Short sale: Win-win-win situation

The beauty of short sales is that they can be a win-win-win situation for seller, buyer and lender. Here’s how:

•The seller gets out of the mortgage liability without facing bankruptcy.
•The buyer gets the home at a reduced price.
•The lender agrees to a loss it considers minimal without waiting through a foreclosure and being saddled with an unsalable property.

If you can no longer make your mortgage payments and your home is now worth less than you owe on it, foreclosure may not be your only option.

A short sale, in real estate terms, is a sale of a house in which the sale price is less than what the owner still owes on the mortgage. It is a procedure sometimes agreed to by lenders, who often would rather take a small loss than go through the lengthy and costly foreclosure process. — in which the lender allows the sale of a home for less than it is worth and forgives the rest of the note — provides another alternative to homeowners.

While there are some significant negative consequences to a short sale, an ever-increasing number of properties are being advertised with that label, says Natalie Lohrenz, director of counseling for Consumer Credit Counseling Service of Orange County in Santa Ana , Calif.

“A lot of people in the last couple of years have just stretched themselves to the limit and you have people with mortgage payments where even when they got the mortgage, the payment was half their income or more,” says Lohrenz. “Now that rates are adjusting, it’s two-thirds or three-quarters of their income and it’s just not possible.”

While it may seem surprising that lenders would agree to accept less than what they are owed, they benefit from the process, as well.

“The lender benefits by not having to go through the protracted process of foreclosing on the borrower and then having to put the property on the market and go through the whole marketing process,” says Stuart Wilson, a real estate agent with Paragon Real Estate Group in San Francisco .

A market saturated with foreclosures can cost lenders billions — as much as $50,000 per foreclosure — according to a study released earlier this year by the Joint Economic Committee.

A buyer’s dream

For a buyer, a short sale is a boon since he or she is getting a property at a reduced price. However, the process of waiting for a lender to decide whether to agree to a short sale could make a lengthy home buying process even longer and more arduous.
Wilson, who has represented both buyers and sellers in short-sale deals, advises working with an agent who’s familiar with short sales. He also suggests that buyers looking to negotiate a short-sale deal come armed with enough documentation to convince the lender that settling for the lower price is their best option.
“You’d better be armed with recent comparables that show unequivocally that the lender’s price is out of line,” says Wilson . “You can’t do this with a cover letter or a conversation. It will need to be done with the kind of documentation that an appraiser would come up with.
“When you go into a short sale, you have an institutional lender and it is an anonymous entity,” Wilson continues. “You don’t get a chance to talk to these people, you don’t know what their guidelines are, you don’t know what their time frames are and you don’t know if your contract will be approved in six weeks or six months. It’s a real crapshoot.”
Lenders are most concerned with the financial situations of the seller when they ultimately make their decisions. If a seller can handle the mortgage payment, there’s no motivation for the lender to let the seller out of the mortgage at a lower price.
“A lot of lenders aren’t even going to consider a short sale unless it seems like (the homeowner) is in financial distress,” says Lohrenz.
Also, if the home has a second mortgage with another institution, a short sale is less likely to be approved since that second institution would have to agree to forfeit all or part of the money it’s owed.

Last gasp only

While getting a lender to agree to a short sale may seem like an answer to the prayers of homeowners who want to unload a house, it’s not a good move if you’re merely looking to find a new place. It’s generally a last-ditch effort when the only other option is foreclosure.
Should you go for a short sale? It depends on how deep a financial hole you’re in and how likely it is you’ll be able to overcome those financial difficulties.
“If they’re just having a short-term problem — short-term disability or maternity leave or layoffs, but they have good prospects to find something soon and they can weather the storm and hold onto the profit through that — obviously they wouldn’t want to think about a short sale,” says Lohrenz.
“But if the choice is foreclosure or short sale, generally a short sale is going to be a better idea.”
Before you think about asking your lender to consider a short sale, it would be a good idea to get your paperwork lined up.
Be ready to document your need and to show the lender you are serious about your situation, including a hardship letter (an honest explanation of your financial situation and how it occurred), pay stubs, bank statements, tax returns, an appraisal and documentation of your debts.

3 critical safeguards

If you’re considering a short sale, experts advise you to take the following steps to meet potential negative consequences head-on.
Get it in writing. Make sure the lender agrees in writing that the short sale will absolve all debts.
“If they owe $300,000 on the house and the short sale is for $280,000, is there any possible way that the lender’s going to come after them for the $20,000?” Lohrenz says. “Most lenders will put that in the agreement that they’re not going to come after the deficiency.”
Protect your credit rating. Ask the lender how it will report the short sale on your credit report.
“Most of the time, a short sale shows simply that a debt is satisfied,” says Lohrenz. “But theoretically, a short sale could reflect on the credit report as ‘settled for less than the full balance.’” Such a designation is a negative mark on your credit report, though it wouldn’t hurt your credit as much as a foreclosure would.
Get professional tax advice. Short sales often have tax repercussions since lenders can claim the forgiven debt as income that they provided you.
That means if you agreed to a short sale for $50,000 less than what you owed the lender, the lender could issue you a 1099 for $50,000, which you would have to pay taxes on.
But there are two “outs,” says Lohrenz. “If you meet the IRS’s definition of insolvency at the time the debt was forgiven, then you generally don’t have to pay taxes on it.”
Or, if your home loan is a non-recourse loan, you’re also likely to escape this tax. With a recourse loan, whoever signed the note is personally liable for the debt, and in a short sale, the debtor would have to pay tax on the difference. A nonrecourse debt is one secured by the loan collateral — such as the house itself — and the debtor would not have to pay tax on the sale shortfall.
The most common case is that mortgages secured by the property — especially for buyers who made a 20 percent or more down payment — is a nonrecourse loan. But it is absolutely critical you consult a tax attorney before you make such a move to ensure that you don’t dig a deeper financial hole as a result of the tax situation.

3 critical safeguards:

1. Get it in writing.
2. Protect your credit.
3. Work with a tax pro.�

By: Anonymous

The serious decline in housing sales in many parts of the country is well documented. This downturn was preceded by several years of rising home prices in many areas. In some cases, prices rose beyond levels that were supported by local salaries, and were clearly not sustainable. The driving force fueling the rise in home prices was the availability of low interest money. Easy availability of home mortgage money, plus historically low interest rates, allowed the demand side of the market to build.

When buyers could expect 15 percent to 30 percent appreciation and get 6 percent interest rates, who would not be motivated to buy? It was a no-brainer! Of course, high demand leads to higher prices. And, high demand leads to more new homes, as builders respond to the demand.

The flow of money for mortgages came from new and unregulated sources. In the not too distant past, government regulated entities, such as Fannie Mae, were the main buyers of mortgages from lenders. More recently, Wall Street investors entered the market for buying real estate loans. Alternative loans, interest-only loans, 100 percent loans, creative ARMs, no-documentation and other high risk products became commonplace. Some of these loans began with a low interest rate that the borrower barely qualified for, and then switched to a higher rate after a short time. In many cases, the borrowers did not understand the risk they were taking.

For most of my experience in real estate, buyers usually put 5 percent to 20 percent down, with 28 percent of their income allowed for mortgage payment and their income was fully documented. When we began to see 100 percent financing on contracts, we were a little concerned by the shortage of personal investment, or skin in the game, as they say. The underlying expectation was that the market value of the home would increase quickly, and the buyers would be covered, if they needed to sell. Home ownership became speculative.

Sub-prime, alternative, no-doc and other high risk loans are not limited to low income or poor credit buyers and are not always predatory. Often, very sophisticated borrowers chose to keep their cash and leverage the purchase. In all price ranges, the easy availability of low interest money fueled the demand for home ownership, as well as investment in rental property. Inevitably, the demand for homes led to price increases and elevated inventories, as builders produced more homes. Then, the cycle was broken.

What caused the break? Foreclosures. Investors soon realized mortgage-backed securities contained more risk than expected, and they stopped buying them. Suddenly, lenders did not have this new market for selling many of their loans. Without the flow of funds for easy mortgages, demand for homes slowed down. Prices began to fall in many parts of the country, and oversupply conditions prevailed. This has created challenging conditions for many homebuilders.

Of course, real estate markets are local and some localities will fare better than others. Job growth, continued low interest rates and reduced supply from builders are key factors contributing to more balanced local real estate markets. But, in nearly all areas, the effects of the ?new? tighter requirements for home mortgages will slow the market.

For the next year, sellers will have to consider the fundamentals to attract a buyer. They will need competitive pricing, excellent presentation and top-level marketing. Buyers will have to have a down payment, good credit and proper income for their loan.

So, for the next few years, it’s back to the future for real estate.

by Roselind Hejl

For thirty-three years, I have either been selling or training other top agents to sell real estate at a high level. My real estate business has survived numerous market cycles. I have depended upon this twelve step plan to allow me in focusing, regenerating, and surviving differing markets. I hope these truths will help you become profitable and ride out any storms on your horizon.

1. The National Association of REALTORS® and your state association will always have published reports that sound better than what you are personally experiencing in the market. Please understand that they support us. They know that whatever they say will end up in public press. We do not need any more negative press! When you read reports that we have reached the bottom or that the market has actually gone up, take it with a grain of salt. Their job is to permeate the world with good news about real estate.
2. Here’s a shocking truth for you – making money in a down market is always harder than making money in an up market. I know that other speakers say that agents get out of the business faster than the business goes down, but I also understand that there will be less competition. The fact remains that sellers are not as excited to sell when they are looking at lower prices, and buyers want to take much longer to make a decision when they believe there will be additional pieces of inventory appearing on the market at better prices.
3. You have to fly against the conventional wisdom that buyers are good in down markets. Buyers take longer to make decisions, they “nibble” more, and they will actually eradicate your net profit if you continue to work buyers as a major part of your income flow. The only way to make money in a down market is to increase your listings at a much greater rate than your board’s inventory increase. For example, in the sizzling California market of 1990, I had to have an inventory of at least ten listings at all times to net two million dollars a year. In the absolutely horrible California market of 1995, it took me 120 listings to maintain the same net income. The reason is simple – the only sellers who will sell in a down market are those who are motivated so I had to increase my sample size to obtain the correct number of motivated sellers. The more listings that I was able to obtain, the more buyer contacts who came into my office. If I aggressively pursued the most motivated buyers, I could keep my income up.
4. It is time to cut expenses. If your assistant is not producing leads, fix the situation or let him or her go. If you are spending money on lead generation systems that are not producing, improve them or stop doing them. If you have an expensive boat parked out back that you haven’t used in the past eighteen months, let someone else throw money into the boat! You do not need the most expensive cable or satellite package. You certainly do not need a $93,000 Range Rover. I became the top real estate agent in California while I was driving a diesel Rabbit.
5. The only reason that you need to talk to a seller every week is for them to continue to like you, to obtain a price reduction, or to obtain a value enhancement. You will have to time-block your activity of calling sellers once a week. Make certain your sellers know that you are trying to achieve their goals, and let them know that the only reason a property doesn’t sell is that it is price incorrectly. Once a week, you need to be requesting price reductions or value enhancements to make your listings more saleable.
6. You are going to have to be more deliberate with your time. There is no more running around without a plan! A couple of years ago, everybody wanted to buy and sell! Now, you have to have schedules to keep. When do you generate leads through FSBOs, expireds, and out-of-state owners? When do you call your buyers in the “A” class, your sellers in the “A” class, and pendings? When do you go on office caravan? When is your day off? When is date night or family night? The only way you will survive a tough market is to utilize your only asset of time extremely well. Go back to the basics of time-blocking and make certain that you know what the perfect week looks like.
7. Don’t hang around with other real estate agents! Other real estate agents will not buy from you, and 95% of them are too negative now! You cannot listen to them. You do not need to listen to that negativity. Spend the time that you would normally listen to the other agents in generating leads.
8. Only listen to real estate speakers who have sold real estate as a mega-producer or still sell real estate as a mega-producer. There are thousands of pundits out there, especially from the technology field, who have not even sold real estate. If they have never sold real estate, please take their suggestions lightly.
9. Get coached! There are numerous expensive and inexpensive coaching programs offered by current agents and former agents. The rule above applies to this as well – if they haven’t sold real estate, don’t let them coach you on how to sell real estate! Seek those who had or have experience in selling in hot and cold markets but were still successful! Having your feet held to the fire, having your activities re-focused on the net-profit producing activities, and being held accountable are all important activities. Most of my coaching clients will double their income this year only because we have spent time re-focusing their efforts into the most profitable areas of tough markets.
10. Don’t forget your family! Time-block family night, date night, and personal time! Work when you’re working, play when you’re playing. There is no room in your life for working while you’re “playing.” It will only upset those you love.
11. If you are doing less real estate, take some time to take better care of yourself. It is time to time-block visits to the gym. Balance your diet, too!
12. Most importantly, get ready for the bottom of the market. You know what it looks like. It is when you can put 10% down on a piece of property. With a 40% expense factor, you can break even with a fully amortized loan. The times are exciting at the bottom of the market, and you should have money in the bank to purchase real estate. Every rich real estate agent from the ’94 to ’96 California market is financially independent, because we had money to invest at the bottom of the market. Quit speculating! There is no room for speculation. At the bottom of the market, buy real estate that will actually break even. Have the tenants pay off the mortgage. Watch the next cycle of appreciation take over and make you wealthy.

Congratulations on being in one of the world’s greatest businesses! I know that it is not like it was, but there is just as much money to be made (if not more) in a down market as there is an up market. You are going to have to be smart. Start a savings account. Accumulate a little bit of money. Buy at the bottom. Some day you will be able to say, “I love this business, but I don’t have to go to work today!”

by Walter Sanford