Short Sales

This information is intended to educate you on the basics of Short Sales. Full details about Short Sales would require hundreds of web pages and we encourage you to do additional research about the subject and get professional advice on your own, if possible. After you read the Short Sale FAQs, if you do have additional questions about the Short Sale process or need help with your specific circumstances, please call us at (714) 814-5212.

 

1. What is a Short Sale?

A short sale is the process by which a homeowner can sell a house for less money than he actually owes on the mortgage(s). This is done by the borrower providing proper documentation to the mortgage lender(s) to show a hardship to pay the mortgage and requesting the lender take a short payoff on the loan. The mortgage lender (or bank) actually takes a loss (or write-off) on the mortgage because the value of the home has fallen below the mortgage balance AND the homeowner has suffered a legitimate financial hardship that has caused him or her to fall delinquent and will not allow him or her to continue to pay on time.

Once the bank approves the discount on the mortgage, the home can be sold for a price near market value without the seller having to come up with cash to cover the shortfall. The mortgage is satisfied and the foreclosure process stops.

2. What type of situation is the short sale best for?  

Most short sales are done on properties that are facing the possibility of foreclosure.

A mortgage that is more than 4 months in default enters into the foreclosure process with the bank and foreclosure attorneys.  You should have received a Notice of Default (NOD) by this point. Recently, lenders are approving more mortgages that are simply behind or "in default," and are being considered short sale candidates without actually being in foreclosure.

Also, the homeowner typically has negative equity or no equity in the home. In other words, the total balance owed on the mortgage(s) is equal to or greater than the price at which the house can be sold. This situation is growing increasingly common due to the recent decline in home prices. This is particularly prevalent in the Orange County and the Inland Empire areas, which have a large pool of homes for sale and where prices have declined 20%-50% in the past year.

In addition, the homeowner must have some type of financial hardship that is preventing him or her from paying the mortgage.

     A typical situation for a short sale is this:

• Homeowner purchases a home for $548,000 in 2005 with a 5% down payment; the mortgage balance is currently $505,600.
• In 2008, homeowner gets laid off and continues to make payments from savings, hoping to acquire a new job soon.
• By 2009, the savings are gone and still not obtained a job. Homeowner begins to miss payments.
• Due to the decline in home values, the home's value has dropped to $450,000 and the homeowner cannot conduct an equity sale. 
• Homeowner is facing a potential foreclosure and considers the option of a short sale.

If your situation sounds at all like this one, you might benefit from a short sale, e-mail us at tristonegroup@gmail.com

3. How does a homeowner benefit from a short sale?  

First and foremost, foreclosing on your home can be a very emotional experience, with the end results affecting your finances. Many homeowners have feelings of remorse, disappointment, and regret that result from a foreclosure.  During the process, the mortgage lender will constantly call to collect the debt owned to them even if you are unable to pay.  A short sale can reduce these calls and allow homeowners to get rid of their big mortgage payment and move on with their lives. A short sale allows you to stop the foreclosure process and get a fresh start.  In our experience, this is the primary benefit to homeowners. They are tremendously thankful to just relieve the burden that their home and mortgage have become.

Another major factor for choosing to do a short sale over a foreclosure is to prevent the lasting effects that a foreclosure has on your credit.  A foreclosure will stay on a person's credit report for 7 years.  Having some late payments and a Notice of Default filed has already done damage to your credit. However, a completed foreclosure will do much more damage and lower your credit score tremendously.  It has been reported that a foreclosure will negatively impact a credit score by 200-300 points.  However, a short sale results in the mortgage actually being paid off, which reflects positively compared to a foreclosure.  After a short sale, the loan recorded will state "paid in full for a settled amount," or some variation of that clause.  It has been reported that a short sale will impact a credit score by 20-100 points.  If a homeowner has several months of late payments, this impact will be greater.  However, over a 2-3 year period, with credit building techniques, a recovery to the credit score will allow a person to get a new loan in order to buy a new house.  Most homeowners appreciate having the ability to buy again in the near future and avoid the 7 year impact from a foreclosure. 

4. Why would a bank or mortgage lender want to do a short sale?

A common saying is that banks are in the business of lending money and do not want to own real estate.  When a bank takes a property back via foreclosure, it is a long and expensive process and often results with the bank holding the property in their inventory as a non-performing asset. Banks have a limit to the amount of non-performing assets they want to hold. Once this limit is exceeded, they have a strong incentive to get rid of these properties at discount prices.

For a lender, doing a short sale avoids many of the costs associated with the foreclosure process. Attorney fees, delays from borrower filing bankruptcy, damage to the property, costs associated with resale, property tax, insurance, etc. all must be paid by the bank during a foreclosure. Once foreclosed upon, the house then goes to public auction, and typically could sell for a fraction of its worth. In a short sale scenario, the lender is able to cut its losses by getting rid of the property faster, and potentially taking a ‘lesser’ loss. It’s strictly a business decision by the bank and its loss mitigation department.

5. Will a short sale “save my house”?  

In the sense that you will be able to continue to live in the house, unfortunately the honest answer is no. A short sale is only done involving a legitimate sale of the home from the foreclosed owner to another unrelated party.

Many of the cards and letters you have gotten have probably promised to save your house; however, this is very seldom possible. We would recommend that you NEVER sign away your deed to someone who promises to “save your house” from foreclosure. It is probably a scam.

6. Will a short sale “save my credit”?

The short answer is yes and no, a short sale can save you from the worst credit disasters.

By defaulting on mortgage payments and having a foreclosure filed against your property, you have already done damage to your credit. Your credit score has declined and those negatives will stay on your credit report for some time. However, it will get much worse if you allow the foreclosure to continue and do not try to short sale the property.

Once a foreclosed property is sold at auction, your credit score is further reduced and when the foreclosure is completed via eviction and repossession of the home, your credit will be even further damaged. If you can complete the short sale BEFORE either of these takes place, then you can prevent that further damage to your credit. In addition, when the short sale is completed, it shows future creditors that you did take care of your obligations.

If your situation eventually winds up in bankruptcy, then that is the worst item that could appear on your credit report, other than a foreclosure. A declaration of bankruptcy will remain on your credit report for 7-10 years, depending on the type of bankruptcy filed, and cause numerous difficulties in getting future credit.

A short sale can help avoid this, but the key is not to wait. 

7. I am in foreclosure. Is a short sale for me or do I qualify for a short sale?

Each situation is different and must be evaluated individually. If you believe you fit the basic criteria of:

1. Late on your mortgage, or have future inability to repay
2. Personal financial hardship
3. Little or no equity in the property
4. At least 60 days until eviction date

E-mail us at:  TriStoneGroup@gmail.com

8. I am NOT in foreclosure and I have missed NO PAYMENTS can a short sale work for me or do I qualify for a short sale?  

It is difficult to do a short sale if foreclosure has not been filed but it is not impossible if there is a good hardship. The lender must be convinced that they will NOT BE REPAID without the short sale.

The key is to have a legitimate financial hardship that will keep you from making the payments. A short sale is not just an easy way out of a bad investment.  If your house has just lost some value and you are now upside down, that is just unfortunately a bad investment and you are responsible to pay the shortfall if you choose to sell.

Short sales are when lenders agree to discount a mortgage for someone who has had a legitimate hardship and who has little chance of paying the amount owed. You may be hearing stories that mortgage companies are hurting and they don't want these houses and are giving big discounts away. These stories are mostly urban myths and are not true. In fact, the opposite is happening. They are not letting properties go cheaply and without very good reason. A short sale is only a last resort, but we do know how to get lenders to agree to a short sale. 

9. What if my mortgage is an FHA...or HUD...or VA mortgage?

Short sales can still be done on all these types of mortgages though each one has different criteria. Just note on the Evaluation Form which one you have and we will take that into account.

10. What other options might I have at this point?

When faced with a foreclosure, some things you may be able to do are:

1. Sell your home through the normal channels
2. Bring your mortgage current by making the missed payments and paying the penalties
3. Refinance your mortgage with another lender
4. Get your lender to agree to a loan modification
5. File for bankruptcy

If you can do any of the first 3, then you probably should! Those are usually the best solutions for a homeowner in foreclosure. However, if your situation is such that your house cannot be sold for the amount owed, you have no money to bring the payments current, and you have no equity to qualify for a refinance, then you should consider a short sale before considering option #5.

Again, we encourage you to educate yourself as much as possible about your situation and seek advice from any attorney or CPA you have access to about your choices. We do caution you against paying for the advice of so-called “foreclosure work-out specialists” or other such advisers, unless it is by personal recommendation.

11. What is "Financial Hardship" and why is it so important?

"Financial Hardship" is a critical part of the short sale equation. No matter what you hear about banks "not in the business of owning real estate," etc. they DO NOT give homeowners a break easily. They require GOOD REASON to give a discount for a short sale. They have departments called "Loss Mitigation," which means their entire job is to reduce the loss the bank takes on a bad loan. Giving big discounts to investors increases the loss on a bad loan, so they don't take it lightly.

The ONLY reason a lender will agree to a short sale is if they determine that the short sale will net them more money than proceeding with the foreclosure. Understanding the homeowner's financial hardship is a big part of the lender estimating whether they will be paid in full for the mortgage.

IF THERE IS NOT A LEGITIMATE FINANCIAL HARDSHIP, A LENDER WILL NOT SHORT SALE EVEN IF THE HOME IS WORTH LESS THAN THE MORTGAGE BALANCE. Quite simply, the lender will make the borrower pay the shortfall if there is no hardship.

     Examples of Hardships:

 

1. Sellers are often unaware about how bad the market really is for housing and therefore don't realize how far the value has declined.
2. Lenders don't like the foreclosure process any more than homeowners do (especially in California). Lenders incur substantial costs during a foreclosure process that can last more than 12 months. They have attorney fees, filing fees, publication fees, lost interest on the money that is tied up, property taxes, insurance, maintenance costs as well as the potential for vandalism of the vacant home. This is all BEFORE having to try to sell the home as a bank owned REO and pay commissions to do that. A short sale is a way to avoid some or all of these costs. If a lender calculates his cost of eviction at $50,000 for a house, they will often take a $40,000 loss on a short sale instead and they will be better off. 
3. Lenders are emotionless businesses. They simply look at the numbers and make a decision. If the numbers favor a short sale, they will accept even if it means taking a large loss. They do not want to wait; they want the deal done NOW. These numbers and factors are what a short sale investor is focused on. In a poor housing market, most of these numbers have very little to do with how nice a home is. 

• Unemployment
• Reduced Income
• Divorce
• Separation
• Too much debt
• Death of Spouse / Family Member
• Payment Increase
• Business Failure
• Job Relocation
• Illness
• Medical Bills
• Damage to Property
• Military Service
• Incarceration

  For The TriStone Group to try to short sale your home, you need to demonstrate a Financial Hardship and a perceived inability to repay your mortgage in a timely manner. To see if we might be able to handle your short sale, e-mail us at TriStoneGroup@gmail.com.

12. Who owns the house after a short sale?

The purchaser of the house is the owner after a short sale, just as in a normal sales transaction. The mortgage lender is paid off and the previous homeowner moves to a different home.

13. What do I do about my back property taxes when I do a short sale?

Just as in a normal home sale, property taxes are the responsibility of the homeowner until the date the sale is closed. Then they become the responsibility of the buyer or investor.  In some cases, we can negotiate these to be paid by your lender as part of the short sale.

If your property taxes have not been paid, this will affect the negotiations between the buyer and the bank.  As such, you must inform us or any buyer of those taxes owed.

14. Can I short sale my own house to myself or my family?

No, this would be illegal. A short sale must be an “arms length” transaction. You cannot short sale your own house nor can close members of your family or friends do one for you either.

In a short sale, the lender is agreeing to discount the mortgage amount due to legitimate hardships; but not so that the homeowner can make a profit. No money from a short sale transaction can be paid to the homeowner (seller). Lenders will not approve any short sale in which they suspect the foreclosed homeowner will profit. 

15. Can’t I just go down to my branch or mortgage broker and talk to them about reducing my mortgage?

Unfortunately, things don’t work that way anymore in the banking business. Once you obtain a mortgage it typically gets bundled with other mortgages and sold to other banks or investors. Oftentimes, the company to which you make your payments is not even the bank who holds your mortgage; they are simply paid to “service” the loan.

Also, once your mortgage lender begins the foreclosure process, the file is turned over to a loss mitigation department so the “lending” departments and the branch no longer have anything to do with the loan.  All negotiations regarding the short sale are done between the Listing Agent and whatever loss mitigation or asset management company works for the lender.

16. Do you handle houses in my area?  

Our focus is in Orange, Riverside, San Bernardino, and San Diego Counties; however, we will consider listings in other areas of California. In addition, we work with other short sale specialists in the State and can often refer your case to another Real Estate Broker if we cannot help you.

We typically have enough knowledge of the local real estate market you are in to be able to make a convincing case to a lender to short sale your mortgage.

To see if we might be able to handle your short sale e-mail us at: TriStoneGroup@gmail.com.  

17. Do you handle duplexes, apartment buildings, condos or commercial property?

We do handle all residential properties in all price ranges, including commercial properties.

To see if we might be able to handle your multi-unit properties e-mail us at: TriStoneGroup@gmail.com.

18. My house is already listed for sale on the MLS but isn’t selling; can I do a short sale?  

Yes, you can and it is relatively common. Some lenders even require that a house be listed for sale before approving a short sale in order to show that a discount is necessary.

A typical example of this is:  

• Homeowner purchases a home for $548,000 in 2005 with a 5% down payment; the mortgage balance is currently $505,600.

  19. My house is really nice, why is the short sale offer so low?

• In 2008, homeowner gets laid off and continues to make payments from savings, hoping to obtain a new job soon.
• By 2009, savings are gone and still no job. Homeowner begins to miss payments and decides to sell the home for $600,000.
• As the months pass, the home's value has dropped to $450,000 and the homeowner cannot conduct an equity sale and the foreclosure process has begun. 
• Homeowner is stuck in the house and the foreclosure is proceeding.

Sellers often have an emotional attachment to their home and often feel a short sale offer is too low. It is important to remember a few things. First, the seller in a short sale can never receive any money in the transaction; therefore it should be of very little concern at what price the short sale is done. The only real exception is when the seller has tax liability concerns. Otherwise, the price should not matter to the seller.

The important factor in a short sale is whether the lender will accept the price. Lenders OFTEN accept prices for short sales that normal homeowners or Realtors are surprised at. Discounts of 30% are no longer uncommon. This happens for several reasons:

20. Should I accept a short sale offer from an investor?

Obviously this is up to each individual, but we believe the only real reason to reject an offer is because you know that you will have a tax problem. Again, most sellers who have a short sale qualify as insolvent with the IRS and can therefore avoid taxes on the short sale if the deal is properly negotiated. Otherwise, neither you nor your Realtor should have a concern about the price.

Investors do not want to waste time with low ball offers either so you can be assured that if they place an offer, they have reason to believe it could be accepted. If you need to sell your home, the quickest and surest way to do so is through an Experienced Short Sale Realtor and Short Sale Negotiator.

21. My Real Estate Agent doesn’t know about or doesn’t recommend a short sale, what do I tell him/her?

If the foreclosure process has already been started, do not let anyone stall you or delay you from taking action! The biggest mistake for a homeowner in default to make is to do NOTHING. Before you know it, you will be left with no options and you will be evicted. You must deal with your situation ASAP, and if your agent does not want to look into all the options for fear of losing his commission, you should look for a new agent.