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 

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.