Expanding Your Home Horizons

When you see a property that is advertised as a short sale, that usually (but not always) means the home is in preforeclosure and the owner and their real estate agent are listing the home on the market for less than what is owed to the banks, and often less than market value. The agent usually lists the home significantly below market value to generate interest in the property and to get a contract on the home as quickly as possible so that earnest negotiations can begin with the bank.

Buying a short sale – or short sale property for that matter – generally will require the same procedure as buying any other home – with the exception of an auction property. Once you identify a property, you will need to have a contract written up by your realtor and presented to the listing agent. The contract will usually contain some special addenda at least one of which will usually indicate you are accepting the home as-is. The listing agent will then submit your offer to the bank for approval. This process could take anywhere from a few days to a few weeks, it varies from bank to bank. The bank may choose to accept, reject, or counter your offer with a higher price. After you’ve reached an agreement and the contract is ratified, the sale will usually (but not always) proceed normally.

While short sales are great opportunities for buyers to get a good deal on a home, buying a short sale property isn’t always easy. So, if you fall in love with a short sale property, here are a few of my practical guidelines you should keep in mind to make your process as smooth as possible.

Rule 1: Never Fall in Love with a Short Sale until after you have gone to settlement and the keys are in your hand because banks basically maintain a right of refusal throughout the entire transaction. Just because you put a contract on a home and it was accepted by the bank, and you paid your inspection costs and for the appraisal and started measuring for carpet, does not mean the bank will not cancel the transaction before closing. Why? It’s business. A cancellation of your deal may mean the bank would recover more money by foreclosing (because of private mortgage insurance) than by proceeding with the short sale. It doesn’t always happen this way, but it happens often enough that you should be aware.

Rule 2: Be Patient and Be Prepared to Submit Multiple Offers on Multiple Homes. Because the prices are so low on short sales, there is likely to be a lot of competition when you go to submit an offer, especially when the home is in good condition. You will be VERY lucky to get the first one you like. You didn’t think you were the only one to notice it was in good condition and real cheap did you???? Be patient with your realtor and the process. Unfortunately the process is often “hurry up and wait.”

Rule 3: Keep your expectation regarding price REASONABLE. Banks are STILL not just giving homes away. For a bank to make a deal with you it has to make good business sense. Banks are not just going to give a home away at any price just to be rid of it…at least not yet. You can get a good deal, but it may not be as good as you perceive. Trying to get a $700,000 for $300,000 is NOT going to happen, even in this market. But to walk into a home with $25,000-$50,000 (or sometimes a little  more) in equity is pretty good by most standards. Many people who bought brand new construction last year are now upside down. Ask them if they’d like that $50K in equity and I’d bet they’d take it.

Rule 4: Ask for as little closing help/down payment assistance as possible. While some banks may offer some closing help, acceptance of your offer will usually go a whole lot smoother on a short sale if you have financing that requires minimal seller concessions -- or closing help. The more money you can take from your own financial accounts for down payment and closing, the more likely the bank is to accept your deal and the process will likely go much faster as well. However, if you require closing and down payment assistance, have your Realtor conduct a market analysis to ensure your offer will bear the higher price, and add the amount of your assistance on top of the asking price. Some banks will not permit more than 3% -6% closing assistance however; so have your Realtor check with the listing agent to ensure there are no limits on closing before submitting an offer. That will save you time and unnecessary anxiety.

Rule 5. Minimize the contingencies in your contract offer. From the bank’s perspective, the best offer will probably be the one at or above asking price with no financial, inspection, or home sale contingencies. Anything more than that is going to take more time to consider. If you have to sell a home or you want to do a home inspection or you need closing assistance, all these requests will usually send your offer lower down the totem pole so keep them to a minimum.

Rule 6. Give the Bank a Deadline and Keep Shopping until You Get a Response.  This is particularly for people who are in a time crunch.  Getting a response from a bank can be the beginning of one long beauracratic nightmare.  And you can only submit one offer on one property at a time.  This is a buyer's market and there are too many properties out there to tie up your time.  If they don't get a response back to you within a reasonable time period for your situation, then you should withdraw your offer and go to the next.    

Rule 7. Ignore rule 5 when it comes to home inspections.  You should always reserve the right to have a home inspection on the property - even if for information only.  I usually will write the contracts for my clients in such a way that they will purchase the home as-is AFTER an acceptable home inspection.  If the home inspection is not satisfactory, they can still walk away.

As I work with my clients, these are some of the key issues I see frequently.  I hope this information is helpful.  The next blog is going to be a reader's choice, so email me with your problems or issues and I will address them in the next topic.  kbullock27@aol.com

Once again, I apologize for not posting sooner but that means I’m out there working hard for my clients. You will appreciate that line more when you are one of them! :o) So, we previously discussed some options for people who are facing foreclosure. One of those options is a short sale – or preforeclosure sale.

So, what is a short sale?

You will find short sales in a number of instances, for example, say you bought your home in early 2006. At that time, you probably would have paid top dollar. And let’s say got into the home with one of those lovely short-term ARMs. Now, the market has tanked, your two year ARM is adjusting next month, and the value of your home has decreased because of current market conditions.  Or you may have taken out a home equity line of credit or refinanced for cash out and used up most of your equity and now are facing a job transfer or divorce.  If you wanted to sell your home, you would likely be facing a short sale because you’re are Upside-Down. That is to say the current market value of your home is less than what you owe. 

What are my next steps?

As I always like to tell my clients, if you have any question regarding specific legal issues, you should consult an attorney. My advice is based on experience and lots and lots of reading and classes on the subject.

• So if I am facing foreclosure and do not want to lose my home and destroy my credit, I should consider a short sale. Well, the first thing I am going to do is call my lender and discuss any other options I may be able to take in saving my home before considering a short sale.

• After I determine that selling the home is my best option, I am going to call a Realtor. But I can’t afford to pay a Realtor can I? Well, my Realtor will work with the bank to establish a commission that the bank will pay as a part of the proceeds from the short sale so essentially the bank will pay for the commission. So yes I can.

• Once I establish a rapport with a Realtor that I feel I can work with, I am going to invite them over to do a market analysis. Why do they need to come over? Because a Realtor can provide the most accurate market analysis when they can personally examine the condition of my home. Looking at the exterior pictures on the MLS from 5 years ago when your home last sold doesn’t help that much.

• Once my Realtor gives me the bad news – that I owe more than my house is worth – then I sign a listing agreement with my Realtor so that they can put the house on the market. My Realtor will do then do some fancy math to establish a sales price.

• I will also proceed to write a letter of authorization that allows my Realtor to call the lender on my behalf so they can begin negotiations. At that time, if I have hired Karla Bullock to handle my transaction, she will elicit support from a real estate attorney who will work on my behalf and attempt to get the best deal possible from the bank (and she pay for their services from her commission so I don’t have to).

• I will need pull together a short sale package which will include my recent W-2s, tax refunds, bank statements, and any other pertinent financial information; a heart-wrenching hardship letter explaining the circumstances that lead me to the short sale and a plead to the bank to accept the short sale terms.

• Once a buyer puts a contract on the home with the terms that we feel we the bank can work with, my Realtor and attorney will present the short sale package to include the listing agreement, sales contract, the hardship letter and my financial information to the bank to begin negotiations. Negotiations can take anywhere from a few days to a few months. I have to keep in mind that the bank is looking at this as purely a business transaction no matter how trying my times may be. This means, if a deal doesn’t make good business sense for them, they may not take it and we may solicit multiple offers until we get the right one.

• If all goes well, the bank will accept the deal, we’ll call it even. However, the bank may issue me a 1099 for the deficient portion of the mortgage that wasn’t paid by the short sale so that I may have to treat that money as taxable income. However, if I am insolvent, meaning my debts are greater than my income, I may not have to. I should consult with a tax advisor.  Or the bank may ask me to sign a promissory note to pay off the balance. 
  So, those are the basics of a short sale from the seller’s perspective. I will post the short sale from the buyer’s perspective in a day or so. It won’t be nearly as long this time I promise. As we are coming into the Spring Swing, this is important information to have. If you have any questions, feel free to contact me anytime. If I don’t have the answers, I know how to find them – and quickly!

I don’t know if there is anyone who has not gotten behind on a bill in their lifetime. I know I have – I think I hear my phone ringing now. It is something that happens to the best of us if you live long enough. I think everyone is prone to go into avoidance mode right? Stop answering your phone, stop opening mail and just shutting down until we can afford to deal with it OR until things are so bad we don’t have a choice but to deal with it. And this may work termporarily for a credit card or cable bill. But when it comes to your house, your home for your kids, your shelter – and for many people the largest single investment they will ever make – the situation is very different. Not dealing with it means eventually losing your home. So if you ever receive a notice of default, the most important piece of advice that I or anyone could give you is – no matter how difficult things may seem at the moment – don’t avoid dealing with it. The earlier you start to explore your options the better.

A few things to keep in mind.

1. In Maryland and most states, it can take anywhere from 6-9 months and potentially up to one year to foreclose on any given property. That gives you a long time to fix the problems.
2. It will cost a lender more money in legal fees and time to go through foreclosure proceedings and resell your home than to work out a payment plan with you. Lenders are not in the business of buying and selling real estate – they loan money to make money. They know – and you should know – it is better for them to work out a solution with you than to foreclose.
3. You have all the way up until the minute your home goes for sale on the court house steps to pay your late payments and fees as established by the lender and save your home. Like I said before – that can take up to a year.

So what are your options?

Did you know roughly 50% of homeowners who enter into foreclosure never contact their lender—the party most able to help them stay in their homes? And we wonder why the foreclosure rate is so high.  One of the key things you have to do is talk to your lender or loan servicer. (A loan servicer is usually a company who gets paid to collect payments and deal with collection issues on behalf of the lender). If you don’t want to deal with the lender yourself, call a Realtor. No, I'm serious! We can call on your behalf and help take some of the emotion out getting to a solution.  I don’t know any Realtor who would not work to help you in that situation and it doesn’t cost you a single penny. What do WE get out of it you ask? Well, maybe when you get ready to sell your home you will hire us OR maybe you will refer us to friends or family. That’s it. So let a Realtor help you when you can’t help yourself. In talking with your lender/servicer, the following are some options you may want to consider.

§ Forbearance – If you call early enough your lender may let you make a partial payment, skip a payment, or add your late payment(s) to the end of your loan. The key is having a plan to catch up. If you are like many of us waiting on that tax return, let your lender know. You may be able to protect your credit score by speaking with your lender while waiting on Uncle Sam.

§ Repayment Plan – The lender may also work out a repayment plan in which they may divide the overdue amount over –for example 6 months - and let you pay the overdue amount in increments with your regular payments.

§ Loan Modification – The lender may agree to change the terms of your mortgage to help you avoid foreclosure. They could switch you to a fixed rate loan, give you more years to pay off your loan or even forgive part of your loan. They could even add your missed payments to the loan and increase your monthly payments to cover the larger loan. Or they could do some combination of these options. Knowing what you can ask for so you can best find a solution to suit your situation is key.

§ One of the least viable options if you are in a cash crunch is Reinstatement – where you pay all past due payments in a lump sum by the end of the forbearance period worked out with your lender. If you can borrow from a friend or family member or you come into unexpected cash, this may be an option.

§ The next is the “Deed In Lieu of Foreclosure” option. In this option, you vacate the premises and give the deed to the lender. The major drawback is obviously that you lose all of the equity you have built in the home. That’s a tough pill to swallow. But the upside is that it saves you from having a foreclosure on your credit report making it MUCH easier to get a loan and buy a new home once you get your finances straightened out.

§ Last but certainly not least is the option to sell your home. Selling your home may allow you to recover some of your equity so that you can move into a less expensive home with a more affordable mortgage. But what if you bought your home over the past one-two years and the value is less than what you owe? That where we get into what is called a Short Sale. Your realtor can negotiate a price with the lender where the lender will accept LESS than what you owe. And do you remember what I said about the comfort of “avoidance”? Well, your Realtor can help you avoid almost every aspect of personally dealing with the transaction while at the same time providing a solution for your dilemma. Once you list your home with us and give us permission to work with your lender, your work is done until it is time to accept a contract and go to settlement. I personally work with a real estate attorney who will – for a fee paid from MY commission – do all the work necessary and neither I nor the seller have to deal with the lender. That’s my kind of deal!

So that’s the long and the short of it. If you would like free, anonymous counseling call 888-995-HOPE. Many major lenders such as Bank of America, Sun Trust, Wells Fargo, Wachovia, etc. are working in partnership with HUD to help homeowners avoid foreclosure BUT you have to have the courage to ask for help!

Next time, I will talk about all the ins an outs of short sales. Please don’t forget if you have a question or need assistance, call me anytime (240) 475-8346. That’s what I am here for!  I am both a licensed loan officer as well as a Realtor so I can really go over all of your options with you.