The home mortgage crisis is affecting people all over the world. Every day, families are losing their homes due to defaults or foreclosures. Many times, families do not know what other choice they have other than foreclosure. It seems like the only option is to let the bank take back the house, as the payment is just too much to handle, especially in these times when the economic conditions are stormy and dangerous. Short sale services are only a step away, continue forward with this article:

Although, foreclosure may seem like the best choice, however, there could be a better option if you are getting suffocated under the loan(s) due to the ownership of your house.

If you do wish to foreclose on your home, then a short sale might be the right option for you. Basically, a short sale is when the outstanding obligations of loans against a property are larger than what the property can be sold for. If you choose to do a short sale, this is the way to save yourself from having to foreclose and be able to pay off the loan by settling with your lender(s). This article will show you how you should go about doing a short sale.

Get the value of your house assessed: If you decide to go through a real estate agent, then your agent will provide you with an estimate of what your property is worth. However, if you opt to sell on your own, you will have to do research on the market value of the area where you live and of your property.

Consider the costs involved: If you have an agent, they will provide you with an estimate of how much it will cost you to close. If you are selling your property yourself, you will need to call a local title company or a real estate attorney and ask what it will cost you as a seller to close.

Confirm the dues that you owe: This is the amount that is due against the property, which is the total of all loans against your home.

Do the math’s: Subtract the total amount of what you owe against your property from the estimated proceeds of the sale. Do not be alarmed if you get a negative number.

Get in touch with your lenders: Speak to a representative in customer service and explain your situation. They may transfer you to a particular department. If it is possible then ask to speak to a manager; they will have more authority and will be able to help you better.

Inquire about the formalities required to be done for a short sale. Some lenders will be more than happy to work with you by reducing the amount that you owe. Then there are others who will look into the agent that is involved(if one) and any other parties that stand to gain anything from the sale of the house and decide if they are willing to make any concessions to make the deal happen. However, there will be lenders that will tell you that your debt is your responsibility.

Short Sales

Short sale real estate is becoming a new trend for real estate investors everywhere. What is it? A short sale is when a bank agrees to accept less than what is owed on a property in order to liquidate their inventory and clear their books from non-performing assets. Here is what they consider for a short sale approval.

The following steps are to be used as a guideline to consider before submitting your property to a lender for a short sale. It is recommended that you consult a legal adviser before involving yourself in any real estate transactions.

All the steps you need to know:

1. Determine Fair Market Value (FMV)

2. Evaluate Sold Comps Systematically

3. Reveal the ARV (After Repair Value)

4. Figuring out the Lenders BPO

5. What is The House Type?

6. Learning the Loan Types

7. Memorizing the Percentages

8. How to Deal with Junior Lien Holders

9. In Closing

The FMV can be determined by evaluating sold, comparable properties in a similar or close proximity to the subject property. Realtors have access to what is called the MLS (Multiple Listing Service). This service provides an inventory of properties available, sold or pending a sale. This analysis will identify sold comparable properties with same square footage, bedrooms, baths, garage and other similar characteristics. Request the Realtors use a sold time frame within 6-12 months when pulling properties in the immediate or surrounding areas. Usually the short sale lender will not consider any sold comparables that are older than 12 months and that are further away than 2 miles from the location of the subject property.

2. Evaluate Sold Comparables Systematically

Contrary to popular and often misguided belief; you can use a formulaic system to work in your favor when determining what to offer on the short sale property. The way this works is like this

Let’s say you have eight sold comparables. You would take out the two highest comps and the two lowest ones and average the rest.

EXAMPLE:

You have a property you think is worth $145,000.

A Realtor pulls a CMA and you find eight sold comparable properties.

The MLS (Multi Listing Service) shows the following sold property values:

$159,000 $154,000 $153,000 $161,000 $148,000 $143,000 $146,000 $151,500

When you use the formulaic approach you would take the two highest sold comparables ($159,000 and $161,000). Take out the two lowest sold comparables which is ($143K and $146K). This would leave four others comps.

$154,000 $153,000 $148,000 $151,500 -

You would then take an average by simply adding up the sum of all the sold comparables and dividing them by the total number of properties left. In this case, that number would be four.

Total: $606,500 divided by 4 = $151,625

You can reasonably justify the house may sell for $151,625 instead of the $145,00 you originally estimated.

3. Reveal the ARV (After Repair Value)

This terminology is jargon or slang often used with real estate investors. FMV (Fair Market Value) is similar. The ARV is made up by the amount of repairs the investor thinks the property needs in order to sell quickly on the open market using FSBO (for sale by owner) techniques and not using the MLS.

It can be argued the ARV is more of a guess or suggested value derived by using sold comparables from houses that were NOT sold by a Realtor. One way to explain the difference is a Realtor will typically use a FMV (Fair Market Value) evaluation method. A real estate investor will consider an ARV (After Repair Value). An appraiser can use both value methods, but generally sticks to the ones that come from off the MLS. The ARV is a less accurate and dependable value than what come off the MLS. It doesn’t hurt to know both.

If you like this article, look for a new one on How to Get A Short Sale Approved – Part 2 of 3
Copyright (c) 2008 Cory Boatright

Kansieo.com

Before we discuss the pros and cons of foreclosure vs short sale, let’s briefly define the term “short sale”:

The “short” in short sale refers to the payoff amount agreed to in a sale transaction as being “shorter” than the mortgage balance owed on the property. In other words, there is more owed on the home than it will currently sell for. In a successful short sale, the lender agrees to accept that shorter payoff in order to facilitate a sale of the home and thus, avoid the costly process of foreclosure.

So why, you might ask, should I consider a short sale if I am facing possible foreclosure on my home?

The short answer is that a short sale is less damaging in terms of the long-term effects on your credit. Let’s take a look at some differences between foreclosure vs short sale:

Short Sale:

* negotiated settlement

* seller’s credit bruised

* no attorney fees

* peace of mind

* buy property again in two years

* liens negotiated

Foreclosure:

* court settlement

* seller’s credit ruined

* substantial attorney fees

* no peace of mind

* buy property again in 8-10 years

* all liens exhausted

Credit Score

The losses of credit points from a short sale transaction can be almost as severe as from a foreclosure. You may actually lose as many as 300 points. So, for example, if you have a FICO score of 700, you could be left with just 400. The importance of this is the fact that having a high credit score means you will enjoy lower interest rates when you take out a loan.

Credibility

When you sell your home through a short sale transaction, it will show on your credit report as “pre-foreclosure in redemption status”. Although that sounds better than a “foreclosure” entry, it is still a negative entry that can damage your financial reputation.

Waiting Period

This is perhaps the main disadvantage of a foreclosure vs short sale. Having a foreclosure on your record may mean waiting for as long as 8-10 years before you can qualify to buy another home at a reasonable interest rate. However, a short sale will likely only require a two year wait.

Tax Relief

One other important item to note: The Mortgage Forgiveness Debt Relief Act of 2007 provides help to some of those who did a short sale, deed-in-lieu or foreclosure on or after January 1, 2007 to December 31, 2009. Check with your attorney or CPA to see if you qualify for an exemption under this law. If not, you would have to pay income tax on the amount of debt forgiven by the lender.

Disclaimer

While every effort has been made here to provide a helpful overview of foreclosure vs. short sale, there is no substitute for competent legal advice.

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When a home owner finds themselves in a position of failing to meet mortgage payments, there is an option that does not include foreclosing on the home. A short sale is a home sale where the lender is willing to accept less than the amount owed on the home. While some lenders do not offer short sales for the loans they have secured, and other lenders may choose a foreclosure as being more financially beneficial for the loaning party, others will allow a homeowner to enter into a short sale if all paperwork is filed properly and on time.

The paperwork involved in setting a short sale in motion is the not so short part of the sale. For obtaining permission to begin the short sale process from a lender the homeowner will need the following documents.

• Letter of Authorization. The letter of authorization will need to include the property address, the loan reference number provided by the lender, the name of the home owner or the person holding the loan, the date of the request, and the agents name and address. The agent may be a real estate agent or a lawyer dealing with the financial matters in the case. The letter of authorization will give the lender permission to speak to any outside parties listed in regards to the homes loan and the home loan status.

• Preliminary net sheet. The preliminary net sheet is a financial document proving the amount of money you expect to receive from the sale of the home. The amount of the total sale, any fees, late charges, and real estate charges. The real estate firm handling the short sale will be able to address the preliminary net sheet. To ensure the approval of the short sale, the bottom line of the net sheet should show zero profits going to the seller of the home.

• Letter of hardship. This is one of the most important documents the homeowner will provide to the lender. This letter should read as real and honest as possible. If there are extenuating circumstances surrounding the sale of the home or the loss of income leading up to the late mortgage payments, the lender will need to know these facts in detail.

• Financial documentation. The lender will also need copies of all financial statements and proof of all income and debt. These statements will include assets, income, bank statements, credit card statements and any monetary statements available at the time of the short sale request. Financial statements that prove the homeowner is not in debt will cause the lender to instantly deny the short sale.

• Purchase agreement. The lender will want the listing agreement and purchase agreement agreed upon by the seller of the home and the buyer of the home. The lender has the right to refuse any and all payments in association with the sale of the home that are not required by law. These may include inspections of the home and home protection plans, depending upon the laws of the state.

A short sale will be highly followed by the lending institution. While this sale will certainly remove the burden of an over expensive mortgage from the homeowner, it will leave that homeowner in the hands of the lender. At any time during the short sale proceedings, the lender can choose to remove the authorization and simply foreclose on the home.

Short Sales

Often times when talking with a Seller they ask, “Why would a lender agree to a short sale?” The short answer is, “It’s in the lender’s best interest.”

Whenever a borrower stops paying on a mortgage that loan becomes what the lender calls a “non-performing asset.” It’s a liability. It is money on which they are earning no interest and what’s worse is that they must now put back up to eight times that amount in reserve. This is additional monies on which they earn no interest.

Since earning money is what they are in business for, the lender stands to lose less money by accepting a short sale. Then they can put the money back into circulation to earn even more money.

A study conducted in 2002 by Craig Focardi of the Tower Group estimated the entire costs of a foreclosure to the lender was $58,759 and took 18 months. You can understand why the loss of a short sale is less than the cost of foreclosure.

If the lender takes the property through foreclosure that property becomes bank owned. You have heard properties described as REO. That stands for real estate owned. The more REO properties held by the lender the worse it looks for the lender and the more reserves they must carry.

Bank owned property is a headache for the lender. Now they have to cope with property maintenance, utilities, and HOA fees. They then must list the property with a Realtor® and pay a commission. They also must insure the property and deal with the possibility of vandalism by the previous owner or others.

If I am current with my mortgage, will the lender consider a short sale?

Most lenders will NOT accept a short sale unless the borrower is delinquent. If you are only one payment behind you may only be able to speak to customer service or the collection department.

In this declining market some lenders are considering a short sale even if the borrower is current with their payments. If the borrower can demonstrate a true hardship and show the inability to make future payments, some lenders are open to negotiation.

In my next article about short sales I’ll discuss the Hardship Test.

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