Short sale
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Found at mortgagenewsdaily.com
On June 28, 2006 "Johnston" responded to HUD Pushes Mortgage Lenders
to Avoid Foreclosure Loses.
The article was about the FHA Loss Mitigation Program which gives lenders the
authority and responsibility to assist homeowners in financial trouble with
their home mortgages. HUD/FHA lenders have options in dealing with distressed
homeowners to stop foreclosure and HUD has recently pushed them to pursue these
including a pre-foreclosure short sale where the borrower sells the property for
its appraised value even though this may result in a "short sale."
What, Johnston asked, is a short sale? "I'm familiar with the term in
stocks, but not real estate or mortgages."
Stocks are sold short when an investor sells securities that he does not own in
anticipation that the price will plummet so that he can buy the stock back at a
lower price and "cover" the sale. A short sale in the mortgage world
amounts to an accommodation on the part of the lender in hopes of avoiding or
mitigating an impending loss.
Let's say that, during a short-lived housing boom, Joe buys a real estate
investment property in Arizona for $150,000. He puts down $30,000 and takes a
$120,000 mortgage loan from Sunburn Bank and Trust (SBT) and, immediately after
closing, a second mortgage loan for $10,000 from his credit union to make
improvements to the property. He rents the property out for a year or two,
nicely covering his mortgage payments then, just as he is about to sell and take
his profit, the local economy hits the wall. First Joe has trouble renting the
property for enough to cover his mortgage payments and then loses his own job,
runs through his savings, and begins to fall behind both on his home mortgage
and the first and second mortgages on the investment property.
The banks are calling him weekly but Joe claims he can do nothing. His
unemployment insurance is gone, both houses are for sale with no takers, and his
last tenant left owing two months rent after virtually trashing the place.
SBT hires an appraiser to inspect the investment property and he reports that it
appears to be in bad shape and probably not worth anywhere near the $120,000
that Joe owes the bank. The bank's loss mitigation specialist estimates that a
non-judicial foreclosure will cost about $4,000 and there are property taxes due
in the amount of $800. The appraiser estimated repairs in the amount of $5,000.
With the second mortgage still outstanding, the bank is looking at a substantial
loss.
The bank has several options.
Foreclosure is the most obvious recourse. While it seems unlikely that the bank
can sell the house at auction for enough to cover the mortgage amount and legal
fees, foreclosure would at least wipe out the second mortgage.
If there is a shortfall following foreclosure the bank could seek a judgment
against Joe for the balance owed. It looks, however, that he might be the
proverbial turnip out of which one cannot extract blood.
A workout or restructure of the loan also looks futile. Joe is clearly
underwater so it is unlikely that he would be able to pay any restructured
amount that the bank might propose.
The bank could accept a Deed-in-Lieu-of-Foreclosure in which Joe would sign over
all rights to the house. The bank, in return, might promise to forgive Joe the
balance of the debt owed. This, however, still leaves the bank faced with the
outstanding tax bill, some legal fees, and the second mortgage.
Or they could search (or encourage Joe to search) for a private party who would
buy the property possibly even before foreclosure begins.
Joe has had the property on the market for some time so apparently the amount
needed to pay off the first and second mortgagees and the back taxes (and
possibly a real estate commission) is more than the market will bear.
It looks like everyone in this deal, except for the city which will collect its
taxes no matter what, is going to get burned.
And that is where a real estate short sale comes in.
We have painted an unusually complicated scenario in order to demonstrate some
alternatives that might take place.
Let's say that Joe's friend Carl has had his eye on the investment property and
is willing to pay $115,000, even in the current depressed market. He approaches
Joe with this offer.
Joe has already given up on the idea of recouping his original $30,000
investment and just wants to get out with his credit history somewhat intact and
without the possibility of a summary judgment against him for any shortfalls on
the payoff to first and second mortgagees.
The $115,000 offer that Joe presents to Sunburn B&T looks like the answer to
both their dreams. Granted, the bank is owed around $120,000 on the original
loan along with several months' unpaid interest and some appraisal and
collections expenses, but it is still facing $4,000 in legal fees and, if the
property does not sell at auction, a second mortgage (which may have to be paid
off immediately after the new deed is filed) $800 in property taxes, and untold
future expenses managing and marketing the property and making needed repairs to
keep the property from deteriorating any further.
The bank might be delighted to take the $115,000 offer but there are still the
issues of the second mortgage and the tax bill. Carl will have to pay the taxes
before closing on the house so the big problem is the second mortgage. Carl
however, can negotiate that just as he has the first mortgagee. SB&T will
probably encourage Carl to approach the credit union with a nominal offer to
release its second mortgage and might even offer to reduce its payoff a thousand
or two to assist in the negotiation. The CU is not in a position to argue as a
foreclosure by SB&T will wipe out their lien position although a deed
transfer in lieu of foreclosure would put them in the catbird seat. Any
pre-emptive strike by the CU to foreclose would force them to pay off Sunburn's
senior $120,000 mortgage to recoup its $10,000 second - not a smart move to
explain to your shareholders.
Both lenders will have to jump through some regulatory hoops to prove that the
deal is the best they can do - a formal appraisal of the property, financial
statements and possibly an asset search to prove that Joe is in financial
extremis - but basically such a real estate short sale can ultimately work to
everyone's satisfaction.
So it is possible that Carl will buy the property for $115,000 to $120,000, Joe
will walk away a free man with only the remainder of his financial collapse to
worry about, and Sunburn Bank and Trust will clear somewhere in the vicinity of
$113,000 to $115,000, a loss of only $5,000 - 7,000 to explain to their
stockholders and federal regulators.
And that is the story of not one, but two short sales. And, if you see a
possible creative real estate investing opportunity here - well good luck to
you.
I am selling a investment home that is going to short sale about $70,000 out of
300,000 in Arizona I am trying to find out if the banks will come after me for
the short fall after we have agreed on a price or if they will 1099b me
forgivance of debt.
Posted By: mike | Sun, 11 Feb 2007 13:24:41 EST
I am a little confused about all this...My 1st mortgage is $200K and my 2nd
mortgage is $15K...I cannot afford the payments any longer and cannot sell the
house due to damages and the value being less than what I owe. I live in WV. Am
I eligible for a short sale or is my only option foreclosure and bankruptcy?
Posted By: Barb | Sat, 10 Feb 2007 09:28:35 EST
With more and more foreclosures are the banks/mortgage companies doing more of
these? Can you do it on your own personal home?
Posted By: Gloria | Sun, 21 Jan 2007 11:27:39 EST
In a [real estate] short sale scenario, what prerequites are there to geting a
short sale offering, funding the deal, & what is the average length of time
to realize or cover the sale with the bank? Is it necesary to have a tax review
with my accountant before entering a short sale? Last of all, does an excellent
FICO score help a short sale situation of the shorter?
Posted By: EBB | Wed, 27 Dec 2006 02:42:27 EST
I recently fell onto a financial burden after my divorce. I have to use the
equity to pay the alimony and now I am overburdened with the house. If is sell
the house short - do I then owe the bank? I am not in foreclosure - but do not
want to get in that situation and I see that happening if I dont make a change
in the future. Any references available for my situation?
Posted By: Sammy | Thu, 7 Dec 2006 12:26:29 EST
How hard is it after a short sale to rent a house? We are in the process of
getting started in doing a short sale and want to move out before it is
finished, because we don't want to be declined to rent because of credit but
what do we tell property managers?
Posted By: pamela | Mon, 27 Nov 2006 13:05:17 EST
Hey Chad. I just read your comment. Check out this book: "Short Sales: The
Secrets & Strategies of Pre-Foreclosure Investing" by Randy Lee. It has
helped me a lot and we have a group on Yahoo that studies it together and shares
ideas and experiences. It's great! You can see it on line at www.Purpose.4T.com.
-Posi. PS: Thanks for the great information here too!
Posted By: Posi Quan | Mon, 27 Nov 2006 07:27:19 EST
How long does it take for short sales to get approved?
Posted By: DSD | Fri, 10 Nov 2006 11:30:13 EST
I am trying to get into foreclosures and short sales, i have lined up the
financing end of it but still feel like i need to learn more prior to my first
purchase. Any suggestions on where i can get good reliable information on the
topic.
Posted By: Chad | Tue, 7 Nov 2006 14:38:18 EST
Is a short sale still an option if the foreclosure has taken place?
Posted By: Ellen | Thu, 2 Nov 2006 08:50:14 EST
How can I get referrals from lenders that have clients that want to do a short
sale??? Where can I find properties being sold in a short sale?
Posted By: Yolanda | Fri, 27 Oct 2006 13:19:07 EST
What are the disadvantages of doing a short sale? Will I have to file a 1099 and
claim it as income? After all is said and done does/will the Lender come after
me to pay the remaining balance? Does the Real Estate Agent/Broker profit from
the sale? Will I be subject to a higher interest rate on future mortgages? Will
future mortgages be harder to obtain? Does doing a short sale affect my credit
rating/scores?
Posted By: Leshia | Mon, 25 Sep 2006 19:10:19 EST
I'm interested in this house, owners divorced and walked away. The bank that
holds the second is trying to short sale the house. 2 offers have been placed
(500k, 550k). I planned to offer a bit more than the offers, but the realtor
called and said the lender (countrywide) will not take any less than the
appraised amt that just came in (approx 750k). What next? Does it go to auction?
I'm confused why the second mortgage company is doing the short sale and not the
primary? Suggestions?
Posted By: Scott | Thu, 21 Sep 2006 05:22:59 EST
I am trying to short sell my house and do have a second mortgage, does this mean
I am uneligable for a short sell? If not what limitations do I have to over
come?
Posted By: coy | Wed, 20 Sep 2006 21:43:13 EST
You know you can just sell the mortgage, this way you don't have to sell the
house, or it will not have to go through forclosure.
Posted By: NATRALL | Mon, 28 Aug 2006 08:31:36 EST
If the property is listed and sold by a Realtor on a short sale, under what
conditions does the Realtor get paid/not get paid for his services?
Posted By: tim | Thu, 10 Aug 2006 11:20:47 EST
What are the chances that the bank issues a 1099 on the remaining balance and
makes you pay taxs on it?
Posted By: virginia | Thu, 10 Aug 2006 09:45:58 EST
I have a home that is worth $560,000.00. 1st is $442,000.00, 2nd/HELOC is
$130,000.00. Taxes say $10,000.00. Broker fee $10,000.00. Net $540,000.00.
$572,000.00 less $540,000.00 $32,000.00 Short. What will happen? Can it happen?
What will the 1st lender take and what will the HELOC lender take? Looking
forward to your response!
Posted By: Chris | Thu, 20 Jul 2006 01:07:43 EST
How long does it take a bank to approve a short sale? Location Long Island New
York
Posted By: Sue | Fri, 14 Jul 2006 13:14:27 EST
I have just received my real estate license and am wanting to list short sale
properties. Where do you suggest I begin, and do you think there is an
opportunity for growth here? Any info would be great.
Posted By: Lynn | Thu, 13 Jul 2006 17:31:58 EST
As an investor what are the different options that one does have besides
approaching the subject propertys owners about a short sale? How does one come
into contact with lenders about short sale offers after foreclosure and prior to
being placed onto the open market? Once on the open market or in a realestate
firms control is a short sale still an option?
Posted By: Tommy | Mon, 3 Jul 2006 17:26:23 EST
I purchased a new home in February, with a first loan of 80% and a second loan
of 20%. I listed my old home with the plan of paying my second loan as soon as
the old home sold. This home has been listed for over six months and has not
sold and the price has been reduced substantially. I have been paying for
mortgages on both homes. I am using my savings and I cannot afford to keep
paying both. I cannot afford my new home without paying my second loan. Can I
short sell it?
Posted By: Amy | Sun, 18 Jun 2006 14:01:57 EST
I have put an offer in on a home that is a short sale. It took months to get a
preliminary acceptance from Wells Fargo, but they said it doesn't have final
approval yet. We are 2 weeks from closing and no one from Wells Fargo will call
me or my agent back. Any suggestions to get an answer, so I know if my family
has a home?
Posted By: lisa | Tue, 6 Jun 2006 20:41:57 EST
Short sale question. The banks approved the 1st & 2nd mortgage. What are the
chances of Freddie Mac also approving it? How long does it take to close once
Freddie Mac has approved it? How common is it for the banks to hold a deficiency
judgment against the seller/homeowner? Any info would be greatly appreciated!!!!
Posted By: Connor P | Thu, 25 May 2006 01:09:36 EST
I've purchased homestudy type training materials from Nouveau Riche. It's been a
very good introduction to RE investing. Highly recommend it!
Posted By: jpwind | Tue, 23 May 2006 13:53:57 EST
I want to learn the mechanics of doing short sales an investor. Where do you
suggest I start?
Posted By: Roger | Mon, 15 May 2006 12:29:23 EST
How do you go about finding/attracting pre-foreclosure short buyers? And what
about lease/rent back of the same property?
Posted By: CJ | Sun, 30 Apr 2006 14:38:00 EST
Is there a list of lenders know to accept short payoffs, as well as a list of
lenders known not to accept short pays? Thanks.
Posted By: prisch | Fri, 28 Apr 2006 17:47:39 EST
Hello, I am interested in purchasing foreclosures for investment reasons. I have
been warned of second mortgages being what is foreclosed, not the original
mortgage. How can I tell which mortgage is being foreclosed? Thanks.
Posted By: stan | Wed, 19 Apr 2006 17:40:45 EST
Three years ago, my husband and I relocated due to his changing jobs. After
trying to sell our house for about a year, we opted to do a short sale. We
closed on the short sale a little more than 2 years ago. We are now applying for
a mortgage. Will this short sale prevent us from obtaining approval? We spoke
with a HUD counselor before the short sale who said that it won't, but we would
just get a higher interest rate. We are just a little nervous.
Posted By: Kasey | Mon, 10 Apr 2006 15:46:51 EST
We submitted an offer for a property where the seller is in a short sale
situation. The mortgage company has not responded to our offer and it has been
at least six weeks since submitting with no answer as to whether our bid will or
won't be accepted. The agent representing the seller tells our agent that the
loss mitigation dept. is busy or that they have requested financials of the
seller. Is this process usual or is the seller and his agent up to something?
Please help!
Posted By: DeeCee | Thu, 6 Apr 2006 10:39:24 EST
My mother owes $38,000 for her house. She is 64, I paid for 4 months of back
mortgage payments. Can she short sale the property to a relative? What amount is
a reasonable offer for $38,000.00 owed? Foreclosure action was started 2 days
ago, she must now direct all inquiries to the foreclosure attorney. Should I
contact a realtor as a potential short buy buyer? Will my mother receive a
1099-C for cancellation of debt and have to claim this as income?
Posted By: Cheryl | Tue, 14 Mar 2006 20:30:15 EST
Can a proprty be bought thru a short sale while the owner is in foreclosure? If
so does the lender obtain a stay of relief in order to sale the property to
potential purchaser? And, how is the second mortgage and back taxes handled? Is
it possible that a tax sale can pre-emptpreclude everything and if so what is
your best advice for going after the property as a potential buyer?
Posted By: joan | Sat, 25 Feb 2006 13:38:36 EST
Will the seller receive a 1099C for cancellation of debt and have to claim this
as income? How long does it take to receive such a statement? My daughter
received $54,000 from the sale and the fair market value is $63,000. She is
repaying $9,000 in equal payments over the next 5 years. However, she owes
another $22,000 to the bank. Do they truly walk away from that much debt or is
this going to come back to bite her later on? I would like her to be prepared in
the event this happens.
Posted By: Debbie | Mon, 13 Feb 2006 07:19:42 EST
We bought our first home 3 months before my husband was laid off and relocated
to another state. The house was on the market for about a year. We did a short
sale and the difference between what we owed and what it was sold for was
$22,477 and the fair market value is 69,000. Do we have to count the difference
as income on our taxes even though we didn't get any money. Do we fall into any
exceptions like hardship or abondment?
Posted By: Jennifer | Wed, 25 Jan 2006 00:50:05 EST
First mortage is $55,000. 2nd mortgage is $87,000. I own 2nd mortage but not
first. Homeowner can make payments on 1st but stops paying on 2nd. Can I
foreclose? Should I foreclose? Home in AZ. Thanks, Rich
Posted By: Rich Stell | Sun, 15 Jan 2006 13:00:56 EST
My mother owes $115,000 for her house. She is 70 and her social security does
not cover the pymt. My brothers have paid for the house the last 3 months.
Several realtors estimate the property at $70,000-80,000. Recently, we applied
for special forbearance. Can she short sale the property to a relative? What
amount is a reasonable offer for $115,000 owed? Does a foreclosure come before a
shortsale?
Posted By: Ed | Fri, 6 Jan 2006 10:41:08 EST
I am currently in the process of closing on a house. We have been waiting for 3
months to close. We are waiting on the short sale paperwork from the seller's
lender (Wells Fargo). Is there any reason why this is taking so long? Is this
normal. We can not get answer from anyone.
Posted By: Jessica | Mon, 19 Dec 2005 15:00:20 EST
a friend negotiated a short sale lst year with a major ban. the seller (who was
in pre-foreclosure) has now been approached by the lender who accepted the short
sale, to pay the deficit...i've never heard of this. i thought the short sale
constituted a fogiveness. help!
Posted By: chris kunkel | Tue, 13 Dec 2005 16:06:58 EST
What happens when you have 2 mtgs & have filed bankruptcy? We kept the house
& are current on pymts but we have now lost our jobs & can't continue to
make the pymts? The amt owed is higher than we can sell the house for. We looked
at doing a short sale. The mtg companies said they would send us paperwork to
start but we are worried that they will try to come back to us to pay the
difference. Can that be done if the house was included in bankrupcty?? Please
share your knowledge. Thanks!
Posted By: Michelle | Sat, 15 Oct 2005 02:49:52 EST
Question: In regard to your Joe short sale example, what are the tax
ramnifications to Joe? Is Joe going to receive a Cancellation of Debt 1099-C for
the difference between what he still owed Sunburn B&T and the Credit Union
in principle and what Carl paid for it? Please advise and expand upon tax issues
and consequeces of short sales for the Seller.
Posted By: Terry | Thu, 22 Sep 2005 11:19:20 EST
Here is the situation: Home was purchased less than a year ago. The seller has
not moved out yet. An eviction notice has been issued to the seller. Obviously
the homeowner (Buyer) hasn't moved into the property yet. Will this affect the
ability of the homeowner to do a short sale?
Posted By: Paul | Mon, 12 Sep 2005 13:19:41 EST
Here is the situation: Home is framed in and starting to deteriate because the
owner has not the funds to complete the value as it sits is 200,000.there is a
268,000 1st mortgage 30,000 second, 90,000.00 in leins. How do I aproach the 1st
mortgage holder and how much can I expect to pay? what are my risks in buying
the 1st mortgage? The builder has several projects in similar conditoin.
Posted By: alanrpeterson@yahoo.com | Sat, 13 Aug 2005 14:29:53 EST
I see an investment opportunity because a short sale offer that nets a minimum
of 82% of the appraised value could be approvable under HUDs guidelines. Let
say, the property appraises for $200,000. If the buyer makes an offer at a sale
price of $170,000, keep costs to minimum so the offer nets nets $164,000, he
could buy the property. Thus, our buyer starts off ahead $30,000 in equity.
Posted By: Jim | Thu, 11 Aug 2005 20:38:41 EST
Can the lender reject a short sale offer even though it would be HUDs net
requirement? or do they have to accept the HUD net requirement?
Posted By: Mark | Sat, 23 Jul 2005 20:16:01 EST
Im a Workout Analyst and I just wanted to clearify some qualifications for a
short sale. HUD will not look at doing a short sale if the property is not owner
occupied. HUD will not always approve a short sale if there is a 2nd mortgage.
It is very difficult to do a short sale if the borrower has a 2nd mortgage. HUD
also does not like to hear that an investor is purchasing the home, that is not
what the program is for, but they never turn down a short sale because of that
reason.
read also the differences between foreclosure and short sale
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