Foreclosure & Short Sale Information

"Short sales", and "pre-foreclosures" are terms often incorrectly used interchangeably.  Although a short sale can be a pre-foreclosure, it is not always. On the average, 60% of short sales are in pre-foreclosure.

WHAT IS A SHORT SALE?

A Short Sale is when the seller is trying to sell their home for less than what is owed on it. If the seller will be unable to pay the difference at the time of closing then they will need to obtain the bank/lenders approval ("3^rd party approval") to "sell short" of what they owe before the home can be sold to another party. A home isn't necessarily in pre-foreclosure for it to be a short sale; they may have been able to keep up with most of the payments avoiding the pre-foreclosure process.

WHAT IS PRE-FORECLOSURE?

Pre-Foreclosure If a homeowner doesn't make timely payments and falls too far behind, the homeowner will eventually receive a notice of pre-foreclosure. Once a homeowner is made aware that their home is in pre-foreclosure, they either make arrangements to get caught up, decide to sell (which may or may not equate to a short sale) or the home eventually is foreclosed upon. 

RealtyTrac.com and other similar sites:

When a homeowner is notified that his home is in pre-foreclosure, that information becomes public record.  Many websites such as realtytrac.com have systemized a way of profiting from the information by making the property's information as well as the homeowner's information, available to those willing to purchase a membership to their site. In most cases the homeowner is unaware and even shocked to hear that their situation has become public. 

THE CONS TO CONSIDER WHEN MAKING AN OFFER ON A SHORT SALE

• Offers are subject to 3rd party approval (banks/lenders).  Even if the seller accepts the offer, the offer is not legally accepted until it is accepted by the 3^rd party.  Currently it is averaging between 2-3 months before getting an initial response from the 3^rd party to the offer, in many cases the bank may not respond at all. Patience is important.
• Banks aren't bound by the same rules as agents and due to the amount of short sales and number of them accumulating on their desks in the current market; they frequently make decisions that are unfair or unpredictable to both the buyer and the seller.

For instance,  you can make an offer on a short sale and it may have been in line for review on the banks desk for over a month, because an agent is required to keep the home listed as active until the bank has accepted an offer, other offers can continue to accumulate and compete with the first one submitted.  Cash offers are going to compare better than those with lending and requests such as closing costs and/or contingencies are considered a burden frequently turned away or even ignored. The Lender/bank can collect and review all offers at once and choose which to accept vs. in a typical sale where the seller is bound to make a decision within a reasonable amount of time and stay committed to only one buyer.

• An offer on a short sale is frequently competing with investors paying cash. Investors will make offers on several short sale homes in the hopes of capturing a small percentage at a good price. They don't have an emotional attachment to the home.
• If you do obtain 3rd party approval, transactions are currently averaging 3 months to close and with little to no guarantee of getting the home.  If you are a first time home buyer and/or are just barely qualifying for your loan, it's possible that by the time you're ready to close, your loan program may no longer be available or the interest rates may have gone up leaving you with no possible way to purchase a home, the short sale or any other. You loose valuable time.
• You may end up with the expense of having paid for an inspection on a home that you may not end up purchasing. Although you wouldn't want to have an inspection done before having the 3rd party approval, there is still no guarantee as much of the terms are verbal only and the bank, playing by their own rules may change the rules.  
• The majority of homes in a short sale situation need work, typically deferred maintenance and occasionally a lot more. Since many of the short sales are also in pre-foreclosure you can expect that many have likely had limited funds to keep up with the general maintenance of the home.
• In my experience, 95% of agents will not or do not want to work with short sale transactions. Because of the time involved, frustration of not being able to assist in the process, and unhappy buyers who will wait months and find that they have been waiting on a home that goes into foreclosure anyway.
• The list price of a short sale does not mean that that is the price the bank will agree to work with; in most cases an agent just chooses a list price that they believe will attract offers so that they have "something" to start the process with the bank. The bank will not begin working with a home owner on selling his home short without an offer.
• If you write an offer and it takes 2-3 months for the bank to respond then chances are good on the third month that you are no longer willing to pay that same price; re-negotiating your original offer often starts the process all over again.
• On the Upside: if you are competing with other offers on a short sale, chances are good that they may drop out leaving your offer the only one standing. A large percentage of buyers tire of waiting and end up purchasing something else. Also, if an offer is accepted by the bank and the buyer has already moved on, another offer can "step in" where the other left off; in these cases you'll see "bank approved short sale" and usually a dollar amount that was approved.

WHAT IS A FORECLOSURE?

Foreclosures are still auctioned at the courthouse steps. There is no opportunity for inspections and its cash only. If the bank can't get what they need at auction then it becomes bank owned (which is the norm), is passed to an agent and goes back on the market usually at fair market value or slightly under for quick sale. These homes (also referred to as REO's or BANK OWNED) are highly sought after and being generally priced at or under market can often sell quick even with multiple offers on the table and even in a down market such as we are seeing currently.

SELLING SHORT? THINGS YOU NEED TO KNOW
As a home owner selling short can be an extremely strenuous experience and has long standing implications for both your credit standing and taxes. If you are in a position where you must sell short make sure you are working with experienced Realtors as a lot of the leg work they will do for you, but some leg work you still have to do on your own. If you don't have to sell and are short, don't sell get right side up in that home, wait until the value comes back etc as you don't want to do this if you do not have to.

Some things to consider for short sales as a seller:

• Credit implications: You are not paying off the full debt and thus the financial institution will "ding" your credit as a result. While this is not quite as bad as a foreclosure, it's still something you want to avoid.

• Tax implications: A lot of sellers selling short are not aware of this and it's a serious implication. Lets say your owe $600,000 on your home, market will only bare $500,000 and you end up selling at $500,000 after the bank approves the short sale at that amount. Later you can and likely will receive an IRS 1099 requiring you to pay the taxes on what the IRS considers $100,000 worth of income (the $100,000 difference in what you sold at vs what you owed is seen by the IRS as income!). That IRS bill could easily be in the ball park of $25,000. Talk to a tax attorney and/or your CPA about these tax implications, do not take this page as gospel for your situation as every situation is different, if you need to sell short, then you need professional help, get it. Laws have been put into place protecting the seller but you need to know if they apply to you.

• For both of the above working with the bank rather than against them can often lead to lesser consequences in terms of credit and/or taxes. For instance a creditor may "forgive" the remaining debt or something similar helping to lesson and/or in some cases completely avoid the negative consequences. If you are in this situation treat the bank as your friend not the enemy as it will only hurt you in the long run, not them.

• Often banks will not even discuss an amount they are willing to consider accepting as payoff of the loan without an offer in hand (from a buyer, not from you) and/or will not even assign someone to review your situation until then, this is again why you want to heed the advice here and consult a tax attorney and/or a CPA and a good Realtor.

IN SUMMARY

There are so many short sales that the banks can't keep up and the time to process is taking longer. Agents are frustrated because they have little to no control and buyers & sellers are frustrated because they can't get any timely answers. There are few guidelines established where the banks are concerned and little predictability.  Those that have the advantage are investors/cash paying buyers that have no particular attachment to the home and plenty of time to wait. Tax and credit consequences on sellers can and are often significant.

BUY BANK OWNED (not Short Sales)

When you can, purchase bank owned homes. They get back to you in days not months, are typically priced very well and although the ride is bumpy it's typically short!