Short-Sale Primer Part V

Here it is. Our final installment. This is one of the most important parts: How Will A Short Sale Affect You. If you missed any of the preceding parts, you can find them here:

Arizona Short-Sale Primer Part I

Arizona Short-Sale Primer Part II

Arizona Short-Sale Primer Part III

Arizona Short-Sale Primer Part IV

This part is most critical, and is the subject of great speculation and debate, and is surrounded with misunderstanding. I strongly advise you to seek appropriate legal counsel regarding your specific circumstances and any legal, tax, or personal credit consequences for your unique situation. State law varies on these issues, and many issues are still being worked out and examined by CPAs, attorneys, and state legislatures.

Three Key Issues

The three most important considerations for anyone looking to do a short sale are, lender’s recourse, taxes, and credit. It all boils down to: how is this going to affect me? Why would I do a short sale, as opposed to just letting the bank foreclose on the home and take it away from me? These are the issues we’ll tackle today, and I’m fairly certain that there will still be plenty of questions in your mind. This is a complex beast, and we’ll take the issues in stride.  One of the key considerations, and an issue that changes things dramatically, is: What is the nature of ownership?

Do You Actually Live There?

There are many “protections” in place for people who are down and out and facing foreclosure. Many of these protections are for people who are facing the loss of their home. People (and the law-makers that derive form them) have a broken heart for those who are hurting and need help. The heart-strings of the masses do not however, play a sad dirge for “speculators”. Let’s make a distinction here. You either bought a home to live in it, or you didn’t. This does not apply to those of you who purchased a home and lied on the application in order to get a primary occupancy rate on your mortgage. Many of the legal protections in place do not apply to investors or short-term “property flippers” who simply got stomped in a series of poorly timed events. So, what are the protections for the standard homeowner?

The Mortgage Forgiveness Debt Relief Act of 2007

In late 2007, the U.S. Congress passed, and President Bush signed, The Mortgage Foregiveness Debt Relief Act of 2007. Go check it out. I’ll paraphrase it here, for those of you who aren’t versed in political speak: If the bank agrees to take less that you owe them on the sale of your primary residence, you will not have to pay taxes on the forgiven amount. Before the passage of this legislation, for example, if the amount “forgiven” is $50,000, the person being forgiven the debt would receive an IRS Form 1099 for that amount. This means that, for tax purposes, and in the year in which the debt was forgiven, you just made an addition $50,000 of income. And the government wants its cut. Now, with the passage of the bill, you are forgiven the tax debt also. Very nice.

Recourse vs. Non-Recourse

Here is the pertinent Arizona Revised Statute in regards to Recourse on Loans for Real Property.  This statute is a little verbose, and in order to clarify as best I may, let me offer this by way of explanation. If an individual buys “. . .a parcel of real property of two and one-half acres or less which is limited to and utilized for either a single one-family or single two-family dwelling,” and if the property’s value has not decreased “. . .because of voluntary waste committed or permitted by the. . .” homeowner, then the bank does not have recourse (the right) to make you pay the difference if the short-sale is less than the amount owed. This also applies to the circumstance wherein the home is foreclosed upon. In other words, you cannot be made to pay a deficiency on the loan, unless it can be proved that the property is worth less than you paid for it because you decreased its value by intentional neglect or wanton destruction. So, if you are being foreclosed upon, and you are angry, and a generally hostile personality, you may tear the house apart in your wrath. You will however, have to pay for the damages you cause. Don’t do it.  As a side-note, mortgage notes have clauses in them that deal with whether or not they are recourse vs. non-recourse in nature. If you have a loan in Arizona, and the loan documents state that it is a “recourse loan,” if you otherwise qualify under the above circumstances, there is no recourse for the lender. Regardless of what the loan documents say. So, does this Arizona Statute on recourse apply to investors, or people who buy the home for something other than living there? On the surface, it appears that it does. I cannot however, make this assertion definitively. It would require a legal mind and case law greater than mine to answer this question.

The Case Against Your Credit Rating

If you are involved in a foreclosure or a short sale, will your credit score suffer? Absolutely. There is only one case that I know of where the borrower’s credit score was not directly damaged, and I detailed that case in Part I of this series. Now on to the larger question. Where and how does the damage occur? Consider this. The real damage occurs because, if you are having a hardship, and you are not paying your mortgage, every time you miss a payment, it counts against you. For example, if you have determined that you are going to let the property go into foreclosure, and you are not going to pay your mortgage any more, each payment you miss counts against you. How many are you going to miss? Plenty. It will take, on average, 6 -9 months for the foreclosure process to be complete. Every one of those months of missed payments counts against you. On top of that, when the property is foreclosed upon, the fact that a foreclosure took place will also be noted on your credit report. A double whammy.

The Case For The Short-Sale

So, if you’re going to have credit damage either way, why do a short sale? Well, it’s a matter of degrees of damage. Usually, a short sale will take 2 – 4 months to completely process. Therefore, the damage is limited to the amount of months of missed payments. If the homeowner has determined that they are having a hardship, it pays to look at all options to resolve the conflict sooner, rather than later. It you are already behind on payments, it pays to get the short sale started ASAP. This alone will mitigate the damage to your credit score. The longer you hold on, or do nothing, the greater the damage. 

What Does The Future Hold

How long is the damage going to last? Depends on the degree of initial damage. It has been guestimated (too early to tell, really) that a person who undergoes a short sale will probably not be able to get a new loan for another home for a minimum of 2-3 years. If, on the other hand, you undergo a complete foreclosure, you can expect to not be abe to get sufficent recovery so as to purchase a new home for 5-7 years. 

So, I have presented as much information as I have, and I hope it has been helpful and informative for you. Thanks for waiting patiently for this final installment, which I’m fairly certain was of primary interest to you who are considering a short sale. As always,

I am NOT an attorney, a CPA, nor anything else important-sounding, and I don’t even play one on TV. If you need help with your specific case, you are encouraged to seek the advice of competent legal counsel. If you have a need for help in any specific area, you are welcome to contact me for a referral to a qualified professional in your area. Thanks for joining us.

Allen Butler

(602) 499-4798

abutler@realtybutlerhomes.com

Go to Part I of the Arizona Short-Sale Primer

Go To Part II of the Arizona Short-Sale Primer 

Go To Part III of the Arizona Short-Sale Primer

Go To Part IV of the Arizona Short Sale Primer

Go To Part V of the Arizona Short Sale Primer

Short-Sale Primer Part IV

Here we are again. In case you missed them, and need to get caught up, here are the first three parts in this series.

Arizona Short Sale Help Part I,  Arizona Short Sale Help Part II,  Arizona Short Sale Help Part III

Today we want to take a step by step look at the process of a short sale. Now, if you’ve looked at my Arizona Foreclosure Help Page, you know that a short sale may not be the best option for you. But if it is, here’s how the process goes.

Sell Means Sell

To do a short “sale” the home has to be up for sale first. If you’ve already determined that you are a great candidate for a short sale, you next have to find an agent who will put your home on the market. Just like any time you put your home on the market, choose the best agent you can find. Choosing the wrong agent to do a short sale can cost you dearly.  This agent should also be someone you trust, or comes with a good referral from a friend or relative, as they’ll become intimately familiar with your situation and your financial life. The first step is to hire an agent and get him or her authorized to speak on your behalf with your lender. You should contact your lender and ask them how to get your agent affiliated with your account. They will either provide the documentation you need, or tell you what to send to them. Usually, the lender will want a note from you that authorizes the agent to speak on your behalf, with the appropriate data included, like the agent’s name, company, contact information, you loan number, your signature, and the date. This should be the last time that you are in contact with the bank, as the agent will take over from here.

What’s Wrong With This Picture?

I recently began working with a client who was attempting to do a short sale with another agent in town.  I’ll not reveal the name of this agent, so as to protect the ignorant, but here’s what happened. This home has been up on the market for 4 months as a short sale. Now, you might be thinking that, in a market like this, 4 months isn’t too bad. Actually, 4 months on the market, for any seller, even in this market, is bad. For a short sale to be on the market for 4 months is absolutely wrong, and is a serious detriment to the seller of the home. The agent in this case was trying to get the seller “top-dollar” for the home. Consider this (and we’ll cover this more thoroughly in our next installment): what good is “getting top dollar” doing for the seller? He’s already upsidedown on his mortgage. By leaving his home on the market for 4 months, the agent is not doing him any favors, and is doing serious damage to his credit rating! Short sales need to happen fast in order to be protective of the client. Protection of the client’s interests is the only reason to do a short sale.  Not only was this home on the market for more than 4 months, the agent in question was actually having the client doing his own negotiating with the bank! The agent would actually call the client for news on how the short sale was going! Incredible!  (If you want referrals from me about agents in your area who are experienced in short sales, just drop me a line. I’ll give out my information at the end of this post.)

Savour The Sensation

If you have a good agent, ad the marketing is done well, you should have an offer on your home within 30 days. Unfortunately, this is a difficult time for sellers, but they can actually relish the idea that their home actually has a potential buyer! There are many a homeowner who would love to have an offer on their home. Any offer. Now, here’s what’s gonna happen:

Getting It Together

Your agent, being the fabulous agent he or she is, has already spoken with the bank, and has a list of documents that the bank will want to accompany the offer on your property. This will undoubtedly include:

a.)  a hardship letter that explains why you can no longer repay your mortgage

b.)  all of your fiinancial documentation which demonstrates the hardship; this will include your pay stubs, all of your checking and savings account ledgers, your w-2s, your 06 -07 tax filings, any IRAs, 401Ks, everything.

c.)  the fully executed offer on your home, along with the buyer’s qualification letter, and any and all addenda, counters, etc.

d.)  an estimated HUD-1 settlement statement from a title company (or an estimated net sheet)

e.)  a copy of your and your agent’s listing agreement

f.)   a copy of the MLS plano sheet

g.)  any comparable sales and tax documentation that supports the value of the offer on the home, along with a letter explaining such from the agent

So, there you have it. A mountain of about 50 pages that need to be faxed to the lender.

The Waiting Game

Now, because everybody and their dog is going into foreclosure, you’ll have to wait your turn to get assigned to a loss mitigator to review your file, check for file completion, and make a decision about whether the bank will accept the short sale.  Your agent should call the bank the same day, or the day after, the documents are sent, in order to confirm receipt. Many agents will simply wait for the bank to call them with a decision. This is not the best idea an agent ever had, as I am personally convinced that unless you call them periodically (like once a week), they tend to forget you exist. When I call, I don’t expect a dicision. I’m just letting them know that I still exist, and that we are waiting patiently. Kinda. I’ll also want to make sure that they don’t have any more documents that they need, or questions they need answered. Expect that an actual dicision will not be made on the short sale for a minimum of 45 days. Sometimes in can take 60 days.

Milestones To Watch For

There are a few things that need to happen before the bank can make a decision, and things which your agent will want to watch for. First, you’ll want to confirm that the lender has ordered, or will order very soon, an appraisal or BPO, or Broker Price Opinion. This is done for the simple reason that the bank is not going to take your agent’s word that the home is worth what they have suggested. They’ll want 3rd party confirmation. If your agent has suggested that the property is worth $300,000, and your offer is for $280,000, great. But, if the bank does an independent review and finds that the home is actually worth about $375,000, they will not accept the sale. Your offer is too low.

Another milestone to watch for is that your case has actually been assigned to a loss mitigation negotiator. It will take about two weeks for your case to be assigned to someone. Once this happens, it will usually be a fe more weeks before this person makes a decision.

The final milestone is the actual negotiation. When the loss mitigator begins to call your agent and talk about the terms of surrender, you’ll know you’re close. The end is in sight.

Crossing The Finish Line

So, all the negotiations are done, the bank has agreed to the short sale, and the property now goes into escrow for processing. This will take an average of 30 – 45 days to complete. At the end of this period, you have moved out of the home, the new buyer has moved in, and your ordeal is over. Or is it? Tune in next time for the consequences. You didn’t think this was over did you?

Go to Part I of the Arizona Short-Sale Primer

Go To Part II of the Arizona Short-Sale Primer 

Go To Part III of the Arizona Short-Sale Primer

Go To Part IV of the Arizona Short Sale Primer

Go To Part V of the Arizona Short Sale Primer 

For specific questions about your situation, or if you need help, please call me direct at (602) 499 – 4798, or email your questions to abutler@realtybutlerhomes.com. Finally, the disclaimer:

This information is for educational purposes only. Seek attorney, tax, and residential legal help for your specific situation.

Short-Sale Primer Part III

Here we are again. Thanks for following along. I have received quite a few questions from poeple about specific topics, and I can confirm that all of your questions will be answered in the course of this (rather long) treatise. Today, we discuss how to prepare yourself for a short-sale. Before we begin though, if you missed part I or II, here they are:

Arizona Short-Sale Primer Part I

Arizona Short-Sale Primer Part II

What, Exactly, Are We Preparing?

You need to prepare yourself in two ways, really, for a short sale. You need to prepare yourself mentally & emotionally, and also financially. Both aspects are critical. Like any challenge, you cannot simply go around it. You must go through it. Trying to avoid problems in life will lead you to a comfortable beach. Only, you won’t be lounging with a Mojito. You’ll be looking for a place to bury your head. First, let’s check your head:

Where’s Your Head?

Here’s the reality folks. I cannot in good conscious inform you that this will be a painless process. Yes, your credit score is going to take a hit, but we’ll cove that in depth later. More to the point is the emotional and psychological trauma of losing your home. Now, some of you out there may be saying, “Psychological trauma!? I’ve never even seen the home I’m losing to foreclosure. It’s an investment property.” Or, you might be trying to rationalize (FYI: The Step Before Acceptance) in this way, “Well, we’ll take a little hit for awhile, but we’ll be all right in the long run.” While I certainly applaud the positive attitude, take just a moment to actually acknowledge that losing a home, whether it’s an investment property or your “home sweet home” will be a troubling setback.  None of us, no matter how much we have in the bank, are immune to financial loss. Now, without getting too “mushy” here, let me just say this: Suffering this kind of loss can and WILL throw you into a bit of a psychological tailspin. Men, in particular, if they are facing foreclosure or serious financial setbacks, can be “emasculated,” so to speak.  One minute you’re riding high on the hog, things are looking great, the family is well, the kids are playing in the yard. The next thing you know, money’s getting a little tight. The credit cards come out more. Lor forbid, you have a mortgage that is adjusting upwards. Suddenly, there is real fear in the air, and you find yourself in a trap that you can’t, seemingly, get out of. Many of us have faced these issues. Believe me, when the mortgage and housing markets crashed (and the rubble is still settling), many of my formerly well-to-do friends and colleagues were happy as clams. Right now, I can count on one hand the number of my compatriots who are still selling real estate or loans. They are truly, truly, in trouble. And losing their own homes as well! Things to remember during this crisis:

1.  Most, if not all, truly wealthy men have declared bankruptcy at least once.

2. This too shall pass. . .

3. Your most powerful earning years are still ahead of you.

4. It’s happening to lots and lots of people. You are not alone.

Getting The Financial House In Order

Now, you’ve discovered that you are a prime candidate for a short-sale. What are you going to need? What is the bank going to want from you. The answer to these questions is fairly simple. You’ve got a financial hardship, right? That’s whay you’re doing this. Now you have to prove it. Remember when you were filling out the paperwork to get the loan on that fabulous new house? You made yourself look as good as possible.  You assessed and reported every nickle you could verify. You proudly paraded your credit score. It was like a first date. Gotta look good, right?! Well, this is exactly the opposite.  Now, you’ll need to very carefully document all of your expenses. EVERYTHING. Groceries, gas, insurance, child support, alimony, that repair to the car last month, all of it. The bank wants to get a clear picture of your economic hardship. You’ll turn over a lot of documents to help you support these assertions of hardship. Here are some tht you’ll need:

1. A hardship letter explaining the nature, cause, and extent of the hardship.

2. Copies of your last 3 month’s bank statements, for all accounts.

3. Copies of your last 2 month’s wage earnings receipts (check stubs).

4. Copies of any additional income receipts (support, disability, etc).

5. Copies of the last 3 year’s tax documents (W-2s, final tax workout forms)

These are a good start. These are almost always requested by a lender for a short-sale. 

Go to Part I of the Arizona Short-Sale Primer

Go To Part II of the Arizona Short-Sale Primer 

Go To Part III of the Arizona Short-Sale Primer

Go To Part IV of the Arizona Short Sale Primer

Go To Part V of the Arizona Short Sale Primer 

Until next time, if you have specific questions, please email them to me at abutler@realtybutlerhomes.com or call me at (602) 499 – 4798.  You can also visit our foreclosure resource center on the realtybutlerhomes.com webpage.

Legal Notice: The information contained in these articles is for educational purposes only, and should not be construed as specific legal advice. Readers are encouraged to contact legal counsel with questions regarding their own specific circumstances.

Is It A Good Time To Buy A Home? Depends. . .

I get calls and emails all the time from potential buyers fretting over whether they should buy a home or not. The short answer is, depends. The long answer. . .well, here it is.

The First Fundimental

The reality is, it is almost always okay to buy a home. The only exceptions to this fundimental are whether you can actually afford it, and whether the home sits in a flood plane, on a geographical fault-line, in a war-zone, on a hurricane frequented beach, in tornado alley, etc., etc. I sometimes question why someone would build a home that is frequented by the wrath of God. But enough about religion. . .

The First Fundimental Broadened

That first part of the first fundimental is so important, I feel the need to spend a little time on it. It is NEVER okay to buy anything you can’t afford. Our consumption-driven country and economic philosophy many times get us into the predicament of spending money we really don’t have. Delayed gratification is not something we, as a nation, specialize in. People want what they want, and they want it now. This type of thinking is partially responsible for the mess we’re in now.

What Is A Home?

Here is fundimental principle #2, and we all need to keep this in mind: a home is a place to live and raise a family. It is secondarily an investment. A home is truly an investment only for a few wild speculators, and a very few seasoned professional property-holders.  For the majority of Americans, a home is a place where you kick off your shoes at the end of the day, get comfortable, watch TV (not too much!), play with the kids, congratulate the wife as she decorates, etc. In almost every case, and there are always exceptions, if you live in the home until you NEED to move, you will inevitably come out ahead. That is, the home will be worth more than you paid for it. This is a SECONDARY benefit to homeownership. Only a few Americans make this their primary purpose.

The Poisoning Of The Well

The problem seems to be that we as ordinary homeowners have been “infected” with the speculator’s disease. Because of market volitility and rapidly increasing prices, we were conditioned to the belief that our homes were going to appreciate rapidly, and we acted on that assumption. We sold our homes for way more than they should have been worth, we pulled out stacks and stacks of cash from the “ATM” that became our homes, and we speculated that we could buy bigger and ever larger homes, and make money (lots of it) in the meanwhile. I encourage you to look up the dangers of “buying on margin,” as this is directly related.

If You Insist

If you simply must view a home as investment, think of it as a longer term investment. That is exactly what it is. Think of it this way: the average homeowner will live in a home for 5-7 years. If we look at the rate of growth over the long term, the gains are almost always appreciable. Since the 1940s (and before), home prices have gone up.

If You Plan to Stay. . .

So, if you want to buy a home, live in it, and raise your family, now is a great time to buy a home. Since prices in metro-Phonix have lowered some, housing has become more affordable. This is great news for many buyers who were pushed out of the market when prices were sky-rocketing. There are so many great houses on the market at unbelievable prices, it’s a buyer’s heaven.

Choosing A Brokerage.

Here’s yours truly over at BloodhoundBlog talking about choosing a real estate brokerage. (This is a real estate agent choosing a brokerage, not a consumer.)

Short-Sale Primer Part II

Hello Again!

Here’s part II in our continuing series on Arizona Short Sales.  If you missed it, Here’s Part I of the Arizona Short-Sale Primer. I wanted to address something that everybody seems to be asking me about lately, and is next up on our list of topics: who is eligible for a short-sale, and why would a bank be interested in accepting one?

Who Is Eligable For A Short-Sale?

There really are no hard and fast rules about who is eligible and who is not. You might hear that a person has to have a demonstrable “hardship” in order to do a short-sale. This can be death, divorce, job loss, health problems, and a host of other things. This tidbit of wisdon is generally correct. A person must have a good reason to attempt a short sale. Banks are not going to forgive tons of debt to people who simply don’t like their homes anymore and wish to move, or those who are thinking something like this:  

“Hmm. My house is worth $100,000 less than I payed for it, and my mortgage payment is pretty high.  Doesn’t is make financial sense to simply dump this home and then rent for awhile, let my credit rebuild, then buy a new home when the market is done crashing? I could save thousands of dollars per month by renting.  Let’s see. . .my current mortgage payment is $3,200 per month. I can rent a similar home for about $1,200 per month. Good GOD! That’s a lot of money. In a few years, when my credit is back to normal, and homes are a lot cheaper, I could buy again. And, I will have socked away tens of thousands of dollars over those two or three years!

The logic sounds impeccable doesn’t it? How could you not think that way? Furhermore, I am not here to say whether or not that is “logical,” “moral,” “ethical,” or anything else. I am saying that with that type of thinking, a short-sale is not the answer.  But can you actually do a short-sale without a verified hardship? The long and short of it: depends.

Going It The Hard Way.

I have a certain client who wants to do a short-sale. He is current on his payments, and is not in a real “hardship.” He simply has a really good reason to move. He’s got a great job offer in another state. However, his house is worth, on the open market, about $10,000 less than he owes the bank.  Can he do a short-sale? Indeed. He can and did. Now, before you get excited about this news, here’s the rest of the story. . . For this particular client, I simply went to the bank with an offer on the property, for about 10k less than my client owed.

Me: “Will you take this offer for less money than my client owes?”

Bank: “Uh. . .maybe. Why?”

Me: “Well, my client wants to move. Will you do it?”

Bank: “Absolutely NOT! Are you joking?!”

Me: “Well, I had to try. Will you do it if my client pays you back the money?”

Bank: “Your client is willing to sign an agreement, and pay us the difference?

Me: “Sure. He really wants to move.”

Bank: “Alright. Let me run this up the flagpole, and see if it’ll fly.

And you know what? It did. 

Moral of the story: There’s always an exception.

Why Would A Bank Do That?

Banks are not in the habit of giving away money, despite bait-n-switch offers on TV. In order to understand why a bank would consider a short-sale, we have to think pragmatically. Consider this: If you don’t pay your mortgage, the bank is not earning any money, right? Well, if you continue to not pay your mortgage, the bank has no choice but to try to get their collateral back from you. That “collateral” is your house. That’s why they loaned you the money in the first place. It’s not because you are good looking, or even your credit score or your financial ability to repay the loan. The real issue is, the money they loaned you has “backing,” in the form of the actual house on the land.

Loss Mitigation

Each bank now has (if they didn’t before) a “Loss Mitigation” Department. This department’s sole cause of existence is to “stop the bleeding.” If they can, they’ll work out a deal with you to get you to keep paying them. They might wave a payment or two in order to get you “caught up.” They may re-negotiate your mortgage at a new interest rate. These are a bank’s primary method of trying to stop the continued loss of money. Sometimes, none of these scenarios will work. You may have lost your job, or gotten a divorce, or what have you. In this case, no matter what kind of “sweet deal” the bank offers, you simply cannot continue to pay. At this point, the bank may themselves suggest that you find a real estate agent to sell your home for what you can get. It will obviously be less than you owe the bank, and they’re generally speaking, “okay with that.” Why? Because of the “bird in the hand, two in the bush syndrome,” only in this case it’s “a bird in the hand and ‘three-quarters of a bird’ in the bush.” You see, if you bring the bank an offer on your home in which, at the end of the day, they will lose $40,000, that’s a “known quantity.” If they don’t accept your offer, they will lose even more later. They will be forced to “foreclose” on your property. This is a legal proceedure which is very expensive to complete. So, whereas now they will lose $40,000, with the cost of the foreclosure process, they are now losing $80,000. Yes, a foreclosure will cost them all of that and sometimes more. Much more. It has been projected by legal experts that a foreclosure in Maricopa County can cost a lender as much as $75,000 – $85,000!!! And, it takes almost a full year sometimes. Certainly not less than 6 months.

But Wait. . .There’s More

If the bank waits for the foreclosure process, and eventually takes your home, they’re also going to have to get the home ready to sell again (utilities on, clean-up, landscaping, locks changed, etc.), pay a real estate agent to sell it (eating those costs as well), and hope the market doesn’t continue to depreciate more during this rather lengthy process. Ouch!!

So, doesn’t it make sense that a bank would always agree to a short-sale in order to save themselves a ton of cash? You’d think so, but there are always these little things called “bureaucracy” and “principles” that get in the way. We’ll touch on those next time. . .

Go to Part I of the Arizona Short-Sale Primer

Go To Part II of the Arizona Short-Sale Primer 

Go To Part III of the Arizona Short-Sale Primer

Go To Part IV of the Arizona Short Sale Primer

Go To Part V of the Arizona Short Sale Primer 

***Keep in mind, these articles are intended for educational purposes only, and should not be construed as specific legal advice. Always consult a qualified attorney or tax advisor with questions about your specific circumstances. If you have questions regarding any of the issues presented here, you are encouraged to give me a call: 602-499-4798 or email me: abutler@realtybutlerhomes.com

Allen Butler, GRI, AHWD

Short-Sale Primer Part I

Unfortunately, one of the hottest topics in today’s Arizona real estate market is the subject of short-sales, foreclosures, and lender owned properties (REO). Now, I’m going to begin a whole series here on short-sales, but you’ll get the answers to your questions on the other subjects as a matter of course. There is a LOT of information to cover, but cover it we will, and in as logical a manner as possible. Here are a list of questions that we will answer, and when they are all done, I’ll post it in the archives:

1.) What is a short-sale?

2.) Who is eligible to do a short-sale?

3.) How do I prepare myself, my home, and my finances for a short-sale?

4.) What is the process of doing a short-sale in Arizona?

5.) What are the consequences of doing a short-sale on my home?

What Is A Short-Sale?

A short-sale occurs when a home is sold for less than the current owner owes to the bank. It’s really that simple, but like a lot of things in life, simple doesn’t necessarily mean “easy.” Short-sales are a rather unique occurance in that they almost always happen in a market that is “depreciating,” that is, a market where home prices are actually going down. Such is currently the case in most of the country. 

A Logical Flow

The following progression will explain the differences bewteen short-sale, foreclosure, and lender owned properties, or REOs. However, remember that the circumstances leading up to a short-sale, foreclosure, etc. will be very different. We’ll cover that topic more thoroughly in our next installment.

Now, for the sake of discussion, let us say that a certain homeowner, for whatever reason,  either a.) needs to sell his home and move, or b.) is having a financial hardship, and can’t pay his mortgage. So, Mr. Troubled Homeowner calls Mr. Real Estate Agent.  Aghast, Mr. Homeowner listens as Mr. Agent tells him that his home is worth less than he owes on it. Feeling suspicious and a little physical sensation of a not very pleasant variety in his bowels, Mr. Homeowner calls another Mr. Agent. The second agent essentially confirms what agent #1 had indicated.

Mr. Homeowner has two choices. He can either a.) sell the home for what current market value is, and bring the difference between the sale price and what he owes the bank to the table out of his own pocket, or b.) he can try to work something out with his bank. If he doesn’t have the money to bring to the table, he must negotiate with the bank to find a solution. Banks have a very keen interest in Mr. Homeowner staying in his home, and continuing to pay the mortgage. To that end, the bank will try to offer solutions to help. They may offer to forego a payment or three (with or without simply re-applying that amount to the principle on the loan –”a forebearance”–), or they may adjust the interest rate for a time, or other possible scenarios. If none of these scenarios will work for this homeowner, he moves to step two: the short-sale.

Your Intermediary

So, not having liked any of the scenarios that the bank had to offer to alleviate his homeownership distress, Troubled Homeowner calls back the agent (you know, the one who told him his house was worth more? ;>) and asks if he knows anything about short-sales. Of course, you already know the answer to that question. He’s an “expert” on short-sales. He read an article about it in the Arizona Republic. 

Plowing A Tough Road

Now, Mr. Homeowner and Mr. Agent, working together, place the home up for sale at or a little below current market value (below in order to expedite the sale).  A buyer arrives, likes the home, and makes an offer. Mr. Agent collects all the data, sends it to the bank, and the bank makes a decision.  If the process works, Mr. Troubled Homeowner sells his home.  Now, there are plenty of issues involving that “sale,” of which I will discuss in depth in our following installments.

Let us say, for the sake of dicussion, that the bank doesn’t like the idea of the short-sale, for reasons which will be discussed later, and they reject it. What happens next?

Foreclosure

Over the coming months, Mr. Troubled Homeowner will begin a new phase of his troubles: debt collectors. He’ll be called at home, at work, his parent’s home, his ex-wife’s home, and his best friend from high school’s home.  The bank wants their money, or they’re going to “repossess” his home. How will they do it? Through a legal process called a foreclosure. The bank will hire attorneys to represent their interests, and essentially go to court to take Mr. Homeowner’s house away. During this time, Mr. Homeowner will receive multiple notices of the impending doom, right up until Sherrif Joe knocks on his door and has his posse remove Mr. Homeowner and his belongings. 

 Now, if the bank is unsuccessful at liquidating Mr. Homeowner’s property at the courthouse steps, they will become the new owner of the home. Since banks are not in the habit of owning real estate, they will hire a new real estate firm to sell the home and get it outta their collective hair, and off the books. When the home goes on the market again, it is said to be an REO property, meaning the bank owns it.

You might be thinking, and I hope you are, that it makes more sense for the bank to just take the home away from a delinquent homeowner, and sell it as an REO. Why would a bank actually consider a short-sale, when they can take it away and sell it themselves? The answer: the foreclosure process is very expensive, and can take up to 8 or 9 months.

Next time, we’ll look at the homeowner’s qualifications for a short-sale, and the reasons a bank might be inclined to take one.

Go To Part II of the Arizona Short-Sale Primer 

Go To Part III of the Arizona Short-Sale Primer

Go To Part IV of the Arizona Short Sale Primer

Go To Part V of the Arizona Short Sale Primer 

Until then, if you have specific questions, please email them to me at abutler@realtybutlerhomes.com or call me at (602) 499 – 4798.  You can also visit our foreclosure resource center on the realtybutlerhomes.com webpage.

Legal Notice: The information contained in these articles is for educational purposes only, and should not be construed as specific legal advice. Readers are encouraged to contact legal counsel with questions regarding their own specific circumstances.