finance your purchase with a mortgage loan, remember that many lenders and FNMA have strict rules on buildings or communities with high levels of non-performing loans, or high percentage of investor-owners. If you plan on FHA financing, the property should be FHA approved,