Short Sale vs. Foreclosure - 10 Myths Busted

It's likely you've heard the term "short sale" thrown around quite a bit. But what, exactly, is a short sale?


A short sale is when a bank agrees to accept less than the total amount owed on a mortgage to avoid having to foreclose on the property. This is not a new practice; banks have been doing short sales for years. Only recently, due to the current state of the housing market and economy, has this process become a part of the public consciousness.

To be eligible for a short sale you first have to qualify!

To qualify for a short sale:

■ Your house must be worth less than you owe on it.

■ You must be able to prove that you are the victim of a true financial hardship, such as a decrease in wages, job loss, or medical condition that has altered your ability to make the same income as when the loan was originated. Divorce, estate situations, etc... also qualify.

Now that you have a basic understanding of what a short sale is, there are some huge misconceptions when it comes to a short sale vs. a foreclosure. We take the most common myths surrounding both short sales and foreclosures and give a brief explanation. LET'S BUST SOME MYTHS!!

1.) If you let your home go to foreclosure you are done with the situation and you can walk away with a clean slate. The reality is that this couldn't be any farther from the truth in most situations. You could end up with an IRS tax liability and still owing the bank money. Let me explain. Please keep in mind that if your property does go into foreclosure you may be liable for the difference of what is owed on the property versus what is sells for at auction, in the form of a deficiency balance! Please note this is state specific and in most states you will be liable for the shortfall, but in some states the bank may not always be able to pursue the debt. Check your state law as it varies widely from state to state.

Here is an example of how a deficiency balance works

If you owe $200,000 on the property and it sells at auction for $150,000, you could be liable for the $50,000 difference if your state law allows it.

Not only could you be liable for the difference to the bank, but in some situations you could also be liable to the IRS! Although there are exemptions (mostly for principle residences) under the Mortgage Debt Forgiveness Act, there are times when you could be taxed on both a short sale and a foreclosure, even in a principle residence situation. Since the tax code on this is a little complicated and I am not a CPA, I advise always talking to a CPA when in this situation as you are weighing your options. Hard to believe? Well, believe it or not, the IRS counts the difference between the sale and the charged off debt as a “gain” on your taxes. That’s right-you lost money and it’s counted as a gain! (I didn’t make that rule, that's a wonderful brainchild of the IRS). Banks and the IRS can go as far as attaching your wages. Not to mention if you let your home go to foreclosure you will have that on your credit, as well.

Guess What? A short sale can alleviate your liability to the bank, in most situations. There are also exceptions to this, but in most cases banks are releasing homeowners from the deficiency balance on a short sale.

2.) There are no options to avoid foreclosure. Now more than ever, there are options to avoid foreclosure. Besides a short sale, loan modifications along with deed in lieu are also examples of the many options. In most cases (but not all) a short sale is the best option. Either way, there are more options today than there have ever been to avoid foreclosure.

3.) Banks do not want to participate in a short sale, or, it is too hard to qualify for a short sale. Banks would rather perform a short sale than a foreclosure any day. A foreclosure takes a long time and creates a huge expense for the banks; a short sale saves both time and money. Banks have more foreclosure inventory than ever before, and certainly do not want any more. Banks more than ever welcome short sales. Qualifying for a short sale is easier than you think, you need to have a true financial hardship, or a change in your finances and your house has to be worth less than what you owe on it. Not only do consumers, but banks also now have government incentive to participate in short sales.

4.) Short sales are not that common. At this present time, short sales range from 10-50 % of sales in various markets and it is predicted that in 2012 we will have more short sales than any other year, to date. Due to economic changes in the last few years, this is something that is affecting millions of Americans. Short sales are in every market, and are not just limited to any particular income class. This has affected everyone from all facets of life. A short sale should be looked at as a helpful tool, not a negative stigma. That is why the government is offering programs that actually pay consumers to participate in short sales. It is not just affecting one community; it is affecting communities and consumers across the nation.

5.) The short sale process is too difficult and they often get denied. Though the short sale process is time consuming; it is not as difficult as the media would have you believe. The problem is that most short sales are denied because of a misunderstanding of the process. It is true that if the short sale process is not followed correctly there is a good chance of getting denied. An experienced agent knows how to avoid this. Short sales require a lot of experience, and a special skill set. If you are looking to go the option of a short sale make sure your agent is skilled and experienced in this area.

6.) Short sales will cost me money out of pocket. A short sale should not cost you any out of pocket money. In fact, you could get between $3000-up to $30,000 to participate in a short sale. In many ways, a short sale may put you in a better financial position than prior to the short sale. Almost every short sale program now has some type of financial incentive for the home owner, as long as it is a principle residence, and we are even seeing relocation money being paid on some investment/second homes. As a seller of a property you should never have to pay for any short sale cost upfront to any professional service. Realtors charge a commission that is paid for by the bank. In most communities there are also non-profits and HUD counselors who can help you with foreclosure prevention options for free. The only potential cost you could incur is if the bank would not release you from a deficiency balance in the short sale, which is happening less and less now.

7.) If I am behind on my payments, I can perform a short sale any time. The farther you get behind on your payments, the harder it is to get a short sale approved. The closer a property gets to a foreclosure the harder it is to convince the bank to perform a short sale. As they get closer to a foreclosure sale more money is spent, thus deterring them from doing a short sale. If you think you need to perform a short sale, time is of the essence; the sooner you start the process, the better. Waiting too long can trigger the ramifications of a foreclosure, losing the ability to do a short sale as a viable option.

8.) I have already been sent a foreclosure notice so I can't perform a short sale. For the most part just because you received a foreclosure notice or notice of default it does not mean that you do not have time to perform a short sale. The timeline and specifics do vary from state to state, but having done short sales all over the country, I have seen banks postpone a foreclosure to work a short sale option as close as 30 days prior to the scheduled foreclosure auction, but the longer you wait the less chance you have. If you have received a legal foreclosure notice, please reach out to a professional right away. The longer you wait, and the closer you get to foreclosure, the fewer options you have. If you have received a notice to foreclose this means the bank is filing paperwork and starting the process to take legal action to repossess the house. You still have time at this point to prevent foreclosure, but do not hesitate! The closer you get to the foreclosure date the harder it becomes to negotiate with the bank for whichever option you choose.

9.) I was denied for a loan modification, so I know I will get denied for a short sale. Short sales and loan modifications are handled by two separate departments at the bank. These processes are totally different in approval and denial. If you got denied for a modification you can still apply for a short sale; in some cases you can get a short sale approved faster than a loan modification, as some loan modifications are denied because they cannot reduce the loan low enough based on the consumers income.

10.) If I go through a short sale I cannot buy another house for a long time. The time to buy another house depends on your entire credit picture and can vary from 12-24 months. There are even a few FHA programs that allow for a purchase sooner than that. I have worked with clients who went through a short sale and bought another house in less than 12 months.

These are just a few of the common myths surrounding short sales and foreclosure. With the options available today, no homeowner should ever have to go through foreclosure, and hopefully this information can help a few more homeowners think twice before walking away from their home not realizing the possible long term ramifications a foreclosure can have.

Rebekah and I understand short sales and foreclosures. If you need personal guidance, or you're looking into buying either a foreclosure or short sale, don't hesitate to call, email, or text to discuss your options.



Source: KCM Blog - Steve Harney

Are You a Buyer Looking to Purchase a Short Sale?

It seems that there is a significant amount of confusion when it comes to purchasing a short sale. There are many misconceptions when it comes to this type of transaction, so below I have provided some information to potential buyers of short sales. If you are looking to purchase a short sale, understand that it is not the same as a normal sale and the approach is very different. There could be several parties involved and issues that are unknown to the buyer and buyer's agent that can affect the transaction. If you are looking to purchase a short sale here is some helpful information.


1. On average, to get a short sale approval, it can take 60-90 days.
There could be mortgage insurance and an end investor on the loan as well as the servicer, which means it has to go through three different processes. Bank of America could be the servicer on the loan but they do not actually own the loan, so, the short sale has to pass their guidelines, then go to the mortgage insurer if there is one, then to the end investor like Fannie Mae and Freddie Mac. If you are a buyer and can't wait at least 60-90 days for an approval and then another 30 days to go to closing, then you need to look at other houses. The worst thing you can do is tie up a house that is in a short sale with no intention of being patient while waiting for a short sale approval. Approvals can come sooner than 60 days, but industry standard is at least 60 days to get an approval or denial.

2. There is a general assumption that you can purchase a short sale for 40-50% under its listed price. In a short sale the bank comes out and does a valuation of the property and will expect a slight discount, but will not accept a huge amount under the market value.
Hopefully, if the agent who is handling the sale is experienced, they will have already gotten an approved list price from the bank by the time you are interested in making an offer. The bank will usually be willing to negotiate on that price, but will not, in almost every case, take 40-50% off of that price. To that point, you may be able to get a reasonable deal on a short sale, though it will not be, in most cases, as much of a deal as you may be able to get on an REO (foreclosed property). Also to that point, most short sales will be in better condition than an REO. When you look at the potential repairs a comparable REO needs and the time and expense it can take to do those improvements vs. a short sale being sold at a slight market discount with improvements already made, the investment could even out. There are REO properties that can be picked up for a huge discount, but require massive repairs that a comparable short sale may not require.

3. Short sales are a very difficult process and it takes a qualified person to handle this type of transaction.
With this type of transaction it takes a very experienced agent on the listing side as well as the buying side. Make sure before you move forward on the transaction that the listing agent has ample experience dealing with these types of transactions, or you could be tied up in a contract for months that never goes to settlement. There are several different types of short sale processes and each bank's process is somewhat different; it takes a professional who has had experience with all of these different types of short sales to help facilitate a successful transaction.

4. In most short sale transactions the properties are sold "as-is" and no repairs will be made.
Although there are some exceptions to this rule, speaking in general, short sales are sold "as-is" and no repairs will be made even if they are found during a home inspection. In most short sale transactions the bank will require both the buyer and the seller to sign an addendum that states the property is being sold "As-is" and no repairs will be made.

These are just a few short pointers for buyers who are looking to purchase a short sale as they are a reality in every market, and if you have the patience you may be able to get the home you are looking for at a discount!

Source: KCM Blog - Steve Harney 

6 Don't After You Apply for a Mortgage

I learned a long time ago that "common sense is NOT common practice“. This is especially the case during the emotional time that surrounds buying a home, when people tend to do some non-commonsensical things. Here are a few that I’ve seen over the years that have delayed (and even killed) deals:


1. Don't deposit cash into your bank accounts. Lenders need to source your money and cash is not really traceable. Small, explainable deposits are fine, but getting $10,000 from your parents as a gift in cash is not. Discuss the proper way to track your assets with your loan officer.

2. Don't make any large purchases like a new car or a bunch of new furniture. New debt comes with it, including new monthly obligations. New obligations create new qualifications. People with new debt have higher ratios…higher ratios make for riskier loans…and sometimes qualified borrowers are no longer qualifying.

3. Don't co-sign other loans for anyone. When you co-sign, you are obligated. With that obligation comes higher ratios, as well. Even if you swear you won't be making the payments, the lender will be counting the payment against you.

4. Don’t change bank accounts. Remember, lenders need to source and track assets. That task is significantly easier when there is a consistency of accounts. Frankly, before you even transfer money between accounts, talk to your loan officer.5.Don't apply for new credit. It doesn't matter whether it's a new credit card or a new car, when you have your credit report run by organizations in multiple financial channels (mortgage, credit card, auto, etc.), your FICO score will be affected. Lower credit scores can determine your interest rate and maybe even your eligibility for approval.

6. Don't close any credit accounts. Many clients have erroneously believed that having less available credit makes them less risky and more approvable. Wrong. A major component of your score is your length and depth credit history (as opposed to just your payment history) and your total usage of credit as a percentage of available credit. Closing accounts has a negative impact on both those determinants of your score.

Yes.....we've had it happen. A first time home buyer was so excited about her first time purchase that she went out and bought all new appliances for the kitchen on her credit card BEFORE the closing took place. When the lender pulled her credit again before closing and saw that there was now another $3000 in debt she no longer qualified. Don't let this be you.

The best advice is to fully disclose and discuss your plans with your loan officer before you do anything financial in nature. Any blip in income, assets, or credit should be reviewed and executed in a way to keep your application in the most positive light.




 
KCM Blog - Steve Harney

As you can see, Georgia is #4 in the nation for short sales!

If you're a buyer, there's a lot you need to know and understand before placing an offer on a short sale. If you're a seller, there's also a big process for completing a succesful short sale transaction. If you're in the market to buy or sell real estate, you'll encounter the term short sale in some capacity. We're happy to talk with you about it. Don't hesitate to call, email, or text for more info.



Graphic courtesy of KCM Blog - Steve Harney

Where Did All of the Houses Go!?!?

What happened to all of the houses for sale?! Just a few months ago we had more properties than we could possibly sell. Now, we're scrambling to find good inventory for our buyers who are anxious to find a home and tired of looking at the leftovers - you know, the stale inventory... the properties that are still available for a reason (overpriced, horrible condition, etc).

When a good property hits the market it seems as if it instantly goes to a multiple offer situation/"highest and best." In the past two months, I've had one buyer who has participated in three multiple offer situations, offered much more than the asking price ($15k, $30k, etc) and still wasn't the best offer. The competition is crazy out there right now and can be very discouraging for buyers.

Realtor.com just released statistics that show that the Atlanta market is #8 in the country in terms of metro markets that have experienced the greatest drop in "for sale" inventory and boy does it show! Here's the complete list:

1. Oakland, CA
2. Bakersfield, CA
3. Phoenix-Mesa, AZ
4. Fresno, CA
5. Miami, FL
6. Fort Lauderdale, FL
7. Seattle-Bellevue-Everett, WA
8. Atlanta, GA (-39.62% decline)
9. Orlando, FL
10. Portland-Vancouver, OR-WA

So what does this mean? Hopefully it's a positive sign for an improving market. If you're thinking of selling your property, now might just be the time. Buyer's have less to choose from so if you get your house in tip-top shape and price it aggressively, chances are, you're going to be successful in selling it! If you're a buyer, it means that you better be aggressive with your home search. If a house hits the market and you think you might be interested, don't wait a week to go check it out. By the time you go view it, it will likely be under contract! If you fall in love with a house that just hit the market, there's probably 4 other buyers who love it just as much. If you'd be heartbroken if you missed it, then it's probably not the time to lowball!

If you're looking to buy or sell in this crazy market, please call or email us! We would love help you!

How much money do I need to buy a house?

If you're thinking of buying a house, you may have taken the first step which is to get prequalified for a mortgage; however, there are some other factors to consider ... like how much money/cash you may need upfront. From contract to close, there are a few numbers you should know about and be prepared for:

• Down payment: ...the obvious! Depending on what type of loan you're pursuing, you may need a down payment anywhere from zero (yes, you read that right - think USDA loan), $100 (FHA loan on a HUD property), 3.5% of the purchase price (FHA loan) to 5-20+% of the purchase price for conventional products. This is due at closing but typically must be available in your account a few days/weeks prior to closing so that the lender can confirm that you have the cash needed to close. The good news is that some loan products (FHA) allow gift funds but check with your lender for the specific requirements on this.
• Earnest Money:  In the local market, earnest money is typically anywhere from $500-$1000 for majority of properties but can be higher depending on the purchase price. Typically the rule of thumb is "the higher the purchase price, the higher the earnest money". This is totally negotiable and can vary greatly. What is earnest money? Earnest money is a deposit to show that you're serious about buying the house (if there was no such thing as earnest money and buyers didn't have any monetary interest, you can imagine that contracts would be broken all the time!). The good news is that earnest money is your money and it comes back to you at closing in the form of a credit towards your closing costs, down payment, or credit to the sales price so long as you follow the terms of the contract and close as scheduled. If you default or terminate after due diligence/inspection periods/contingency periods, etc, then you risk losing your earnest money. In some unique situations, it can be negotiated that earnest money is non-refundable or is paid to the seller - be sure you understand your contract! Prepare to write an earnest money check when you write the offer, although sometimes it can be negotiated to be paid upon a binding agreement or within so many days of the binding agreement date.
• Closing Costs & Prepaids: If you're obtaining financing for the purchase of a property, you will incur several fees/costs/etc. that are collectively known as "closing costs" and "prepaids." These fees include things such as the lender's origination fee, attorney's fees, credit report fees, initial deposits into escrow to cover hazard insurance and taxes, etc. In the current market, it is typical that the seller contribute towards buyer's closing costs; however, this contribution doesn't always cover 100% of the costs. It just depends on how the deal is negotiated. When shopping for a mortgage, be sure that the lender provides an estimate of how much cash is needed to close. This should include your down payment, closing costs, and prepaids. Some lenders try to sneak by by just telling the client about the down payment amount and never mentioning the closing costs amount upfront. Be sure you know how much you will need to close the deal so that you can prepare ahead of time!
• Home Inspection: While a home inspection is optional, it is HIGHLY (notice the capitalization, bold, italics, underline ... you get how we feel about this, right?) recommended. Home inspections in this area typically run anywhere from $250-450 depending on the size of the house and what all the inspection includes. Some inspectors can also do termite, radon, mold inspections, etc. Either way, you'll want to budget for this ahead of time. You'll need to pay for the home inspection at the time of the service - just depends on when you have your home inspection, but be sure to do it during your inspection/due diligence period.
• Appraisal: Majority of lenders these days collect this fee upon contracting on a property while others may collect it at closing as part of the closing costs. Go ahead and budget for this as an upfront fee. Typically it's around $400-500 in this area.

These are the main items that you will need money for; however, there are always optional items like home warranties. Many first time home buyers have limitied cash reserves and don't know exactly what to expect when it comes to purchasing a home. You may be prequalified to purchase a home, but be sure that you have the funds to move forward if you're considering making an offer!

...now, to cover our rear ends, please know that the information above is specific to our location (perhaps in many areas, earnest money needed is much more!). Every situation is different and should be discussed with the Realtor or lender that you are working with. Some of this information is subject to change ... like the $100 down payment that HUD offers buyers pursuing an FHA loan - this is a current promotion that could end at anytime. Questions? please call or email us!

Real Estate in Numbers: Butts, Clayton, Fayette, & Henry Counties

Here's the scoop on real estate for the first quarter of 2012 in the South Metro Atlanta Area (Butts, Clayton, Fayette, and Henry Counties). Reviewing the numbers is always interesting.

How to Increase Curb Appeal!

The weather was absolutely beautiful here in Atlanta this weekend!! It was so beautiful that it made me want to do some "spring cleaning" projects outside so that I could soak up some sunshine! While my husband prepped our yard for spring landscaping, I took on a project that I never completed last summer .... I gave our front door and trim a facelift. It was in need of a good scrubbing and a fresh coat of paint! We always recommend that anyone looking to sell their home take on these simple projects to increase curb appeal before putting the home on the market. I'm not looking to sell my home anytime soon, but as I sang along with my iPod (my poor neighbors!!) and worked away, I realized what a suprisingly easy task this was and it made such a difference! Check out the following examples of before and after photos to see what a few hours can do in terms of increasing curb appeal which is oh, so important!!!!

Inspired? I hope so! Sprucing up the entry way can be a very easy and low cost job. Remember that buyers' form opinions about properties before they ever go inside. We've pulled up to some houses in which the buyers didn't even want to go inside of based on what they saw on the outside. Give buyers something to get excited about!!