Hello Again, and welcome to The Butler Blog. As always, I am your intrepid host, Allen Butler, managing director of TRBLLC and agent of West USA Premier Properties.
Today we’ll continue with our series on pre-foreclosure help for Arizona families. Last time, we talked about loan modifications and the problem with negative equity. Let’s review that for just a moment:
Remember, if you want to stay in your home, you can either bring your account current, or you can modify your loan to make it more affordable. Loan modifications are a personal choice that should be taken cautiously, and with an eye to the future. Also remember, the payments will go up again, and you may be in the home for quite awhile.
Now, for those who can’t keep their homes there are other options to minimize foreclosure damage. Today, we’ll deal with one option, and that’s a short sale.
A short sale is nothing more than selling your home for less than you owe the lender. You are asking the lender to allow you to do a “short payoff” or short sale on the home. Here is an example.
If you owe $250,000 to your lender on your home, and you can no longer pay, you can get permission from your lender to place your home on the market at the current fair market value and find a buyer.
In Arizona, negative equity is tremendous, and it’s not uncommon for a home like this home to be listed on the open market for $120,000. Once an offer is secured, this offer is submitted to the borrower’s lender, and the lender agrees. They’ll allow you to sell it for $120,000.
However, there is still $130,000 left on the loan balance. What will happen to this “extra debt” you owe the lender? Many times, the debt is simply forgiven and written off by the lender. Of course, there is more to this, as there are lots of legal, credit, and tax pitfalls to look out for. We’ll deal with those in future episodes, but remember, these are serious topics for qualified professionals.
The question begs itself at this point: why would a lender do that? Why wouldn’t they just foreclose on the home and sell it themselves? It’s a good question, and one that we’ll answer in a moment, but first: why would a HOMEOWNER do a short sale? What are the benefits to THEM?
First, for homeowners facing foreclosure, a short sale can
1.) Minimize credit damage resulting from foreclosure
2.) Avoid a foreclosure on credit and/or public records.
3.) Make the foreclosure process less disruptive to personal life.
4.) May allow the borrower to make a new home purchase much quicker.
Now, as to why a lender would do a short sale, it helps to understand the inner workings of the foreclosure process from the lender’s perspective, and it’s ALL about money and finance.
1.) First a lender has to spend LOTS of money to remove a homeowner from their home.
2.) Second, lenders will have to spend thousands on maintenance and holding costs.
3.) Third, lenders can SEE what a home is worth TODAY, but cannot know what the home will be worth later. If prices continue to fall, lenders will lose even more money.
4.) Finally, every time a lender forecloses on a family, it causes further depreciation of the market and THEIR OWN loan portfolios.
A short sale actually benefits both homeowners AND lenders, and is probably the best idea if you simply can’t stay in your home. Let’s take a look at eligibility requirements.
1.) First, any homeowner who has a verifiable hardship can pursue a short sale.
2.) Second, the home has to have negative equity to pursue a short sale.
These really are the ONLY two requirements to pursue a short sale. However, how a short sale is processed and how it works is considerably more complex. One of the most serious complexities is the tax, legal, and credit considerations. Let’s look at those briefly.
1.) Sometimes, due to special circumstances with second lien-holders, insurance companies, or a HELOC, the homeowner may be asked to contribute to the loss, either up front, or with a promissory note.
2.) For some, the Mortgage Debt Forgiveness Act of 2007 may not protect them from having to pay taxes on the discharged debt from the lender.
3.) In rare cases, the lender may demand that the homeowner waive their rights under the Arizona Anti-Deficiency Statutes.
4.) The credit damage arising from mortgage default can also be substantial in cases where short sale processing is anything but “short,” and drags on for almost a year.
These are SERIOUS potential consequences, and you absolutely MUST protect yourself.
1.) First, always talk to trained, certified, professionals about your specific circumstances.
2.) Seek a real estate agent with short sale experience, and at least 3 short sale references from clients with completed short sales.
3.) Know and understand the tax and deficiency laws in your state.
4.) Never pay anyone for help. Almost ALL reputable loan counselors and short sale agents DO NOT charge ANY fees to the client, ever.
Now, this has been a brief overview of the short sale, and in our next installments, we’ll break down short sales even further. Next time, we’ll deal with verifiable hardship, and the immediate actions to take when hardship comes.
Please, if you have questions or concerns about loan modifications, I encourage you to call our offices, or simply send an email. We are always here to help. Also, remember, these broadcasts are just my own personal opinions. The things I say should NEVER be construed as specific legal, credit, or tax advice. If you have questions regarding your specific set of circumstances, I encouraged you to call my offices, and also to seek the appropriate professional counsel.
Until Next time, this is Allen Butler, Managing Director of The Realty Butler LLC, and agent of West USA Premier Properties, signing out.