PHOENIX SHORT SALES: MYTHS

Short Sales are Impossible and Never Get Approved

Nothing could be further from the truth!

• Are short sales more difficult? Yes.
• Do you need to learn a new process? Yes.
• Are they impossible? ABSOLUTELY NOT!!!

With Hundreds of Successful Short-Sale Closings behind us, we urge you to contact us as soon as possible, as time is of the essence.

Banks are Not Accepting Short Sales

The reality is that banks (and the government) are trying to do anything they can, within reason, to avoid foreclosing on property. To think that they would deny a Short Sale in hopes that some future legislation will pass and pay them for their loss is preposterous.

The reality is that more banks are aggressively pursuing Short Sales and agents (like the one who gave you this report) who understand how to process them. Freddie Mac recently hosted a national training webinar for real estate agents where they expressly stated the organizational goal of "eliminating distressed assets through modification or short sale".

I'm Embarrassed to do a Short-Sale

It is understandable that you may have reservations about letting the world know that you owe more on your home than it is worth however, understand that according to recent estimates, 1 out of 5 homeowners in the US is in your exact situation. You are to be congratulated for admitting you need help, taking action, and finding a professional who can work with you towards a solution.Listing my Home as a Short Sale is an Embarrassment

With 40 to 60% of the sales in the US predicted to be Short Sales or foreclosures you are not alone!

You Must be Behind in on your Mortgage in Order to Negotiate a Short Sale

While it is true that initially some lenders wanted you to be in default (missed a payment) before they were willing to consider a short sale - this trend has almost all together reversed. Today lenders are looking for verifiable hardship, monthly cash flow shortfall or pending shortfall and insolvency.

If you meet these three requirements and are in a position where you will soon not be able to afford your mortgage, act now! Don't wait until the countdown clock to foreclosure has started and you have even less time left.

Buyers are Not Interested in Short Sales and Avoid Them

This is a myth that potential sellers hear all the time - thankfully the reality is that today it is not. In fact many agents are getting calls from buyers who say "I only want to look at foreclosures and Short Sales!"

Short Sales and Foreclosures have become synonymous - not with issues - but with GOOD DEALS. International buyers specifically are interested in these properties. If you list with the educated CDPE agent who gave you this report you have a very good chance of seeing a contract on your property, soon.

There is not Enough Time to Negotiate a Short Sale Before My Foreclosure

This is a myth that probably hurts homeowners the most. Many don't realize that foreclosure is a process and there is time.

The foreclosing party (in most cases a lender) can stall a foreclosure up to the final day of the process. These days many lenders will stall a foreclosure with as little as a phone call from you letting them know that you are trying to sell. Almost all lenders will stall a foreclosure with a legitimate contract, in our view there is always time until the foreclosure process is complete and final.  We are motivated to represent you as our client and always have our clients needs and concerns met in every one of our transactions.  As you are our client, not the lender.

For many Arizonans with an underwater mortgage,completing a short sale or foreclosure before the start of next year is essential to take advantage of a large tax benefit set to expire at the beginning of 2013.

Ordinarily any debt forgiveness received is treated by the IRS as income to the debtor – you.  This means you are viewed by the government to have received the same amount of money to your income as was canceled in your debt.

Example: If you owe $200,000 on your home and the bank recovers $100,000 through short sale, foreclosure or Trustee’s Sale you may still owe the difference unless the bank cancels the remaining $100,000 debt.  If the lender forgives your balance (by either agreement or state law), the Tax Code says you also received $100,000 of income on which you must pay taxes. (Note there are exceptions to this law so contact us to review  your individual scenario).

For most, if not all, people having to pay an added tax bill of between $20,000-$30,000 in taxes as a result of that income is staggering.  Fortunately the Mortgage Forgiveness Debt Relief Act of 2007 makes it possible for many homeowners to avoid paying income tax on the canceled debt they may have received after being foreclosed on or completing a short sale.  Now there are a few qualifications:

1. Homeowner must have completed the short sale or foreclosure BEFORE 2013

2. The property must qualify as the tax payer’s “principle residence.”  A “principle residence” is different than a “primary residence.”  Whereas a primary residence is the property where the homeowner currently lives, a principle residence is one the homeowner lived in during 2 out of the last 5 years.

3. Homeowners may only claim up to $2 million of this debt cancellation, meaning most struggling homeowners will no need to worry about the cap.

What is a Short Sale?

According to the Arizona Association of Realtors®, “The term ‘short sale’ is used to describe a sale in a situation where there is more debt owing against a property than the property’s value. In a loan default situation, (pre-foreclosure) the creditor(s) may be willing to agree to allow the property to be sold for less than the loan amount and/or accept less than (or “short”) the amount owed as payment in full.”

II. Why do Short Sales Work?

Fundamentally, a Short Sale is a bank authorized alternative to foreclosure. It is not an alternative to a sale. The basic idea is that instead of getting foreclosed on, you sell your property at a price and terms and conditions satisfactory to you and your lender. This can usually take place under the following conditions:

1. You are unable to continue making payments due to some hardship (divorce, death, loss of job, health, etc).
2. The amount owed on your house is greater than what Buyers are willing to pay in this market.

The bank is often more willing to take a reduced amount in a short sale rather than take the property back through a Trustee’s Sale. The banks are in the lending business, not the property ownership business.

Foreclosure vs. Short Sale

• A Foreclosure in Arizona usually occurs in the form of a Trustee’s Sale. Because we have Deeds of Trust instead of Mortgages, when a Buyer borrows funds from a Lender, they agree to let the Lender SELL the home if they default. The party entrusted with this sale is a Trustee. When a property is taken back due to default, the Lender attempts to sell the property at a Trustee’s Sale to wholesale property investor/buyers. If the property does not sell, the Lender now becomes owner of the property and must attempt to sell it themselves as a Bank Owned (REO) property on the open market.
• A Short Sale bypasses this step by allowing the Owner of the property to sell the property BEFORE the Trustee’s Sale takes place. The sale is contingent on the Lender’s approval of the terms and amount of the sale. Because the net dollar amount to the Lender in a Short Sale is usually higher than the net amount in a Trustee’s Sale or REO sale, they are usually more inclined to accept the offer and let the sale take place.

III. Short Sale Stages

One of the most commonly asked questions is whether or not a Seller needs to be behind in payments to do a Short Sale.

Because Short Sale considerations are always as a result of some kind of hardship, Lenders expect that the hardship results in an inability to pay the Lender because they can’t afford to. IF the Borrower is making regular monthly payments, it defeats logic that there is a hardship. The exceptions to this are porce, Death, Incarceration, Deportation or some other event that can’t be remedied and is date certain to take place.

Remember, a Short Sale is for someone who NEEDS to sell due to hardship, but CAN’T sell due to market conditions (property value). The following outlines a typical series of events that take place as a Borrower moves fromHardship to Trustee’s Sale (Foreclosure)

Hardship

Something changed that had effect on the financial health of their household. This could be something temporary (job loss, job change, health need, increase of debt, decrease of income) or something permanent (divorce, death, incarceration, deportation).

Soft Default

Due to the hardship, the borrower begins to fall behind in payments to the Lender. The missed payment will trigger a call from the Lender to remind the borrower that the payment is due and to find out why they are not making the payment.

Workout Solutions

When the Borrower informs the Lender of the hardship circumstances, the Lender may offer a variety of workout solutions aimed at helping the Borrower retain ownership of the house. These solutions can be a revised payment plan, refinance or other solution to help the Borrower bring the account current. If the Lender sees that the hardship is a permanent one, they often will advise the Borrower to pursue a Short Sale with a qualified Real Estate Agent.

Hard Default

After attempting some workout plan with the Lender and either defaulting from that plan or being denied the plan altogether, this will usually trigger more of a hard line relationship with the Lender. Unless and until the Borrower brings the account current, the Lender will turn the heat up with calls and letters demanding repayment and threatening foreclosure and judgments. This can go on for several months.

Foreclosure Department/Notice of Default

At some point the Lender will determine that the Borrower is not able to or not going to remedy their situation. The ONLY solution for the Lender at this point is to move the file into their foreclosure department and issue an official Notice of Default which informs of a coming Notice of Trustee’s Sale.

Notice of Trustee’s Sale

Once a Borrower receives a Notice of Trustee’s Sale, it will state a FIXED date of Auction. The Notice will come in the form of certified mail or even physically posted on to the front of the house. The name of the Trustee will be disclosed and the date and location of the sale. This date is 90 days from the notice as required by law. NOTHING changes that date except the account being brought current or the Lender postponing it because of a Short Sale they are evaluating.

Trustee’s Sale - SOLD

At the sale, the Lender (via the Trustee) attempts to sell the property for some price above their minimum opening bid price. This price is some percentage of value the Lender has determined they are willing to sell for instead of taking the property back for it to become Bank Owned.

Anywhere between Hardship and Trustee’s Sale is where a short sale offer can be negotiated with the bank. The steps for a Short Sale have the same basic steps for all real estate transactions. You List the property, you Contract with a Buyer and then you Close Escrow. The added dimension is the Bank/Lender Negotiations and Approval.

Short Sale FAQ

How long does this take?

The process can take 60-120 days to get a buyer, get approval and get it closed. You can still reside in the property until it closes escrow, and in some cases even rent the home back from the Buyer.

Will the Bank seek to recover the amount of loss?

The lender has sole discretion whether to pursue a deficiency judgment in those instances when the judgment is permitted. In many instances this is not allowed on the 1st position loan for a primary residence. To determine whether a pending foreclosure or short sale is subject to a deficiency judgment, you should talk with a real estate lawyer. Ultimately, your agreement to do a Short Sale is between you and your bank. They will disclose if there is any liability to you.  It is imperative that in a Short Sale the approval letter from your bank to sell the home includes "no deficiency balance is due and all deficiency will be waived". 

Are there tax liabilities?

Some banks will issue you a 1099 tax statement according to bank policy and/or current law showing their loss as your gain. In other words, you may be liable for taxes as if you earned the amount the bank lost. In many cases there is already financial hardship and as a result there is little if any tax impact. You will want to check with a tax accountant to determine how that will impact your tax return/payment. http://www.irs.gov/individuals/article/0,,id=179414,00.html

Will this impact your credit or prevent you from buying a home again?

Your credit will reflect a debt settled, and could be there for up to 7-years. However, unlike foreclosure, this will reduce your credit score but will not impact your ability to obtain credit or buy a house again in the future. You will likely NOT be able to do business with the same bank again, however.

What will it cost me to start this process?

Our goal is nothing out of pocket for all our short sale sellers, as the bank will normally pay most fees associated with selling the home.  Occassionally I do see Lenders asking for HOA payments and fees to be paid for or caught up by the seller.  If at all possible, it's a good idea for sellers to try to maintain the property and stay current on HOA dues.   Of course, we will do everything we can to make sure that no costs are associated to you for the sell of your home.  You may have other choices as well, please feel free to call me anytime to discuss your current situation.  Please remember time is of the essence and we can only help sooner than later.

Jennifur Newell (623)826-7968
Brent Newell (623)826-6319
JennifursHomes.com
info@jennifurshomes.com

*These answers are accurate but not guaranteed due to all Mortgage Companies, Banks, Municipal, City, County and State laws differ

Real Estate Mortgage Anti-deficiency Laws

Arizona has two laws which prevent certain lenders from seeking a "deficiency judgment" for certain types of residential loans. The laws are commonly known as "Anti-Deficiency Laws" and may allow you as a real estate owner and debtor to walk away from a property without owing a deficiency judgment amount.

If your house is secured by a Deed of Trust, generally then the lender may not recover any deficiency if (1) the property is 2.5 acres or less; (2) it is used for a single one family one family residence and (3) is sold pursuant to the Trustee's power of sale. In the unlikely circumstance that the home is secured by a mortgage (instead of a Deed of Trust) the same criteria applies. There is one wrinkle in the case of a mortgage or a deed of trust and that involves a home owner who causes a reduction in value of the property by not taking care of it or damaging it. Commercial properties and vacant land are not protected by these laws. VA loans and FHA loans have special considerations and may not be covered by these statutes because of federal law.

The protection of the Anti-Deficiency Laws for home owners apply whether the property is your primary residence or not. As long as the property is 2.5 acres or less and is being used as a single one or two family residence, the owner is often but not always protected from a deficiency.

What happens if, like many homeowners, you took advantage of increasing property values and low interest rates to refinance the loan? Do the anti-deficiency laws apply when there is a default in payment of that loan? Again, it depends. The answer turns on whether the loan is secured by a purchase money security device such as a deed of trust or mortgage.

The leading case in Arizona on this issue is Bank One of Arizona, N.A. v. Beauvais. That case suggests that a typical refinance loan keeps the character of a purchase money loan and is protected. This result could be different if the refinance added funds to the original loan. A consolidation loan where a first purchase money loan and a second loan are bundled together into a single loan, the protection would still apply where the first loan is larger.

What about a home improvement loan or home equity loan? This presents a problem for the home owner. A separate loan that is taken out for a purpose other than to buy the property is not a "purchase money" loan and therefore the anti-deficiency laws do not prevent a lender from waiving its security and suing the homeowner directly.  We at Platinum Integrity Real Estate fight to get all deficiency balance waived in writing on the bank Approval Letter to Short Sale.

If a home owner fears that he or she does not qualify for this anti-deficient exception, one way a deficiency judgment may be avoided is by deeding the property back to the lender prior to foreclosure and securing a release. This is known as a deed-in-lieu of foreclosure. By accepting the deed, the lender is agreeing to accept the property for the amount that the person owes, thus eliminating any potential deficiency.  

This article is a short summary of the law and there are many issues which may affect the application of these laws to the facts of your scenario.  Please feel free to call us directly and we can discuss your personal