What is the difference between a foreclosure and a short sale?
A foreclosure is when the bank takes ownership of the property after the property owner has defaulted on the loan. The foreclosure process in Colorado can take months after the first mortgage payment is missed.
A borrower is “short” when the borrower owes an amount on his property that when combined with closing costs and commission is higher than current market value. A short sale occurs when a negotiation is entered into with the homeowner’s mortgage company or companies to accept less than the full balance of the loan at closing. A buyer closes on the property and the property is “sold short.”
Why would a lender accept a short sale?
In a nut shell, money! The bank losses more on the property if they complete the foreclosure process than if they negotiate a short sale with the borrower. The foreclosure process is very costly to the lender when you include legal fees, property carrying fees such as maintenance and utilities, insurance, and taxes, not to mention lost opportunity costs when the bank’s money is tied up in the property. In other words, the bank’s money is tied up in ownership of the property when it could be generating interest from other qualified borrowers. Additionally, banks are in the finance business, not the property management business. Once the property is bank owned the market value declines even more. By negotiating a short sale with the borrower, they can save several thousands of dollars on each property, release their funds, and avoid ownership of the property. Is it too late for a short sale if the lender has already started the foreclosure process?
Probably not, but it depends on the lender and where they are in the process and how flexible they are willing to be. This is why it is important to hire a qualified real estate agent that can negotiate with the bank on your behalf. The sooner you contact the agent and get the home listed, the sooner you can find a buyer, close the deal, and move on with your life.
Why do I need a real estate agent?
Lenders prefer to work with professionals who understand the local market. The lender will want expert advice on pricing the home, marketing the home, and negotiating with the future buyer. A real estate agent can show the pricing history of the property in the Colorado Springs MLS to help justify any buyer offers. Most lenders will not accept a pricing history for a For Sale By Owner (FSBO), they want to see that the property was properly priced and marketed in the local MLS. Also, home owners are often emotionally tied to the property and can interfere with negotiations. A third party can negotiate with the lender and future buyers without getting emotionally involved. Do I need a lawyer to complete a short sale?
Though legal representation is not required to complete a short sale, it is highly recommended. The Home Rescue Expert program used by the Murray Knoll Partners is negotiated by a law firm at no additional cost to the seller. This program gives the seller the legal representation often needed to ward off the lender(s) when they come knocking on the door for payment. There is a fee up front that is escrowed and returned to the seller if it is not used during the transaction. Can I negotiate a short sale with the lender?
Most lenders will not allow the seller to negotiate the short sale. There is no financial benefit for doing so. Lenders prefer to work with qualified experts who know how to price and market the home at the start of the process, saving valuable time and money for all concerned. Why would I want to sell my Colorado Springs property as a short sale?
If you owe more on the property than the property can sell for and you can no longer afford the monthly payments due to a financial hardship, a short sale may be the best option to get out from under the payments. Short sales also have less of an impact to the credit score than a foreclosure and allow for a quicker recovery for a future home purchase.
If I haven’t missed a payment, can I still do a short sale?
Possibly. You need to be able to prove a financial hardship to your lender that will impact your ability to make future payments.
I have a second mortgage on my property, does this mean that I can’t do a short sale?
Not at all. Lenders in second position understand the risks associated with being in that position. A qualified real estate agent or their representative, will negotiate a short sale with the lender in second position as well as the lender in first position. Am I a good candidate to sell my property as a short sale?
Can you prove a financial hardship? Has the primary financial supporter of the household encountered a significant loss in earnings, divorce, health, or death, making it impossible for the remaining members of the household to pay the mortgage? If yes to any of these questions, you may be a good candidate for a short sale. Do I need to use all my savings and retirement before I sell at a short sale?
NO. In fact, we want to talk with you BEFORE you start to dip into your savings and definitely before you start to spend your retirement funds. You should not have to expend all your savings knowing you can not recover from your unfortunate circumstances.
Can I stop the foreclosure process by starting a short sale?
Maybe. Again it depends on the lender and their flexibility and cooperativeness. Many lenders will suggest contacting a qualified real estate agent to initiate the short sale process. In most cases, you will need an offer on the property to delay a foreclosure. It will be stressful because often the delay is not approved until just before the sale date. This can continue for months while the bank works toward an approval. It is highly recommended that you talk with a real estate professional BEFORE the lender initiates the foreclosure process. Once a foreclosure date is identified, the time to find a buyer is very limited.
Should I do a loan modification before I do a short sale?
The real question is can you qualify for a new loan and can you afford the payments? This is the process for a loan modification. If you can, then by all means, start the process for the loan modification. Please note, that with a loan modification there is no need for a third party to be involved, so DO NOT pay for a third party service to assist you. This is between you and your lender. Please note: a loan modification will not solve the problem in the case of loss of income, job transfer, or death. Should I consider foreclosure?
In some cases foreclosure is an option. Because the seller is required to disclose their liquid assets to their lender when conducting a short sale, a foreclosure may be a better option for them. Should I consider bankruptcy?
This is a question you should discuss with a bankruptcy attorney. Murray Knoll Partners, as members of the Home Rescue Expert program have access to a bankruptcy attorney that will provide a one hour free consultation in Colorado Springs or Denver. Should I rent my home instead of doing a short sale?
This is a very good option in some markets, particularly in Colorado Springs where we have a shortage of rentals. If you can rent your home for the amount of the mortgage payments, this may be a good option to allow you to keep the home till the market improves or until your financial situation improves. You will need to calculate in the cost of a rental for your family and the potential for loss rent when the property is vacant. What should I look for in an agent to help me with a short sale?
You want an agent that understands your options and can provide your the resources to help you make an informed decision. If you choose to sell your home as a short sell, you want an agent that understands the short sale process, preferrably one that is a Certified Distressed Property Expert (CDPE) but also one that is a Certified Home Rescue Expert (CHRE) which uses the most successful short sale processes in the industry.
Is it better to do a short sale or walk from the property and allow it to foreclose?
It depends on your goals. If you want to preserve your credit, then by all means, negotiate a short sale. If your credit is of no concern and you want to just walk away or you have assets you want to preserve, then you may consider a foreclosure or deed in lieu of. But a foreclosure does not guarantee forgiveness of the debt. In other words, you may have a foreclosure today, and years down the road after you are back on your feet, the bank may file a claim against you to recoup what is owed. Please seek professional advise on this matter.
We have an offer, what now?
With the CHRE process, the offer is within 5% of the list price. Additionally, the buyer agrees to conduct the inspection and the appraisal prior to submitting the contract to the bank. So with the seller's acceptance, a market value offer, and an appraisal, the CHRE process obtains bank approval 95% of the time. Depending on the bank, there is still a waiting period, but most banks approve the offer. With the buyer's investment in the inspection and the appraisal, they are more committed to the transaction, so there is no need to take backup offers. Once we have bank approval, we can close within three weeks, we've already completed the inspection and the appraisal.
Will I have to pay the bank the difference that is owed and what the buyer pays?
It depends. You need to make sure your agent negotiates forgiveness of the debt with the bank. If this isn't done at the time of closing, the bank can come back in the future and demand payment of the debt. Something else to watch for, is that the debt that is forgiven can be taxed by the IRS as income. Because we use a law firm to negotiate our short sale, we receive debt foregivene
If the buyer walks, do I get their earnest money?
No. Chances are that if they leave the deal, they will do it legally and their earnest money is returned. In most cases, this happens before the bank approves the short sale. The bank countered. Can they do this?
Yes. You have to remember that the first time the bank is involved in the short sale is when they receive the first offer. They will conduct a market analysis of their own to determine if the offer is a reasonable offer. If they feel it is too low, they will counter. The buyer doesn't have to agree and can even counter with their own price. The buyer's agent should be able to justify the buyer's price with a market analysis. If this can't be done, then maybe the buyer does need to come up in price. However, if the contract is accompanied by a lender's appraisal, we find that the bank in most cases will not counter, why would they. Again, another reason why the CHRE process makes so much more sense. My home has been listed as a short sale for weeks in the Colorado Springs MLS but we haven't received an offer?
Chances are, you need to lower your price. When a buyer sees that the property is a short sale, they assume that it will require more work, so it really needs to be priced below market value. A good short sale agent has a pricing strategy in mind and should lay this out for you in advance. They will take into consideration the market value and the foreclosure date, and identify a pricing strategy with regular price reductions that can be provided to the bank with the first offer as a pricing history. Short sales that are priced at market value will not find a buyer and short sales that receive an offer 20% below list price most likely will not get approved. A history of price reductions is necessary to show the bank that a buyer was not found until the price was dropped below a certain level.
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