Primary residence, first time buyer, purchased condo at $298K in August 2006. Had 80/20 option ARM, both lenders finally agreed to short sale. Property will be sold by end of this month for $145K. How do I make sure that I don’t end up paying taxes for the difference? Am I covered under the Debt Relief Act?
Short sale approval occurs when banks allow borrowers to sell their property for less than the balance due on the mortgage note. The primary goal of short sales is to minimize lenders’ financial losses and prevent the property from falling into foreclosure.
Short sale approval is based on many factors and varies by lender. Unified criteria include: properties cannot be in foreclosure; borrowers owe more than the home is worth; and borrowers cannot own assets which can be used to satisfy the mortgage note.
The biggest mistake borrowers make is procrastinating about contacting their lender when they become delinquent with payment. This usually stems from embarrassment or fear. Believe it or not, lenders do not want your property. They are in business to make money, not manage properties. Most are willing to work with borrowers and devise a plan that is beneficial to both you and the lender.
The short sale process typically takes between four to nine months. Much depends on the bank’s caseload, number of lenders involved, and ability to locate a buyer. The process becomes more burdensome when borrowers hold a second or third mortgage against the real estate.
Borrowers will work with a loss mitigator assigned through their lender. Mitigators do not make final decisions on short sale approval, but can be instrumental in helping obtain a successful outcome.
Loss mitigators are overwhelmed with work. They are oftentimes verbally abused by frustrated, stressed-out borrowers. If you want an edge on obtaining short sale approval, be nice to your mitigator. Organize financial records and provide requested information in a timely fashion. Take time to thank the person for assisting you through this difficult process. As they say, you catch more flies with honey.
Banks generally require borrowers to submit a short sale packet consisting of a variety of financial documents. Expect to provide bank, credit card and investment statements, previous years’ tax returns, tax or creditor liens, list of income and expenses, spousal or child support orders, and property tax and homeowners’ insurance receipts.
Lenders oftentimes request borrowers to submit a short sale hardship letter outlining events which caused them to become delinquent. The hardship letter is a crucial element toward obtaining short sale approval. It should be crafted with care and include dates of events which took place. Events might include loss of employment, death of a spouse or child, divorce, or chronic illness.
Many banks require borrowers to have a sales contract in hand before authorizing short sale approval. Others grant time to list the property through a realtor to locate a buyer. Borrowers can save time and money by selling to real estate investors.
Today, investors are particularly interested in foreclosure and short sale real estate because these properties are sold below market value. Use the Internet to locate investors in your area or ask friends, family, realtors and banks for referrals. Some investors purchase real estate across the nation, so if you are unable to locate a local investor look for nationwide investors.
Investors oftentimes purchase distressed properties with cash in order to obtain a lower purchase price. Everyone knows cash is king and lenders are generally more receptive to working with buyers who have cash in hand.
Simon Volkov is a real estate investor with a penchant for helping borrowers who are struggling to maintain their mortgage payments. Simon has helped hundreds of homeowners obtain short sale approval and is called upon by local realtors and real estate lawyers to assist in short sale negotiations.
Simon is the author of the wildly popular “Short Sale Hardship Letter eBook Course“: a no-nonsense guide detailing how to write a short sale hardship letter and increase your chances of approval ten-fold. If you need to sell your house fast and want positive results, visit www.SimonVolkov.com now.
Many turn to short sale to save their property from foreclosure. However, short sale is not as easy as it seems. There are several steps that have to be taken before an approval from the lender will be acquired. What is a short sale? A short sale happens when a property owner decides to sell the property and its value happens to be less than the value of the remaining balance of his loan. This is what makes it difficult to get approved. The lender has to be careful in his decision because he will lose significant amount if he agrees to it. Once he agrees to it, he will receive a discounted payment for the borrowed amount.
In order to get the approval of your lender, you have to be prepared. You should not only prepare your hardship letter but the rest of the requirements as well. Make sure that your package is ready. You should also familiarize them so that you will be able to answer the questions raised by your lender. You have to be ready so that you will not waste a good short sale package.
The first thing you need to do is to call your lender. There are systems that direct you automatically to the loss mitigation department. If your lender does not have this, make sure that you get to the right department. You have to introduce yourself first and talk to them politely. Let them know that you are interested in a short sale arrangement.
If you get an appointment with a mitigation officer, you should know what to expect. He will most likely tell you about the losses the firm will incur if he approves your package. You have to be patient and polite as he speaks. However, you have to look professional as well. It is essential that you know how to present your package so that the mitigation officer will see it from your perspective. This is also another reason why you have to complete all the requirements first.
You should prepare your answers as well. It would be best if you practice before the meeting or come up with a good script. Be prepared to provide more information if requested by the lender as well. However, see to it that you have the hardship letter, the financial statement, the Authorization to Release Information, the purchase and sale agreement and the estimated HUD1.
It would be best if you put yourself in the lender’s shoes. Consider the state of the real estate market today. The number of foreclosed property is high. This means that the lender is could be handling a lot of foreclosure issues. You can use this when you negotiate. Highlight what the short sale would do for them. It will eliminate the need to market the property when they foreclose it. This will also get rid of the expenses caused by the foreclosure processes too.
Short sale offers a lot of benefits; however, your lender will not approve it that easily. There are several things you have to do and prepare to ensure that you get the approval. First, prepare all the requirements. Make sure that you prepare for the conversation with the mitigation officer as well. This will increase your chances of being approved.
Foreclosures in the country have pushed past over one million homes. Couple that with folks just trying to sell their home for whatever reason and there is a glut of homes in many markets. While this level is high it is within many historical swings of the past. The point of this discussion is to point out the incredible buyers market that exists in many areas of the country.
Arbitrage in the financial markets takes advantage of price differentials between more than one market. Money is made taking advantage of the differences. In real estate, with the benefit of trained Certified Property Managers and the like, there exists the potential to invest in areas, which are depressed and hold good value in the future. Like examining the financials of a company so the same type of play can be marshaled with investment situations across the country. In crafting offers, returns in the 25% plus range over say a two-year period must be factored in even consider the ramp up into these venues outside of one’s backyard. Finding deals in the backyard would be best, however, lacking that one must look elsewhere. In an example of buying a rental condo in a resort area that has abundant inventory and has plenty of foreclosures forcing prices down some investment play may be possible. If a rental condo is listed at $300,000.00 and has and existing mortgage of $280,000.00 with a pending foreclosure pressing the owner this might be a deal worth looking at. Owners with ARM mortgages with accelerating payments and/or other pressures have come to bear on owners who find themselves in a fix. Many of these condo rental properties with onsite rental offices make for a decent cash flow. In some water front properties the gross rents will approach $30,000 plus per year. In trying to negotiate with a lender with a foreclosure action in hand it is best to have ones own financing or cash to bring to the table. That lender will not cut the price (mortgage) if they are being asked to hold the mortgage. In this example, a proposed “Short Sale” would be probed as a possible action. In this case, the owner receives nothing. The owner may save a foreclosure nick on their credit but that’s it. The lender on the other hand will be offered an offer in the $240,000 range IF the return is figured. The lender takes a $40,000 plus hit on the deal with additional costs for legal fees, past payments, late charges, etc. in addition to the “short” settlement. This is a big hit for the lender. However, Real Estate Owner (REO) properties have to be liquidated. If the lender foreclosed and sat on the condo for another six months and took another hit at sale time, the proposed $40,000 plus hit starts to look pretty good.
An investor needs to determine the condition of market place in a year or two. The economy still has strength, employment is strong, so then it is a question of what will be happening in the market down the road. If that analysis comes up positive then one would continue on the track. An outside force on these waterfront investor condo properties will come to into play as when possibly the dollar falls against the Euro or Pound. Those buyers coming into the market with stronger currencies will see these situations as strong buying opportunities and prices may spike back up. A Realtor needs to market to these buyers immediately. In addition, with stronger currencies abroad vacations in these waterfront condos can almost look cheap with a good deal of safety. A few years down the road, the rentals could be pumping and the demand could be up for these specific properties which can be rented when not being used by the owners. Naturally, there is no guarantee that this will play out exactly that way, but it is an educated analysis basis on the facts currently in hand. When depreciation, interest deductions and other factors are put into the equation, perhaps a $40,000 “short” is not enough. Perhaps it will take a little more. In any case, an investor’s numbers should be shared with the lender to shore up the case for the “short sale” and give a little cover to the work out specialist who is signing off on the deal. The lender will have several BPOs (Broker Price Opinions) of the value as several AVMs (Automated Value Models) to further peg the value. However, if things have not been moving with say six months exposure to the market place, then the lender may be compelled to pull the plug.
Much like when the accelerated depreciation plug was pulled in the 1986 Tax Code, properties must stand on their own. Limited Partnerships and REITs were being offered with low (50% LTV) leverage to realize any kind of cash flow. In this case, a highly leveraged mortgage would insure a negative cash flow. Thus the return on investment will be calculated on a low leveraged situation. The 25% plus return then would be possible. Each case needs to be turned inside out before making an offer. If there has been several price reductions over the listing period with offers of paying all the closing costs and such, then this will garner further investigation. To save a lot of time, the question phased as: “To save us both a lot of time, I’m looking to buy at a deep discount from a motivated seller or a lender who will consider a deep “short sale. I’m very liquid in cash and can close quickly. Is there any shot at a deal on this property?” If not move on.
This glut of properties won’t be here forever. It took a few years to absorb the Savings and Loan fiasco and major write-downs that took place, but it was absorbed and money was made by many. The original owner being in an overly leveraged mortgage situation may have cast the initial foreclosure situation. High leverage kills when the underlying financing is an Adjustable Rate Mortgage in a rising interest rate market. Cash flow disappears. The bleeding begins.
It’s no place for the faint of heart. Like arbitrageurs in the financial markets, it takes a strong will, liquid cash and a good feel for the current market and the future market and how it will all play out. The climate for a play is here and now in some targeted areas. Over 1,000,000 foreclosures, a glut of listings on the market, a falling dollar making attractive situational buys to foreign borrowers makes for a play now. “Knock, knock.” “Who’s there?” “Deal” “Deal Who?”
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Dale Rogers is a thirty-year mortgage veteran and frequent contributor to the Broken Credit Blog. The BCB is a free website created to assist the general public with information about credit repair and responsible mortgage lending.
When you are starting to be behind your mortgage payments, you need to avoid undergoing foreclosure. The negative impact of foreclosure is deeper compared to other ways of settling the unpaid debt. This can scar your credit for years and this is a much- dreaded way to lose your homes.
This is the reason why most people would look into the possibility of short sale. Undergoing short sale does not mean you can escape the negative effects on your credit. However, it certainly has more advantages compared to foreclosure. One, you can be eligible to get a new mortgage after 2 years as opposed to foreclosure which is after 5 years. Second, you can keep your dignity because. Third, credit scores deduction can be as low as 50 points and the effect can be as little as 1 and a half years.
There are so many good things about short sale. However, the challenge lies on how to get your lenders approve your offer. Short sale is known to be a tedious process in the sense that lenders are being critical about it. They want to ascertain well if your offer is worth absorbing the loss.
One way to get your lenders to accept your offer is by understanding their point of you. There are certain things you should know about your lenders and short sale.
Reasons why lenders would settle for short sale
You may wonder why lenders would allow a loss for sale in exchange for the forgiveness of you debt. Well, here is the real reason. They want to reduce their number of non-performing loans.
In lending, loans are considered performing if the borrower is able to keep up with payments on a regular basis. However, once the borrower starts to be in default for 90 days or more, the loan will be considered non-performing. Lenders do not want them because if their number rises, they could be in trouble financially. Non-performing loans can have a negative impact to their financial statements and eventually would put them out of business.
This is the reason why lenders would opt for a short sale. This transaction can minimize the number of non-performing loans of the bank. They would take their chances from this transaction, especially if they already have an increasing number of non-performing loans.
On the other hand, short sale loss is usually lesser than foreclosure. Banks can set an allowable loss for short sale to take place. Moreover, banks would also avoid the hassles of foreclosure if they accept short sale offers.
Additional information about lenders and short sale
The chances of being approved of your short sale offers lies on several considerations. One, if the application of short sale falls within the 180 days grace period before the non-performing loans of the bank will be considered a liability. And two, the loss of short sale is acceptable for the third party investors involved like Fannie Mae and Freddie Mac. For Fannie Mae, it is acceptable if the loss is less than foreclosure. For Freddie Mac, it is acceptable if the offer reaches 90 to 92 percent of the BPO or Broker’s Price Opinion.
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