| Going through the foreclosure process is a stressful | | | | At the title company, there should also be a third party |
| time for homeowners. Most do not understand what | | | | notary present as well. The following are some of the |
| their options may be. If a homeowner has tried | | | | forms generally needed to perform a short sale: |
| unsuccessfully to negotiate a loan modification with | | | | • Authorization to release information. Required |
| their mortgage lender, then they may believe that their | | | | form for bank. The homeowner authorizes investor, |
| only options are to declare bankruptcy or allow the | | | | their staff, partners, and Title Company, to talk to the |
| bank to foreclose. This reasoning is not true, and these | | | | bank, creditors, and/or lien holders about this mortgage |
| options are generally not in the best interest to a home | | | | only on the homeowners' behalf. |
| owner. Enlisting the assistance of a Real Estate | | | | • Real Estate Sales and/or Purchase Contract. |
| Investor to perform a Short Sale may allow the owner | | | | Required form for bank. Outlines sale of house |
| to repair their credit quicker. The purpose of this article | | | | between buyer and seller. It is important to remember |
| is to educate the homeowner what a short sale is, | | | | that the sales price will be determined between the |
| why the homeowner should consider a short sale, | | | | bank and the investor. The homeowner will not |
| what the short sale process entails, and why a bank | | | | determine, impact, or influence the sales price of this |
| would consider a short sale. | | | | transaction since a short is occurring. |
| WHAT IS A SHORT SALE? | | | | • General Warranty Deed. A general warranty |
| A 'Short Sale' is named based on 'shorting' a bank on | | | | deed is a type of deed where the grantor (seller) |
| the amount due on a given mortgage. Specifically, a | | | | guarantees that he or she holds clear title to a piece of |
| short sale is when the bank agrees to discount the | | | | real estate and has a right to sell it to you. This form is |
| loan balance for a seller who owes more on his | | | | given to Title Company showing that the homeowner |
| mortgage than the home is currently worth. | | | | is serious about selling property and that the investor is |
| Generally, short sales are used when the homeowner | | | | serious about purchasing the property. It is in escrow |
| is both behind on payments and owes more than the | | | | pending approval. |
| property is worth as a way to create equity for the | | | | • Escrow Payoff Authorization. If there is any |
| investor so they will purchase an otherwise | | | | money left in the escrow acct, this would apply to the |
| non-performing asset for the bank. | | | | loan. Signed copy goes to the bank. |
| A short sale is transferring ownership of the house to | | | | • Hardship Letter. This letter should be hand written |
| another person, most likely an investor, at a discounted | | | | by the homeowner detailing the situation they are in |
| rate negotiated by the bank. When performing a short | | | | and why this short sale would be beneficial to them. In |
| sale, banks require an Agreement for Purchase to be | | | | order to validate this information, the bank will require |
| signed. The investor performing the short sale will be | | | | basic financial information from the seller. |
| purchasing the house with cash in exchange for the | | | | • Basic financial information. The banks will |
| discount. Then, the investor will turn around and sell the | | | | generally want to see back taxes, pay stubs, bank |
| house for a profit. Since they are selling the house for | | | | statements, and other financial information to determine |
| a profit, the investor will not charge a fee to the | | | | the financial situation of the homeowner. |
| homeowner for their services! As per bank | | | | After the paperwork is filled out, the homeowner isn't |
| requirements, the homeowner is not allowed to | | | | required to do any more work until the actual closing. |
| financially benefit from this transaction, and any profit | | | | The investor will perform all the functions of the |
| split is considered fraud and is a felony. | | | | remaining process. |
| Banks generally prefer negotiating short sales with | | | | The entire process of a short sale is as follows: |
| investors rather than a Realtor. The reason is that | | | | • Fill out all paperwork |
| investors are the end buyers. Realtors generally wait | | | | • Offer submitted to bank by investor |
| for the banks to negotiate and then try to find a buyer | | | | • Investor coordinates with the bank on an |
| for the discounted price. If the Realtor is unable to find | | | | appraisal |
| a buyer, then the banks time and money has been | | | | • Investor gets results of the Appraisal |
| wasted. Therefore, banks would rather negotiate with | | | | • Both investor and bank negotiate the sales price |
| an investor who is the end buyer than a Realtor who | | | | • Investor receives the payoff letter, stating the |
| is not the end buyer. | | | | sales amount and closing date |
| WHY SHOULD A HOMEOWNER CONSIDER A | | | | • Investor communicates with the homeowner the |
| SHORT SALE OPTION? | | | | closing date so the homeowner knows when to |
| Declaring bankruptcy or allowing a home to go into | | | | vacate the property |
| foreclosure can be devastating to a person's credit for | | | | • Close on the house at the title company's office. |
| anywhere from 5-10 years. However, having a short | | | | The homeowner will need to attend this closing as well |
| sale performed on your house may only hurt a | | | | as there is more paperwork to fill out. |
| homeowners' credit score for 2 years. So if the | | | | WHY WOULD A BANK ACCEPT A SHORT SALE? |
| homeowner is in danger of losing their home anyways, | | | | The most frequent question a homeowner asks is |
| they will save themselves a great deal of money by | | | | "Why would a bank be willing to discount a house?" |
| allowing an investor to try to negotiate with the bank | | | | The answer is because banks are not in the business |
| on their behalf. | | | | of owning property nor are they in the business of |
| It is important to note that the homeowner cannot | | | | holding onto non-performing assets. |
| perform a short sale on their own home, nor are they | | | | When an asset is performing, they are allowed to lend |
| allowed to financially benefit in any way from a short | | | | 7-9 times its value and collect interest on that amount. |
| sale. From the banks perspective, the bank is willing to | | | | When the asset is not performing, they cannot loan |
| take a loss and rid itself of a non-performing asset as | | | | out eight times the amount loaned. So a bank is |
| long as the homeowner is not profiting from the | | | | motivated to rid itself of a non-performing asset even |
| transaction. They don't want to reward people for not | | | | if it means taking an immediate, short term loss. |
| paying their mortgage. In this case, the bank requires a | | | | Plus, the foreclosure process is expensive to the |
| 'lose-lose' transaction, where both parties must make | | | | lenders. There are legal costs and holding costs in |
| sacrifices. This scenario means that an investor cannot | | | | place. According to the FDIC, losses for lenders on |
| offer to split the sales price with the homeowner. | | | | foreclosures range from 20 - 60%, or an average of |
| It is important that the homeowner completely | | | | $50,000 or more per foreclosure! |
| understands this point: Once the homeowner agrees | | | | Avoiding foreclosures is also a benefit to the |
| to a short sale, the homeowner is selling the house, is | | | | community. A 2005 case study titled "The Municipal |
| not allowed to profit, and is not allowed to live in the | | | | Cost of Foreclosures" by William Apgar, stated that |
| house after the transaction. | | | | homes in foreclosure that become vacant provide |
| There are some other potential pitfalls that an ethical | | | | sites for crime or other neighborhood problems. One |
| investor should inform the Seller. Except for certain | | | | foreclosure can impose up to $34,000 in direct costs |
| conditions pursuant to the Mortgage Forgiveness Debt | | | | on local government agencies, including inspections, |
| Relief Act of 2007, be aware the I.R.S. could consider | | | | court actions, police & fire department efforts, |
| debt forgiveness as taxable income. However, the | | | | potential demolition, unpaid water, sewage, and trash |
| ethical investor should educated the homeowner that | | | | removal. Finally, the report states that one foreclosure |
| they should fill out form 982 when filling out their taxes | | | | can result in as much as an additional $220,000 in |
| in order to request tax forgiveness from the | | | | reduced property value and home equity for nearby |
| government. | | | | homes! Therefore, local communities and local |
| Also, there is also no guarantee that a lender who | | | | governments strongly encourage the banks to work |
| accepts a short sale will not legally pursue a borrower | | | | with investors to achieve short sales for the benefit of |
| for the difference between the amount owed and the | | | | the overall community. |
| amount paid. In some states, this amount is known as | | | | In summary, it is better to work with an investor via a |
| a deficiency. However, a good investor will do his or | | | | short sale than let your house go into foreclosure. This |
| her best to negotiate with the bank to accept an offer | | | | not only benefits the home owner, as they will put |
| for the 'satisfaction of the loan', meaning that the bank | | | | themselves in a better position to quickly improve their |
| won't pursue the home owner for the difference of | | | | credit compared to a bankruptcy or foreclosure, but it |
| what is owed on the property after the short sale. | | | | also reduced the costs of the community and |
| When working with a knowledgeable and experienced | | | | prevents rapid decline in home prices in a |
| investor, they are able to guide you through and, in | | | | neighborhood. Due to holding costs and other |
| many cases, prevent many of these pitfalls. | | | | expensive financial constraints, the bank benefits and is |
| WHAT DOES THE SHORT SALE PROCESS | | | | greatly motivated to negotiate a short sale. Utilizing an |
| ENTAIL FOR THE HOMEOWNER? | | | | investor for this process will be more effective than a |
| First, it is important to understand that short sales are | | | | Realtor because the investor will be able to submit a |
| not named as such due to the length of time it takes | | | | Purchase Agreement, and the bank will take the short |
| to complete. The short sales process can last | | | | sale packet seriously. While the process may take a |
| anywhere from 1 -12 months, though on average they | | | | couple of months and require quite a bit of time and |
| are completed within 3-4 months. But the good news | | | | effort from the investor, the homeowner will have to |
| is that there is very little work to be done by the | | | | do very little work and not pay any money for the |
| homeowner. All time, effort, and expenses are paid by | | | | services. Therefore, with all the benefits to the |
| the investor performing the short sale. | | | | homeowner, neighborhood, and surrounding community, |
| There is a great deal of paperwork needed for a | | | | the short sale option is a much better scenario for |
| short sale. When it comes time to sign the paperwork | | | | everyone involved than the house going to foreclosure. |
| with the investor, it is best to do so at a title company. | | | | |