Definition of a Short Sale

Definition of a Short Sale:

A short sale is an “arrangement” between the owner of their home and the bank that lent them the money to buy their home to accept an offer for less than the total amount owed to pay off the home. The “deficiency” is the difference between the amount owed and what the bank collects at the short sale.

Although, the “arrangement” can take many different forms, there is no other definition of a short sale. I say this because many realtors and some investors simply throw the term around as if it meant “a sale under market value.” No. A bank owned (foreclosed) house is not a short sale. A seller deciding to lower their price and take less profit is not a short sale. An older lady who owns her home free and clear, sells her $150k home for $75k, is not a short sale. For it to be a Short Sale, someone must be getting “shorted.” Either the seller, or the bank.

 Another important definition of a short sale is how it differs from foreclosure. In foreclosure, the homeowner falls way behind on their payments and the bank repossesses the house and sells it. In almost all cases, the bank pursues the homeowner for the deficiency! This is not a widely known fact but ask someone who has gone through foreclosure, and they will tell you the only way out of this was to file for bankruptcy.     

How It Can Happen - The Arrangement

Most short sales arise when a seller owes more on their house than they can sell it for (upside down). The owner of the home then attempts to make an arrangement with their lender to sell the house for less than is owed.

The term “arrangement” was used in the definition and is intentionally broad because the arrangement depends on the bank that holds the loan. Though there are general practices, every bank does it differently. This article will give you the most common arrangements, but if you take part in a short sale, it’s crucial you assume nothing until you have the bank’s policies in writing.

There are some overriding principles to consider:

1. There is no such thing as a free lunch. This is not some dream alternative to foreclosure where the money you owe magically disappears. The deficiency will be accounted for. The deficiency can be 100% loaned to seller in the form of a promissory note, which they then must repay.

2. It is a cumbersome process. If you are entering into a short sale as a buyer or seller, don’t expect it to go as quickly as any other sale. There’s a lot of “back and forth”.

3. The employees of the lender that are negotiating the sale are not there for the benefit of the seller. Their only goal is to collect as much money for the lender and they will use whatever means necessary. You can be sure that they will most likely misrepresent their own policies and in a fair amount of cases flat out lie to the seller in order to intimidate and scare them into paying more money.

This is a good example: a lender negotiating a short sale that, as a policy, they don’t “write off” any of the deficiency and that the seller would have to have a promissory note for $40,000. This lender also told the seller that their hands were tied and this decision came directly from the investor who provides the money for the lender. The lender also said there is absolutely no negotiation on the amount owed, either pay the deficiency, or they will foreclose. The lender made the promissory note very manageable (20 years 0%) so that the seller would be more enticed to just roll over.

But the seller called the lenders bluff. The seller then provided a letter from an attorney stating they would qualify for a bankruptcy, thus rendering the lender incapable of collecting anything. That same day, the lender called the seller saying they would reduce the promissory note and write off $30,000 of the debt! It would have to be reported as 1099 income, but it would not have to be paid. Amazing change of policy! Then the seller saw what was happening and just said, “no thanks, we don’t want to owe you anything, we’ll just go ahead with the bankruptcy.” Two days later the seller received a written offer that the lender would completely forgive the debt and simply report it as 1099 income! Wow!

The moral of the story is that the lenders will sometimes use falsehoods to obtain their money. Many of the managers of the collections departments are paid a commission on the total amount of money they collect. Just imagine if that seller had rolled over on the first offer! That employee would have been responsible for keeping $40,000 of his company’s money with one five minute phone call!

One other important thing to remember is that if the lender gets the property back (i.e. short sale doesn’t go through), they have to put it up for auction. This creates the risk that additional money will be lost if the house doesn’t sell for what it’s worth.

The Details of the Arrangement

Different banks have different policies. The best case scenario is to get a bank that actually “writes off” the deficiency. All that happens here is that the seller has some minor derogatory credit reporting, but doesn’t actually owe the bank any more money. This credit reporting can consist of anything from “creditor settled for less than the amount due” all the way to “foreclosed.”

As the example noted, many banks will do a promissory note for the deficiency. 

How did we get to this place in the first point?

A short sale can come about for many different reasons. In some cases the owner of the house could have been making the monthly payments on time. Let’s say you owed 300k on the home, but the best offer you had after having the property on the market for 6 months was 250K. So, the moral of the story is that you do not have be behind on your payments to request a short sale. You just have to show that your home can’t be sold for what you owe.

In other cases, short sales happen when a seller can’t afford to make their payments and is nearing foreclosure or bankruptcy. It makes life much more complicated if you are living in the house in question. The bank’s ability to scare you is much greater in that case. In this case, a short sale is only slightly better than the alternatives. You will still lose your house, and your credit is still destroyed just because you’ve made 4-5 late payments on your mortgage.

People tend to think that a bankrupcty, foreclosure, or reposession will damange your credit rating more than the multitude of late payments that lead up to one of the above mentioned actions.

Conclusion

Again, a short sale is not a magic cure. It’s also not some mystical solution that only an elite few know about. If you’re curious about selling your house as a short sale, the first step is to contact a certified short sale/foreclosure agent. We will be able to give you choices and possibly an alternative to foreclosure and bankruptcy. If you’re an investor, there are much better ways to obtain undervalued homes.

Remember that this is a complex process and you should always seek the help of a professional when considering a short sale.

Top ten reasons why it’s a great time to buy real estate

1. Selection, selection, selection. There are homes for sale in Reno/Tahoe in every price range, style, and size right now. Just a few years ago the resale inventory was much lower. A buyer was forced to make compromises if they were going to locate the home of their dreams. There is a great selection of single family homes, condos and townhouses. You can find large lots, small lots and a lot that will easily accommodate a boat or RV. The options are plentiful. 

2. No bidding wars. In 2005, we had clients who made offers on multiple homes, sometimes 5 or more. The clients would lose about 90 percent due to the feeding frenzy that existed at the time. Other buyers bid the properties up substantially from the original listing price. There were escalation clauses where buyers authorized their agents to outbid other offers by thousands of dollars. There is little to no bidding in this buyer’s market.

3. You can make an offer. A few years ago when you made an offer, the only question was how high above the list price could the buyer reach in hopes of the best offer on the table. Today the sell price list vs. price ration is about 90 percent or less. A seller will not be insulted if you make them an offer they can’t refuse.

4. Patience is tolerated. In the hot seller’s market that existed, everything was rushed. Find a house before other buyers did. Hurry up and make an offer, also make the offer as high as possible to forstall being outbid. Today a buyer can take more time. A buyer may look at several homes and think about their decision for a day or two.

5. Due diligence is welcomed. In this market a buyer is encouraged to obtain a home inspection, termite inspection and appraisal. In 2005, many buyers waived these contingencies in order to gain an advantage over multiple offers.

6. There are plenty of new or nearly new homes. In the not too distant past buyers has to play games if they wanted a new home. There were lotteries and waiting lists in order to obtain a new construction. Some buyers slept in their cards in order to get to the head of the lines. Now, it would benefit a buyer immensely to have a Realtor represent them in buying a new home because a Realtor will represent your interests and get you the best deal possible on a new home.

7. Repair Requests are welcomed. After a buyer completes a home inspection, they are allowed to submit a repair request to the seller. In the past, a seller might insist the home was sold as is. Many times, there were back-up buyers waiting for the primary buyer to upset the seller whose home was increasing in value almost daily. Short Sales however, are still primarily sold as is. To get the distressed price 99% of the time you will still need to waive the repair request.

8. Location, location, location. Today’s buyers can find homes closer to work, school or ideal shopping locations. In the past, buyers flocked to the outskirts in order to find affordable homes. This meant a longer commutes and the possibility of being in less desirable neighborhoods. In this market, reasonably priced homes are within biking or walking distance to schools, major highways and friends.

9. Fewer investors. It is estimated that one-third of all sales in 2005 were to investors. These non-owner occupied buyers caused the market to inflate and the affordability to decline. Mortgage fraud became commonplace. It’s a great time to buy without having to compete with hundreds of prospective land-lords.

Welcome to my Blog

Welcome to my blog. My team and I are committed to providing you with the finest Real Estate services in the Lake Tahoe/Reno region. I would like to invite you to come back in the near future to find useful tips on buying or selling a home, updates on the local real estate market, and other real estate/ business news that I think you will find insightful and helpful.

 Also, you can find the most current information on available properties at the following link: 

 http://www.laketahoepropertiesblog.com/search-properties/

 If you can’t find a particular property, please give us a call and we would be more than happy to customize a search for you. We can help with securing difficult financing and also are experienced with short sales and foreclosures. If you just want to know what homes are selling for your neighborhood please give our office a call and we can provide you with a free market snapshot of any specific area.

Tahoe/Truckee Office number 530-550-7500

Reno Office number 775-787-7600

Thank you for visiting my blog I look forward to having the opportunity to assist you in the future.

 Best Regards,

 Roger Rempfer