Why do lenders agree to Short Sales?

June 16, 2009

short-salesThis is one of those questions many people are asking me these days. There are so many homeowners in Tampa Bay, Florida that are behind on their payments and exploring their options that I thought I’d write a bit about why short sales make sense for lenders. I can assure you they aren’t accepting less than you owe because they want to do you a favor!

Lenders are willing to accept a Short Sale for the following reasons:

  • To avoid the cost of foreclosure — Lenders lose, on average, $50,000 per foreclosed home
  • To avoid adding additional real estate to their inventory; afterall, they are in the business of lending money, not purchasing homes
  • Perhaps the Seller has a true hardship and is a likely candidate for filing bankruptcy

So even though a short sale might be in your lenders best interest it is often a challenge to get them to realize this fact. This is why you need a knowledgeable Realtor skilled in navigating complex real estate transactions like Short Sales. Please don’t hesitate to call me if you have questions or need help. Also, you’re free to post comments right here and I’ll respond quickly.

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Home short sale flips nixed

June 12, 2009

Published: June 12, 2009

TAMPA – It may be a bit tougher now for investors to flip short sales for big profits.

Attorneys’ Title Insurance Fund notified its 6,000 member lawyers this week that it will not insure deals made with a popular – but controversial – method for closing flips of short sales. A short sale occurs when a mortgage holder agrees to allow a home to sell for less than the mortgage balance so that foreclosure can be avoided.

The Orlando-based fund is a major underwriter for lawyers who write title insurance in Florida. In a letter to lawyers, the fund said it has become aware of short sale programs advertised on the Internet that promise to make investors lots of money with little or no work.

The letter says they involve investors entering option deals with homeowners for “the exclusive right to purchase their property for a period of time.”

The investor negotiates a short sale with the mortgage holder by convincing it that the price it is offering is the market value of the property. The investor then finds a buyer for a much higher price. The sales happen simultaneously, and the investor pockets the difference.

The problem is that “the original lender is not told that the buyer is flipping the property on the same day for thousands more than the lender has been told is the market value of the property,” the letter states.

The fund’s decision could have a major effect on short sale flips because many investors use lawyers to close deals when traditional title companies won’t.

The option contract method has been gaining steam as a way to work off inventory in a bad real estate market.

Critics say mortgage holders are misled and don’t realize they could be selling for more. Some real estate agents and buyers complain that the option contracts lock some buyers out of the market. That’s because some types of loans forbid flips.

Some lawyers have raised concerns that sellers may have to pay the difference later.

But proponents say investors can make money and homeowners can avoid foreclosure. They say mortgage holders would lose even more money if they foreclosed on the home.

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What is a short sale?

June 10, 2009

shortsaleA short sale is a sale of real estate in which the proceeds from the sale fall short of the balance owed on a loan secured by the property sold.

In a short sale, the bank or mortgage lender agrees to discount a loan balance due to an economic or financial hardship on the part of the mortgagor. This negotiation is all done through communication with a bank’s loss mitigation or workout department. The home owner/debtor sells the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender, sometimes (but not always) in full satisfaction of the debt. In such instances, the lender would have the right to approve or disapprove of a proposed sale. Extenuating circumstances influence whether or not banks will discount a loan balance. These circumstances are usually related to the current real estate market and the borrower’s financial situation.

A short sale typically is executed to prevent a home foreclosure, but the decision to proceed with a short sale is predicated on the most economic way for the bank to recover the amount owed on the property. Often a bank will allow a short sale if they believe that it will result in a smaller financial loss than foreclosing as there are carrying costs that are associated with a foreclosure. A bank will typically determine the amount of equity (or lack of), by determining the probable selling price from a Broker Price Opinion BPO (also known as a Broker Opinion of Value (BOV)) or through a valuation of an appraisal. For the home owner, advantages include avoidance of a foreclosure on their credit history and partial control of the monetary deficiency. A short sale is typically faster and less expensive than a foreclosure. In short, a short sale is nothing more than negotiating with lien holders a payoff for less than what they are owed, or rather a sale of a debt, generally on a piece of real estate, short of the full debt amount. It does not extinguish the remaining balance unless settlement is clearly indicated on the acceptance of offer.

Short sales are common in standard business transactions in recognition that creditors are not doing debtors a favor but, rather, engaging in a business transaction when extending credit. When it makes no business sense or is economically not feasible to retain an asset, businesses default on their loans (called bonds). It is not uncommon for business bonds to trade on the after-market for a small fraction of their face value in realization of the likelihood of these future defaults.

Read more about short sales at Wikipedia

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3 States Account For Half Of The Country’s Foreclosures

June 6, 2009

foreclosures-mar-2009-by-stSince 2007, foreclosures have dominated national real estate news. You can’t turn on the news or open a paper without seeing at least one foreclosure-related story.

But for all of the discussion, even two-and-a-half years after the peak of the housing market, home foreclosures continue to be geographically concentrated.

In looking at the latest stats from foreclosure marketplace RealtyTrac, more than half of the country’s foreclosure actions from March 2009 occurred in just 3 states — California, Florida and Nevada.

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Foreclosures Account for More Than Half of All Sales

June 6, 2009

In its monthly existing home sales report, the National Association of Realtors said foreclosure sales accounted for more than half of all existing home sales nationwide in March. NAR also reported that foreclosed homes sold for 20 percent less than homes not facing foreclosure.

Source: National Association of Realtors

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Homes Still Cost Too Much

June 3, 2009

cul-de-sac-syndromeBy John F. Wasik,
Author of Cul-de-Sac Syndrome: Turning Around the Unsustainable American Dream

You would think with home prices still dropping like hailstones in most areas, that homes would be bargains.

The present buyer’s market obscures a key fact about the housing crisis though: millions sought the refuge of cheap credit, subprime and adjustable loans during the boom because they were the easiest routes to homeownership in a time when house prices far outpaced income growth.

The sad fact is that the Great American Dream is still out of reach for far too many and it was the declining affordability of decent houses that was one of the triggers of the housing bust.

It’s not that home prices haven’t plummeted as banks unload foreclosed homes at fire-sale prices. The national median home price fell to $169,000 in the first quarter, according to the National Association of Realtors. Bank-owned properties are selling at 20-percent to 50-percent discounts.

“Contrary to popular belief,” says Jeffrey Lubell, executive director of the Center for Housing Policy, “the recent decline in home prices has not resolved the nation’s housing affordability problem.” Read more

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