Short Sales & Foreclosures 101 for Buyers

I hear a lot about short sales & foreclosures. Why would I buy one?
To save money! One both short sales and foreclosures, the banks are “cutting their losses” and selling for less than they originally loaned. Banks make money making loans. They don’t want to be in the business of owning homes. A “regular” seller, however, may not be as motivated as a bank and/or may not be able to take a loss.

Exactly what is a “short sale”?
When a property is offered for sale for less money than it takes to pay off the underlying mortgage(s) or deed(s) of trust, the owner petitions the lender(s) to take less than the full amount due. The lender(s) may decide it is in their best interest to “sell short” instead of going through foreclosure, but they may not.

How quick are short sales?
“Short sales” aren’t short time-wise – they may add an extra 1-24 months to the sales process! Buyers need to realize that the closing date (the date they own the property) may be pushed back for months and/or may never occur if the lender and sellers can’t come to terms and the property goes to foreclosure. Short sales can be excellent for investors or 2nd home buyers or for anyone who wants a “good deal” and is extremely flexible about close of escrow dates.

What about the condition of the property?
The majority of short sales also include “As Is” addendums or clauses – the seller will make no repairs though the buyer has the right to inspect. Some short sales are still occupied by the property owners and some are vacant. Some are in excellent condition and some need lots of work. Remember, when people can’t afford to make their house payments they often can’t/don’t make repairs, either.

What is a foreclosure?
When a property owner doesn’t make their payments, the lender forecloses and takes back the property through the foreclosure process. This can take anywhere from 6 months from the first missed payment to a couple of years. Bank-owned, foreclosure and REO (real estate owned) are all terms for properties owned by the lender.

How long does it take to buy a foreclosure property?
Most foreclosure transactions add another 2-4 weeks onto the usual 4-6 week escrow period for a “regular” resale, but times vary.

What about the condition of the property?
The properties are vacant. They may or may not have utilities on and condition varies widely. Foreclosures are sold “As Is” and the lender also dictates many of the terms of the contract. Buyers normally have the right to inspect the property.

As a buyer, what’s most important to me?
That depends. When we meet we will spend a lot of time talking about your goals and your parameters, and discuss the pros and cons of new homes, resale properties, short sales, foreclosures, for sale by owner and auction properties and decide fits you best.

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Short Sales and Foreclosure 101 for Sellers

Why would I consider selling my property as a short sale?
If you owe more on a property than it is currently worth and you are experiencing a hardship (i.e. job loss, medical problems, military deployment, job transfer, adjustable rate mortgage reset to a higher interest rate, etc.) call your lender and ask what they can do to help you. They may suggest a loan modification, a forebearance of payments, a reduction in interest rate, a “deed in lieu” of foreclosure, a “deed for lease” and/or a short sale.

Exactly what is a “short sale”?
When a property is offered for sale or sold for less money than it takes to pay off the underlying mortgage(s) or deed(s) of trust and the lender(s) agree to take less than the full amount due. The lender(s) may decide it is in their best interest to “sell short” instead of going through foreclosure, but they may not. The promissory note and deed of trust you signed at closing outline the foreclosure process; there is not one word about a short sale in those documents. Each lender makes their own rules, and their rules may change. If there are multiple lien holders (such as first and second mortgages, a Home Equity Line of Credit, a pool loan) each lender must agree to the terms of the short sale. The more lenders, the more complicated the transaction. Important: in a non-HAFA short sale, the lender(s) will require that you, the seller, may receive no monies at closing. All of your owner’s equity is forfeited. If you qualify for a HAFA short sale through the US Treasury, Fannie Mae or Freddie Mac, then you can receive $3,000 at closing if you meet the terms and conditions of your short sale.

What are “HAMP” and “HAFA” and how do Fannie Mae and Freddie Mac fit into these government programs I’m hearing about?
The Homeowner Affordability Modification Program and the Home Affordability Foreclosure Alternative program have been set up to help people who can no longer afford their primary residence and can’t sell it for enough money to cover the amount of the loan(s) on the property (i.e. “underwater borrower”). First a homeowner applies to their lender thru HAMP to see if their loan can be modified. If it can, and the homeowner is satisfied with the loan modification, then that’s it. If the loan can’t be modified or if the homeowner doesn’t like the terms of the modification, then they are to be given the option to do a short sale. As of August 1, 2010, loans owned by Fannie Mae and Freddie Mac are now also part of HAMP and HAFA. Homeowners can get a pre-approved for the program and a list price pre-determined by their lender. Paperwork is now more standardized and guidelines are much clearer than in the past. Call or e-mail us and we can walk you through the basic guidelines to see if HAMP/HAFA works for you.

How quick are short sales?
“Short sales” aren’t short time-wise – they may add an extra 1-24 months to the sales process! You will have to provide documentation of your income, your hardship and all of your assets. You must be honest with your lender. You need to realize that the closing date may be pushed back for months as the lender(s) negotiate with you and you negotiate with your buyer. Many buyers get tired of waiting and back out of the transaction and your property needs to be marketed and sold again. The short sale may never occur if the lender(s) and you can’t come to terms. In that case, the property goes to foreclosure if you can’t bring your payments up to date.

What is a foreclosure?
When you don’t make your monthly payment the lender may take back the property through the foreclosure process as stated in your closing documents from when you bought or refinanced your property. In Arizona, where most properties have deeds of trusts instead of mortgages, once payments are 90 days behind the bank can send you a Notice of Default. Approximately 90 days later the Trustee’s Sale will occur and your property will be sold to the Trustee or to a 3rd party if you haven’t caught up all monies due the bank, including penalties and interest, or sold the property through a short sale. Once the Trustee’s Sale occurs, you no longer own the property and it must be vacated. (One exception: tenant-occupied properties with valid leases may continue to be occupied by the tenant until the end of the lease)

What happens to our credit with a short sale or foreclosure?
Both adversely affect your credit, though the amount of damage varies. On a short sale, if you continue to make payments your FICO score should drop less than if you stop making payments. At this time, a foreclosure stays on your credit report for 7 years. If you have a government security clearance, if you have credit cards, if you go to buy insurance or a car, open a business, or need to borrow money, a short sale or foreclosure may have serious consequences/costs for you. Before doing a short sale or a foreclosure you should always seek professional legal and/or tax counsel.

Will we have to pay our HOA dues?
Absolutely! If you don’t, the HOA will probably move quickly (within 2-3 months) and turn your delinquent account over to an attorney and a lien will be filed against you. Back payments, interest, penalties and lawyer’s fees grow exponentially. Three months of back payments can quickly turn into thousands of dollars. Foreclosures can drag on but HOAs are becoming aggressive on quickly collecting the amounts due to their associations.

Will we have to pay our property taxes and homeowner’s insurance policy(s)?
Absolutely! If you pay through an escrow account, confirm what date your taxes and your insurance are paid to and make arrangements to pay these. You are responsible for the insurance on the property as long as you own the home (see your original loan documents). Foreclosures can drag on. A fire or flood could have catastrophic results for you. Your taxes are also your responsibility (see your original loan documents) and you need to keep them current as long as you own the property. If you pay your taxes and insurance policy(s) separately, keep them up to date unless your attorney gives you specific instructions otherwise.

Will we have to pay income taxes?
Maybe. Tax consequences of short sales and foreclosures can be very complicated so you must seek professional legal and tax advice.

How do we get started?
Call us and we’ll arrange a time to meet and review your options. If you, your attorney, your tax advisor and your lender(s) agree to a short sale we will outline our marketing strategy and review the short sale documentation, forms, and potential outcomes.