The term "short sale" is negotiating with a mortgage holder (bank) to accept less than what is owed on the property as payment in full. You might wonder why the bank would allow this to happen...read on.
A short sale is a strategy when there is a distressed homeowner who owes the bank close to or more than what the property is worth. The bank agrees to take a loss to avoid a lengthy legal process, potential property damage and costs associated with selling the home. Its hard to believe that this situation occurs with property values in Denver rising each and every month, but with low down payment loans, a year or more of missed payments due to the pandemic and HUGE penalties added to the balance, its a lot more common than you might expect.
Here is how it looks:
The homeowner owes $200,000 to their first mortgage holder and the payments are behind. Their property is worth $200,000 in retail condition. With the property negotiating strategies, we get the bank to accept $100,000 to $150,000 as payment in full. Purchasing a $200,000 retail property for 50% - 70% of its value is where we both are paid. Obviously this is an example. Market prices are much higher right now.
With proper negotiations, we take deals that most investors would pass on and turn them into amazing deals. Most of our happiest homeowners have come from deals that had no equity.
We take the time to build a relationship within the banking industry. Building these relationships will insure our success to help other homeowners. Do not let anyone discourage you from working with me on this process. Work with us and we will provide the solution for your situation.
SO...WHY DOES THE BANK SHORT SELL?
There are many reasons why banks accept short sales. The main reason is because the payments are late and you, the homeowner, can prove that you can no longer afford the property due to loss of income from the pandemic.
The property does not have to be in foreclosure for the bank to accept a short sale. Some banks require the foreclosure notice to be served, while others will accept a short sale when just a few payments are late.
There is no specific number of payments that must be delinquent for the bank to open a short sale. Often homeowners will call us when they are not yet in default, but cannot make any more payments. In this case, we contact the bank on behalf of the homeowner (after you sign the Authorization to Release Information Form) and let them know that you won't be able to make any more payments and to open negotiations for a short sale before the payments are even late.
Let us look at a few more reasons why banks will except a short sale:
-The mortgage is in arrears or foreclosure.
-The property is in poor condition.
-The homeowners have hardships due to COVID and cannot make the payments anymore.
-New homes in the area are being chosen over existing homes.
-People are moving out of the area or neighborhood.
-The bank's shareholders are concerned when there are too many defaulted loans on the books.
Banks have reports due at the end of each quarter. They are more inclined to accept short sales at the end of a quarter to "clean up their books." The absolute best time to get short sales accepted quickly is the last quarter of the year. We have called banks on December 9th and been told the short sale would be accepted if we would close by the end of the month. Banks short sale all year, the're just faster in the last quarter for the banks own good.
-Some banks are required to keep a cash reserve of up to three times the retail value of each REO.
REO means real estate owned. Once a property is taken back by the bank the foreclosure sale is considered and REO. An REO is a liability not an asset. Too many liabilities will cause any business to go under if not dealt with quickly.
It breaks down like this "The bank has a $200,000 property and is required to keep three times that amount as a cash reserve. This means the bank is sitting on $600,000 in un-lendable money. The homeowners could drag the foreclosure on for two years utilizing the bankruptcy system. Would it be better for the bank to sit on $600,000 for two years or accept a short sale today? Imagine if the bank has several thousand foreclosures across the nation. The answer is obvious. The short sale is a relief. Obviously the bank will not tell you that.
Think of it like a Bank credit report: Every defaulted loan is like a black mark on the credit report. The more foreclosures a bank is carrying, the riskier it appears. If you were a larger bank lending to a smaller bank, would you lend your money to the bank with more or less defaulted loans? Exactly...less! The bank needs to borrow this money as inexpensively as possible so that it can make money lending it you you.
As you can see, a short sale is often a welcome answer to a big problem. When the bank takes the short sale it can write the loss off and clean up the books before any reports are due. You might be surprised that banks have entire departments dedicated to short sales. They are called the Loss Mitigation Department. Knowing how to "win" with this department is very important.
AS A HOMEONWER, WHERE DO YOU BEGIN?
HomePath is a Fannie Mae short sale program which you must qualify for through your current Lender. Qualifications include; homeowner is ineligible to refinance or modify, facing a long term hardship, behind on payments, owe more than your home is worth, can no longer afford your home and are ready or need to leave. You will need to provide an income and expense worksheet along with your recent tax returns. The process involves pushing an enormous amount of paperwork back and forth between you and your Lender. Its best if someone very detail oriented manages the process because paperwork gets "lost" all of the time.
In most cases the best option is to have us negotiate the short sale for you. It is important to realize that when submitting a short sale package, we are building a case, the better the case, the better the chance of getting it approved. With proper negotiations, we take deals that most investors would pass on and turn them into amazing deals. Most of our happiest homeowners have come from deals that had no equity.
Think of yourself as an attorney preparing for a court hearing. If the attorney shows up unprepared, the case is lost.
Do you remember the OJ Simpson trial? Did you think he was guilty? If you think he is guilty, why do you think he walked away from a double murder charge? His attorney built a great case. His case was presented better than the prosecution's case. Short Sales are the same concept, the better the case, the better the deal.
Having done so many over the years, we know exactly what the banks are looking for. Before we submit your short sale package, let us look at an overview of what we are about to do for you:
-We are going to submit a total of three offers. Each offer will have a different focus and will be higher than the previous.
-The first offer will focus on your distress, loss of income due to COVID, and the overall hardship of the situation. This will be our initial offer and the lowest.
-The second offer will focus on the distress of the neighborhood, hundreds of behind on payments, the real estate bubble ready to burst, an increase in crime, job losses, natural disasters, or whatever is happening in the area. In this offer, we will raise our initial offer to get closer to the number the bank countered at.
-The third offer is our highest and final offer. In this offer we will focus on the financial loss to the bank by denying our short sale. We will break down, step-by-step, how much the bank will actually lose, how long this will take, and we will send a copy to the loss mitigation reps boss. This is called the LRR (Lender Recovery Rate).
The short sale process is very complex. Most of the time homeowners get frustrated dealing with the bank. You send in your paper work, pages and pages worth and they can't find it. Or, you sent it to the wrong place even though that's where they told you to send it! You send it in again and now another month has gone by. Now they want new paystubs, bank statements and employment verification. To top it off now you have a new rep to work with that doesn't know anything about your situation so you spend another 2 hours repeating yourself. Most banks will not allow you to short sale your own home, if you could everyone would. With this process, you need expert help and that is why we are here. If you choose this option, call me ASAP so we could get you on the road to financial recovery and stop the financial bleeding. Let us show you how we can short sale your mortgage, eliminate the bank, it is a perfect solution for your situation...everyone wins.
The Short Payoff vs. The Short Sale
How is this different than the short sale? It also has to be done in a certain way. If you are an "underwater homeowner" let's say you house is worth $200,000 and you owe $210,000. Depending on your financial situation, you might try to negotiate a short payoff with your lender. In this scenario, the lender agrees to release the lien, their interest in the property, allowing it to be sold to a new buyer. The lender agrees to accept less than the amount owed on the property to release the lien, this is called a "short payoff." The only catch is the lender will instruct you to sign a promissory note for the difference. The bank will not tell you that many times they will accept less.
The promissory note is an un-secured document that is basically, an IOU to the previous bank.
The Downside:
A. You must be current on your mortgage payments.
B. You must have good credit.
C. You must be able to prove you have the ability to pay off the debt in a reasonable amount of time...basically 3-5 years.
The Upside:
A. you keep your good credit and can purchase another home or anything else you want.
B. You never fall behind with your payments and never get your name in the paper, which is embarrassing.
When is the best time for a "Short Payoff?"
A. You might request a short payoff when your home has lost value dramatically or even just enough to make it impossible to sell. This is the case with most of the underwater homeowners. Add a 6% real estate commission to the cost of selling pushes many homeowners over the edge.
B. You do not have the ability to pay the large amount to get completely out of the property.
Will all lenders do a "Short Payoff?"
No, not all lenders will; however, you will never know unless you ask. Remember, the advantages of a Short Payoff is that you are able to move out of your property and get on with your life. Buying another, more affordable home, immediately! There SHOULD BE no negative marks on your credit. We help negotiate that along with the promissory note for you. If for some reason down the line, you lose the ability to pay the promissory note, the credit ramifications to you are significantly less.
Call me for your free advice 720-541-9991.