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, such as a professional real estate agent can negotiate with the lender and future buyers without getting emotionally involved. 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 only option to get out from under the payments while saving your credit score. If I haven’t missed a payment, can I still do a short sale?
Yes, as long as you can 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 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? Have you exhausted your savings in an effort to pay your bills? 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. 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.
Should I do a loan modification before I do a short sale?
The real question is can you afford the house if the loan was modified? If the answer is yes, then certainly, do a loan modification. The first goal should always be to keep the borrower in the home, if that is what they want to do. Sometimes, a loan modification will not solve the problem in the case of loss of income, job transfer, or death. 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. What should I look for in an agent to help me with a short sale?
You want an agent that understands the process and is not afraid to challenge the lender. Ideally one that is certified to work with distressed properties. The Certified Distressed Property Expert or CDPE is a new certification that has recently exploded in the market to help the growing number of sellers obtain relief from their mortgage payments. CDPE agents are trained to work closely with the lender on the seller’s behalf to help preserve the seller’s credit. Nancy Murray of Murray Knoll Partners is a CDPE real estate agent in Colorado Springs helping both sellers and buyers with short sales. 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, 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?
Your agent should have a feel for what the bank will accept based on the current market value of your property. They may suggest making a counter back to the buyer, accepting the offer as written or rejecting the offer. Once agreement is reached with the buyer, the seller’s agent will submit a detailed short sale package to the lender for approval. This is when the waiting begins. The bank approval process can take 2-3 months, or even longer, before the bank responds to the offer. The buyer walked before we had an answer from the bank. What do we do now?
Unfortunately, this happens all too frequently, but it is easy to understand why. Many buyers have a limited time to purchase a home and move. If the short sale process is taking longer than expected, then the buyers need to exit the agreement and look for another property. The buyer’s agent needs to set the expectation with the buyer from the onset so they understand the process. The experienced agent should know how to handle this situation to either prevent it in the first place, or how to deal with it after the fact. The listing will be placed back on the market and your agent should work hard to find another buyer. In most cases, the original offer will remain with the bank waiting for approval. This is done to save time when the next buyer is found.
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. 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. 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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