Download Contrmporary Finance - Sect 7

(Begin with slide Cont Fin – Sect 7 – Beginning)
SECTION 7
SHORT SALES
WHAT IS A SHORT SALE?
Some sellers who are not able to sell their home at the price they wanted decide to work with
their lender and sell their home. They want to avoid foreclosure and the lender agrees to let a
new buyer purchase the home for less than the mortgage balance while the home is in
foreclosure or pre-foreclosure status.
In essence, the lender is willing to have the home sold and take a loss on the sale. With so
many houses going into foreclosure, a lot of lenders are willing to work with homeowners even
if their payments may be current, but won’t be shortly.
A Short Sale gives the seller an opportunity to get out from underneath the excessive debt and
get the house sold. In most States, the house is normally listed in MLS with a heading of short
sale.
(On the next page put slides Cont Fin – Sect 7 – Pgs 001 & 001A)
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There are consequences to a short sale:
Lender Must Approve: The short sale is dependant on the seller finding a buyer that is
qualified. If the lender rejects the offer, the short sale may not take place.
Tax Consequences: There is a provision in the IRS code where the debt will be forgiven and
not taxed due to the Mortgage Forgiveness Debt Relief of 2007. This forgiveness lasts only
until the end of 2009. From then on, an owner/seller that is forgiven a debt amount will have to
claim that amount as income.
(On the next page put slides Cont Fin – Sect 7 – Pgs 002 & 002A)
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There are consequences to a short sale:
Impacted Credit Report: The short sale will show up on the seller’s credit report and will
impact the scoring. However it will not impact the credit report as much as a foreclosure. Still
creditors will be expecting to be paid.
Buying Another Home: The seller will need to seek legal advice to see whether a foreclosure
or short sale is their best option. Some lenders will impose a deficiency judgment making the
seller responsible for the difference between the loan amount and the amount paid.
(On the next page put slides Cont Fin – Sect 7 – Pgs 003 & 003A)
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REQUIREMENTS THE SELLERS MUST MEET TO BE ELIGIBLE TO DO A SHORT SALE:
1. The Home Market Value Has Decreased – Comparable sales show the lender that
the home is worth less than the unpaid balance.
2. The Mortgage IS IN or CLOSE TO Default Status – If the lender sees the house is
or will be defaulting they want to avoid the foreclosure problems.
(On the next page put slides Cont Fin – Sect 7 – Pgs 004 & 004A)
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REQUIREMENTS THE SELLERS MUST MET TO BE ELIGIBLE TO DO A SHORT SALE:
3. The Seller Has Entered into Hardship Times – The seller must submit a hardship
letter to the lender stating they cannot pay the difference upon the sale; they must state
why they have stopped making payments or will no longer be making payments.
These are considered hardships: unemployment, divorce, bankruptcy, death, medical
emergency/illness
These ARE NOT considered hardships: buying another home, moving into an
apartment, bad purchase decisions, pregnancy, or unhappy with the neighborhood
(On the next page put slides Cont Fin – Sect 7 – Pgs 005 & 005A)
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REQUIREMENTS THE SELLERS MUST MET TO BE ELIGIBLE TO DO A SHORT SALE:
4. Seller Has NO Assets – The seller must submit a copy of their tax return to the
lender. If the seller has assets the lender may not grant a short sale because they will
want the homeowner to pay the difference or they may grant the short sale contingent
on the seller paying back the shorted difference.
Three Stages of Foreclosure:
1. Pre-Foreclosure Stage
2. Foreclosure Stage
3. Post-Foreclosure Stage
(On the next page put slides Cont Fin – Sect 7 – Pg 006 and 006A)
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THREE TYPES OF FORECLOSURES
Stage 1 - Pre-Foreclosure Stage
Pre-Foreclosure Stage - At this stage the investors will be able to best help the distressed
homeowner and themselves. Further damage to the homeowner’s credit rating can be stalled
and the home may be transferred at an agreed upon price BEFORE the lender is involved.
Often friends, business associates, a real estate agent, an accountant, or attorney are able to
stall the foreclosure.
(On the next page put slides Cont Fin – Sect 7 – Pgs 007 & 007A)
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Stage 2 - Foreclosure Stage
Foreclosure Stage – Some investors or real estate agents will go to the County Clerk’s office
and see which houses are in foreclosure.
The foreclosure process at this point varies depending on the State where the foreclosure is
occurring. Some States have a judicial foreclosure which pertains to mortgages and these
take longer to complete. Other States have a non-judicial foreclosure that relates to deeds of
trust and a trustee handles the process. This takes a shorter time to complete.
When the judicial and non-judicial processes are complete the house is then ready to be sold
at auction to the highest bidder.
(On the next page put slides Cont Fin – Sect 7 – Pgs 008 & 008A)
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Stage 3 - Post-Foreclosure Stage
Post-Foreclosure Stage – The lender now has taken control of the property. The property is
either in possession of the lender’s Real Estate Owned Department (REO) or in the
possession of the new owner or investor who purchased the property at auction.
If the property IS IN THE hands of an investor a person may still be able to make an offer on
their own or with the help of a real estate agent.
(On the next page put slides Cont Fin – Sect 7 – Pgs 009 & 009A)
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Reasons Why Buyers Might Not Want to Buy a Short Sale
1. Seller Paid Too Much - If the seller paid too much for a house and the market has
fallen the buyer might also be paying too much for the house.
2. Lenders Can Change Conditions – Some lenders reserve the right to renegotiate the
conditions and terms of the short sale. If the market changes, new laws pass, or new
information comes in, the lender would then change the terms of the contract. These
lenders have lawyers working with them while most buyers do not.
(On the next page put slides Cont Fin – Sect 7 – Pgs 010 & 010A)
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Reasons Why Buyers Might Not Want to Buy a Short Sale
3. Lack of Cooperation By the Seller – The seller is losing their house; it is not being
forclosured but they are losing their home and their credit will be impacted negatively.
4. Lenders Discount the Commission - The agent will be doing more work and spending
more time on this transaction; the sale could mean less commission for the agent. It is
important for everyone involved to be aware of the commission details.
(On the next page put slides Cont Fin – Sect 7 – Pgs 011 & 011A)
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Reasons Why Buyers Might Not Want to Buy a Short Sale
5. Indefinite Home Closing Process – The seller’s lender is in charge and not the buyer
so the closing date may not be convenient for the needs of the buyer. Because of the
default, the process and paperwork can drag out for a long period of time.
6. Appraisals - The seller’s loan balance may exceed the value of the home. Sometimes
appraisers are pressured by banks to appraise to the benefit of the lender.
(On the next page put slides Cont Fin – Sect 7 – Pgs 012 & 012A)
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Reasons Why Buyers Might Not Want to Buy a Short Sale
7. Strict Qualifications – Sometimes a house may be listed as a short sale but the
homeowner actually does not qualify for a short sale. The seller must qualify and be
approved for a short sale.
8. Homes Selling at Market Value – If a lender believes a home can make more money
through foreclosure they may hold out for a higher price. The interested buyer will then
have to wait indefinitely.
(On the next page put slides Cont Fin – Sect 7 – Pgs 013 & 013A)
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Reasons Why Buyers Might Not Want to Buy a Short Sale
9. Homes Selling “AS IS” – Lenders will probably not be paying for the repairs disclosed
on a home inspection, pest inspections, roof certification, home protection plans, or
deferred maintenance.
10. Higher Buyer Closing Costs – The lender will not want to pay for any extras that a
normal seller wanting to make a sale does. Sometimes the lender will not pay for the
standard seller’s closing costs and so the buyer would have to pay these fees.
(On the next page put slides Cont Fin – Sect 7 – Pgs 014 & 014A)
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Steps in a Short Sale

Seller signs a listing agreement with a real estate agent subject to selling as a
short sale with third-party approval.

The agents finds a buyer who makes an offer for less than the amount of the
mortgage.
(On the next page put slides Cont Fin – Sect 7 – Pgs 015 & 015A)
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Steps in a Short Sale

The seller accepts the buyer’s purchase offer.

The seller’s lender accepts the buyer’s purchase offer.

Transaction closes when the buyer delivers the funds, the lender releases the
lien, and the seller delivers the deed.
(On the next page put slides Cont Fin – Sect 7 – Pgs 016 & 016A)
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Who Makes Money On A Short Sale?
EVERYONE EXCEPT THE SELLER!
Listing Agent and Buying Agents – They may not make as much commission because the
lender will insist on a fee reduction but they will still get something.
The Buyer – The buyer probably purchased the property at below market value which gives
them a lower loan. Also they may qualify for a first time homeowner tax credit.
The New Lender – The new loan is new business and a new money source. The underwriter
and loan processer make money.
(On the next page put slides Cont Fin – Sect 7 – Pgs 017 & 017A)
(On the next page put slides Cont Fin – Sect 7 – Pgs 010B)
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Who Makes Money On A Short Sale?
EVERYONE EXCEPT THE SELLER!
The Appraiser – Even though the property may be selling for less than the market value the
appraiser will still be paid for the appraisal.
County Tax Assessor - The tax assessor will be able to continue collecting property taxes.
Insurance Company – The buyer will be taking out a policy so an insurance agent will get a
commission and the insurance company will collect premiums.
(On the next page put slides Cont Fin – Sect 7 – Pgs 018 & 018A)
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Who Makes Money On A Short Sale?
EVERYONE EXCEPT THE SELLER!
Title Company – The owner will be getting a title policy and an ALTA policy in favor of the new
lender.
The Escrow Company – The escrow company will be paid for their services.
Real Estate Lawyers – Sellers should always get legal advice before they enter into the short
sale contract.
(On the next page put slides Cont Fin – Sect 7 – Pgs 019 & 019A)
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Who Makes Money On A Short Sale?
EVERYONE EXCEPT THE SELLER!
Tax Consultants & CPAs – Sellers should always seek tax advice before they enter into the
short sale contract.
IRS – They will collect if the lender issues a 1099 to the seller.
(On the next page put slides Cont Fin – Sect 7 – Pgs 020 & 020A)
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