Avoid Foreclosure With A Short Sale

Avoid Foreclosure With A Short Sale

Author: Dean Henderson

So you´re caught up in the wave of foreclosures like a lot of other people? It´s now becoming the new Negative Status Symbol. Know that you are not alone, it is a tough place to be and unfortunately it may get worse before it gets better. There is a stigma that goes along with losing something, especially when it´s your home. Also, the financial mess it creates can stick with you for years to come. Unfortunately there are not a lot of solutions; regardless of what you hear in the media and from your lender. So it´s a bitter pill to swallow, and in order to succeed you have to get quality information & move forward quickly with your decision.

You may be considering a Short Sale to relieve you of your problem? Short Sales are a good solution, but you need to know what to expect.

Short Sales usually take a long time.

This is a double edge sword, because on the one hand you get many weeks, or more likely many months of free rent while waiting, but the roller coaster ride can be agonizing. And you won´t know for certain if it will succeed or just be a lot closer to foreclosure, until you near the end of the process.

Avoiding foreclosure is really the only benefit you should expect.

Don´t expect to receive proceeds from the sale. Most lenders (with the exception of FHA insured) don´t want the owner to receive any benefit at all. In fact lenders stipulate that the seller/owner must not receive any proceeds from the sale of the property, as one of the agreements to doing a short sale.

Hopefully the person working on your short sale really knows what they are doing.

Realtors are still getting up to speed on how to do a Short Sale. Some know how to do them, but most do not (not effectively anyway). Realtors are not usually ecstatic about doing them either. It takes roughly 6 times the amount of work compared to selling a regular property. Whoever does the negotiating needs to keep consistent pressure on the lender to work on the file and get it done. In my experience this is where negotiators fall down on the job. They are not proactive in their pursuit of pushing the file along to get a payoff approval.

What is the basic anatomy of doing a short sale?

The property should first be listed for sale to find a buyer. Once a buyer is found and an offer is made, all the necessary paperwork from the owner; which pretty much includes all the information that was provided to get the loan in the first place, must then be submitted in the right order, and in the right way to the lender. Submitting it the right way can mean the difference of it ending up on top of the stack, or the bottom. Once an offer is submitted the bank will call for a BPO. Once the BPO is done, you then find out if the buyers offer was within their guidelines and will be accepted. Assuming it is, the bank will then issue the payoff approval good for 30 to 45 days. They will usually give extensions if it is needed to close, but never rely on that.

What is a BPO and why should you care?

A BPO is a "Brokers Price Opinion. "Usually done by a local real estate agent. The bank orders the BPO which is basically a comparison of the value to other properties, in order to gauge whether the offer made by the buyer will be accepted, rejected, or countered. Whoever you have doing your short sale, they must understand how to effectively set up a fair and accurate BPO. It is a must for the banks BPO agent to be met at the property with your realtors BPO report and knowledge of the property (yes your real estate agent can do their own BPO too). The whole objective is to influence the value of the property down, in order to insure that the bank will take the least price possible. Because values are always subjective anyway, do not leave this important key of the whole short sale process to chance. If you get nothing else out of this article, know that the BPO IS the Key difference between selling your property or not.

There are three main financial issues that are worth knowing about.

• Property taxes usually become delinquent, because when you don´t have enough money to pay your mortgage, then the property taxes are most likely not getting paid either. In order for escrow to close, the property taxes must be paid. These will most likely be paid by the bank or indirectly by the buyer, and be included as part of the short sale payoff.
• Income taxes are based on what´s called the phantom income from the sale of a property. For instance if you originally bought your property for $300,000 and this was the amount of the loan (100% financing for this example), say the loan was paid down to 290,000 then if the home lost value and was sold via short sale for $150,000, you could be taxed on the $140,000 cancelled debt ($290,000 - $150,000). Even though you lost the house too. This is a very simple example because you have to take into account your personal situation in regards to other income and expenses in other areas of your life. Special note: there are many ways to lower or completely extinguish the tax burden if you do a short sale, or end up getting foreclosed on. The Mortgage Forgiveness Debt Relief Act (H.R. 4638) of 2007 provides relief from debt forgiveness taxation for certain owner occupants now until December 31, 2012. This is specifically for Owner Occupied properties (limit of 2 million dollars). If it is an investment property there are other alternatives available, one being insolvency (if your debts are more than your assets), there may be other options too. Get a good tax professional or CPA, they are worth their weight in Gold... Do not let someone talk you out of a short sale simply because it will be better off to let the property go to foreclosure, this is not the case. Note: We are NOT giving you tax advice, because we are NOT tax advisors.
• Deficiency judgments´ can be requested by the lender for accepting a short payoff (or when a foreclosure takes place too). More and more lenders are insisting on an agreement or promissory note by the owner to pay a portion of what was originally owed, usually over a number of years, and usually at no interest. This requested deficiency is usually calculated from the 2nd mortgage, at about 10% to 40% of that value. If it would be a hardship to pay back, and you are planning on doing bankruptcy anyway, then you could simply agree to the installment which would subsequently be wiped out by the bankruptcy. Or if your plans do not include bankruptcy then maybe the short sale along with this payment, would still be better than the alternative.

A Short Sale is definitely one solution that should be given serious consideration. It is a viable alternative to saving you from foreclosure, but you must find someone that has the experience and knowledge to do them effectively. Not all Short Sales succeed, roughly 1 out 4 of them do not work for one reason or another. You should have a back up plan in case of failure. Sometimes you can resubmit a new short sale package and start the process all over again, and sometimes the lender will just put an end to it and want to take it to sale. There are other options at this point like loan modification, or bankruptcy.

Whatever is done, never give up. Keep fighting down to the last second. I have seen miracles happen, just when it was looking like there was no possibility of avoiding foreclosure.

Dean helps owners facing foreclosure in Santa Barbara County California and surrounding areas. There are a handful of solutions available including Loan Modification and Short Sale. Free report outlines alternatives to foreclosure: http://www.freezeforeclosure.me Dean works with distressed Owners, Realtors, and Investor Buyers to create a Win, Win, Win for everybody!