Friday, July 31, 2009

Homeowners who are “underwater” in their homes - owing more on their mortgage than the value of the home - can turn to a short sale to avoid foreclosure. Simply put, a short sale is accomplished when the homeowners sell the property and their lender or multiple lien holders agree to accept the sale price as payment on the loan.

In December, a client of Matt Martin Real Estate Management in Vienna completed a short sale on her home. She and her husband, who do not want to be identified for privacy reasons, were transferred for work. They were unable to sell their home for more than they owed on the loan.

“We rented the house for a while, but the rent we were able to get did not cover the mortgage payment, so we began dipping into our credit cards to pay our bills. We contacted one company to help us with a short sale, but they charged us money upfront and never helped us. We got in touch with another Realtor, who worked with Matt Martin, and they were able to make arrangements with the lender for a short sale. We had three offers on the house in August and then closed in December,” she said.

It was a happy ending for this couple, since their lender agreed to take the sale proceeds. They did not owe any additional money to the lender, to the Realtors involved or in taxes. In addition, the couple’s credit scores, while slightly lower, remain in the 720s.

“We were so relieved to be able to avoid a foreclosure on the property,” she said. “Not only would that have had a negative impact on our credit score, but it would have hurt the neighborhood, as well.” reported in May that more than one-fifth of Americans owe more on their mortgage than their home is worth. For homeowners who can pay their monthly debts and do not need to move, being underwater is unpleasant and worrisome. For those who must move because of a change in life circumstances (such as a job loss, medical emergency, divorce, death or job transfer) or because they can no longer afford the payments, owing more than the value of the property is a much larger problem that could lead to a foreclosure.

A short sale can be a better solution because the long-term consequences are less painful than a foreclosure.

Karen Ricciardi, a Realtor and Certified Distressed Property Expert (CDPE) with RE/MAX Select Properties in Potomac Falls/Sterling, says, “A foreclosure will stay on your credit record for seven to ten years. On top of that, every time you apply for credit in the future, you will be asked if you have ever been foreclosed on, and you have to admit the truth.”

Ms. Ricciardi stresses that short sales are designed for people who have a demonstrated need to sell their home, not for people who just want to sell or get rid of a mortgage they don’t want to pay.

“A lot of people who can’t afford their payments but don’t want to sell will try a loan modification before a short sale, but often even this won’t solve their financial problems,” said Fernando Herboso, a Realtor with Key Realty Group in Gaithersburg. “If the family does not have any other assets, then a short sale may be the best solution. The household will have to walk away from their home without any cash, but at least they can move to a home they can afford.”

Short-sale experts agree that homeowners should get in touch with their lender as soon as they know they will be unable to keep making loan payments.

“Borrowers should call their lender and explain their situation and then immediately call an experienced real estate agent who understands the short-sale process,” says Emmaniece Gordon, an associate broker and CDPE with Keller Williams Realty in Millersville. “An agent should do a comparative market analysis to get an idea of the current market price of the home to evaluate if there is any equity in the property.”

Pricing the property correctly is crucial to a successful short sale.

“Borrowers need to get their home on the market as fast as possible, but they need to be sure it is listed at the true market value, not at the price they need to pay off all their debts,” says Matt Martin, president of Matt Martin Real Estate Management in Vienna.

Homeowners should continue to make their payments as best they can during the short sale process.

Ms. Ricciardi points out that Virginia law allows for a “nonjudicial foreclosure,” which means that foreclosure paperwork is automatically generated as soon as a borrower defaults on their payments for three consecutive months. She recommends that homeowners seek help as soon as they experience a cut in pay or job loss or anything that prevents them from keeping up with their monthly payments.

Ms. Gordon says extensive documentation is required for a short-sale agreement to be arranged, including the typical items needed for a loan application such as W-2 forms, tax returns, pay stubs, bank statements and a complete financial statement. Most important for any short sale is the “hardship letter.”

“The homeowners, not their real estate agent or some other representative, need to write a letter to the lender explaining the difference between where they were on the day they were approved for a loan and where they are today,” says Mr. Martin.

Ms. Ricciardi says lenders are stringent in requiring proof of hardship, not only looking at the financial statements of the homeowners, but also requiring proof of an accident or health problem, a death in the family, divorce or separation or a job transfer to another area.

“There have been a number of cases of fraud, particularly where homeowners sell their home to a relative on paper and then continue to live in the property for less money,” Ms. Ricciardi says.

Proving the household income is not sufficient to make the loan payments, especially if the mortgage has an adjustable rate and the payments have risen, should be enough to encourage the lender to agree to a short sale, Mr. Herboso says. He says the lenders generally prefer to have the homeowner sell the home rather than taking it on as a foreclosure.

“In the hardship letter, the homeowners need to be very specific, including exact numbers of how much they paid for the home and what their payments were in the beginning of the loan, what the home is worth now and how their income has changed,” says Ms. Ricciardi.

Ms. Ricciardi and other short-sale experts stress that homeowners need to work with an experienced real estate agent or third-party company that understands how to work through the short-sale process and get the sale approved by lenders. She recommends working with someone with the CDPE designation, which demonstrates their education in the short sale and foreclosure process.

“It takes patience to reach the right person at the bank and to make sure that all the documentation gets to that person so they can make a decision,” says Ms. Ricciardi. “Homeowners should immediately sign an authorization that allows their agent to make calls on their behalf when they are attempting a short sale.”

Ms. Ricciardi says she has been able to help 100 percent of her clients complete a short sale, while Mr. Martin says his company has been able to complete 92 percent of their short sales. Both say that, nationally, only about 20 to 25 percent of attempted short sales are approved.

One major complication in many short sales is that the homeowners often owe more than one lender.

“We were able to resolve a short sale for one property that had nine liens on it,” says Mr. Martin. “It is very common for people who cannot pay their mortgage to have a second mortgage or home equity line of credit and to have a lien on the property to pay back taxes and homeowner association dues. That’s why you really need someone who can negotiate with the lenders to resolve all of these issues. Often the first lender will find it is in their interests to get the deal done, so they will negotiate a settlement with the other lender.”

Mr. Martin says that each individual short sale is different and requires negotiations. Many homeowners assume that once a short sale is complete, they can walk away from the property with no further financial obligations, but this may not always be the case.

“Consumers need to understand that when they buy a home, they sign a deed of trust for the property and a promissory note for the loan,” says Mr. Martin. “So when they relinquish the home, they have taken care of the deed of trust, but they may still be obligated to pay the promissory note, which is more like a note signed for a personal loan.”

Mr. Herboso says that some banks consider the mortgage paid after a short sale, but others will require the sellers to repay some portion of the debt, often at a zero-interest loan with low payments.

Ms. Gordon stresses that determining how the unsatisfied debt will be repaid or forgiven is an important part of the short sale negotiations, so sellers should never assume their debt has been absolved.

“Virginia is a ‘recourse state,’ which means that the lender can file a deficiency judgment and go after the debt if the sellers have not negotiated a waiver with the lender,” says Ms. Ricciardi. “However, I have seen very few cases of people having a judgment filed against them.”

In addition to the concern about continuing to owe debt on the property, homeowners should consult a tax attorney to determine whether they will owe taxes on the forgiven debt.

“In general, if the home has been their primary residence, the homeowners won’t owe taxes on the forgiven debt because of the Debt Relief Act of 2007,” Mr. Herboso says. “If the property has been an investment, the rules are different, but even so, a short sale can sometimes be a solution to financial problems.”

Buyers interested in purchasing a short sale need to be prepared to be patient and flexible, since short sales can take 60 to 90 days and even up to a year for approval. A short sale is not just a standard real estate transaction between the buyer and the seller, but also requires the acceptance of an offer by the lender.

“Buyers looking at short sales should decide how much they want to spend, arrange financing and then decide how long they are willing to wait for a property,” says Ms. Gordon. “Buyers can put a time frame in their offer that gives them the option of withdrawing the offer if it has not been approved quickly enough. They need to be aware that their preapproval for a loan will expire at some point, too, and they need to be prepared with financing if their offer is accepted.”

Short sales are often in good condition, but if the homeowners have been financially distressed for a long time, they may have deferred essential maintenance projects on the property. Short-sale buyers should have a home inspection so they know what they are buying, but they should also be aware that the sellers are normally offering the property “as is,” meaning they will not make repairs.

“Short sales are usually listed at the market price or below market because the sellers want to sell quickly,” says Mr. Herboso. “Buyers may be tempted to make a lowball offer on a short sale since they know the sellers are desperate, but they need to be aware that the bank is unlikely to accept a low offer. Buyers should make an offer based on current comparable values, possibly discounted a little to cover any necessary repairs.”

Mr. Martin says the key to a short sale going to completion is a good listing agent who knows how to price the property appropriately and can communicate well with the lender.

“The great thing about buying a short sale is that you are locking in today’s price while you wait for the bank to approve the sale,” says Ms. Ricciardi. “Now that prices are going up again, it may well be worth the wait.”

Short sale tips for sellers:

Contact your lender as soon as you recognize you will have a problem paying your mortgage

Continue to pay your mortgage as long as you can; even partial payments are better than no payment at all

Make sure you and your listing agent have all the necessary documentation - including a hardship letter, financial documents, authorization from the bank and an exclusive right-to-sell agreement

Be very specific and clear in your hardship letter, explaining with numbers why you need a short sale

Work with a Realtor who can do an accurate market analysis and price your home according to its true market value

Work with a Realtor and an attorney who can make sure that the title transfer and release of liens is handled appropriately

Make sure you understand everything you sign; particularly important is understanding your future obligations (if any) toward the unpaid debt

Consult a tax attorney to be sure you understand the tax obligations of a short sale

Short sale tips for buyers:

Be patient and flexible with the settlement date, short sales can take from 45 to 60 days or more

Have an alternate plan in place in case the short sale is never approved

Short sales don’t make sense for buyers in temporary housing, which must be vacated by a certain date, but be sure you can vacate within 30 days of the completed sale

Homes in better condition are more likely to receive Federal Housing Administration appraisal approval

Agents need to consistently communicate with buyers, sellers and the lender in a short sale to make sure everyone can come to an agreement on the terms

Work closely with lawyers who have good access and relations with the lender in order to expedite a short sale, especially the title transfer and the release of any liens on the property. The last thing a first-time buyer needs is to deal with the unpaid debts of the previous owner

Make sure to get an inspection. Homeowners who have been struggling to pay their bills are likely to have deferred important maintenance on their home. While adding a fresh coat of paint is a minor job for first-time homeowners, repairing the roof or replacing the furnace are expensive propositions that may be a budget breaker for the household. A home inspector can evaluate the systems and appliances and provide an estimate of when things might need to be replaced.

Pay careful attention to the details of the contract. When the sellers are in financial distress, there is a greater likelihood of items being removed from the home or damage occurring during their move.

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