Introducing: A Simple Guide to Short Sale and Foreclosure

Foreclosure

Homeowners Predicament:

• Ruined Credit
• May end up owing after the foreclosure
• Collectors chasing: Judgements & garnishments
• Shame

POSSIBLE SOLUTION: SHORT SALE

What is a short sale?

• A short sale is the sale of a property, for less than what is owed, by obtaining permission from all the secured creditors to do so.

Who takes short sales?

• Any creditor, secured by collateralized real estate,whose equity position in the property is compromised.

Parties involved in a Short Sale

1.   Homeowners- provide copies of notes, prepayments & loan balances.
2.   Listing Agent- letter of authorization signed.
3.   Loss Mitigation Officer
4.   Trustee
5.   Additional Lien Holders
6.   Title Company
7.   Appraiser or BPO from Realtor

       

                                Difference Between Short Sale vs. Release of Lien

• In a short sale the creditor settles in full the amount owed by the debtor for a value that is less than what the creditor is owed.  The remaining balance is forgiven (NOT necessarily for the 2nd loan holder).  The homeowner no longer owes anything to the creditor (NOT necessarily for the 2nd loan holder).

• In a release of lien, the creditor removes its security interest in the property but the amount owed is not forgiven.  The homeowner still owes a balance to the creditor.

Short Sale vs. Release of Lien

• A creditor that authorizes a short sale will issue a settlement letter stating that the debt is settled in full for a specified amount.

• A creditor that releases a lien will, prior to releasing the lien, make the homeowner sign a new promissory note, not secured by a trust deed on the property, stating the value of the debt and the terms of payment/

• Listing agent keeps Seller informed w/ documentation as to what could happen, including foreclosure.

                                  Who does a Short Sale Apply to?

• Seller that has missed payments

• Seller that is in foreclosure

• Seller that is upside down in a property and must sell

• Jump in payment or balloon payment coming due

• Loss of employment/divorce/illness/family death

Note:  Seller requests short sale to avoid foreclosure

                                              

Discounts

To What Extent Do Creditors Discount?

• Creditors discount debt secured by real property based on their convenience and risk.

• If they will surely get paid they will not discount at all.

• If they will most likely get paid most of what they are are owed they may discount somewhat.

• If they will definitely lose an account but still get something at the auction, they will discount very much.

• If the creditor will most likely get nothing at the foreclosure sale, they will be inclined to discount heavily in order to get a recovery.

Why Do Creditors Discount?

• Creditors discount only when they will lose even more at the foreclosure or will end up with the property in poor condition.

• The higher the chance they will get paid at the foreclosure sale, the lesser the chance they will discount.

• The lower the chance they will get paid at foreclosure sale, the higher the chance and amount of creditors will discount.

                                           Who makes Initial Contact?
                                            Emotions Drive Decisions

• There are very few things in this world that stir emotions as hard as real estate.  Real estate is the reason for most wars.

• When it comes to a person's home, things get very personal.

• Sellers want burden removed from them.

   

                                           Realtor Disclosures

• Listing must show sale needs third party approval.

• Possibility of foreclosure

• Hold harmless- because the Lender may not approve.

• Possible tax implications- 1099C - Cancellation of Debt filed with IRS

• Possible credit consequences

• Seller may still owe to creditors

• Sellers nets no money from the sale

• See Broker for requirements- code of Ethics

• Legal vs. non-legal

• Disclose to Buyer on offer

• Disclosure about re-sale

    

                                          Basic Requirements of the Lender

• Hardship letter

• Purchase Agreement / Listing Agreement / Buyer Brokerage Agreement

• Estimated settlement statement (HUD1) with commission

• Market Analysis / Appraisal

• Pay stubs, Bank Statements, W-2's, tax returns and financial statements

                                                      Time Frame

• Approximately 30-90 days with no guarantees.

• May need to extend or postpone foreclosure

• Must comply with all time frames

Get everything in writing!

                                            NRS -    DEFAULT AND SALE

• NRS 107.080  Trustee's power of sale: Power conferred; required notices; effect of sale; effect of failing to substantially comply with requirements of section.

• NRS 107.081  Time and place of sale; agent holding sale not to be purchaser.

• NRS 107.082  Oral postponement of sale.

• NRS 107.083  Proceedings after purchaser refuses to pay amount bid.

• NRS 107.084  Liability for removing or defacing notice of sale.

• NRS 107.085  Restrictions on trustee's power of sale concerning certain trust agreements:  Applicability; service of notice upon grantor; scheduling of date of sale; form of notice; judicial foreclosure not prohibited; "unfair lending practices" defined.

• NRS 107.090  Request for notice of default and sale: Recording and contents; mailing of notice; effect of request.

• NRS 107.095  Notice of default: Mailing to guarantor or surety of debt; effect of failure to give.

• NRS 107.100  Receiver: Appointment after filing notice of breach and election to sell.

                                              Short Sale Flow Chart

 Listing Taken / Real Estate Authorizations Obtained            

↓

 

Short Sale Package Requested from Lender 

↓

Initial Requirements to Lender

↓

Offer Accepted

↓

Final Requirements Sent to Seller's Lender with HUD 

↓

Seller's Lender Approval - Settlement Amount Obtained

↓                 

Short Sale or Release of Lien Disclosed by Lender

↓

Docs Signed by all parties, Money Deposited 

↓

Escrow Closed with First Centennial Title

Example:

Purchase price:  $450,000
(three years ago)

80% Neg Am loan:  $360,000
Loan payoff amount at 110%:  $396,000
(maybe a prepayment penalty of $6,500.00)

Contracted Sale amount:  $380,000.00
(February1,2008)

Expenses:

• Owner's Title Policy:  $1,374.00

• ½   Escrow Fee:  $408.00

• Recording Fee:  $20.00

• Reconveyance Fee:  $90.00

• ½ Transfer Fee:  $871.25

• County Taxes:  $700.00

• Additional Costs:  $150.00

• 6% Commission:  $22,800.00

___________________________________
Total Expenses:              $26,413.25

Proceeds before Payoff:  $353,586.75

Lender is owed $396,000.00  We are asking them to short sale the
difference= $42,413.25

Short Sale they would release in total and accept $353,586.75 send title company a paid in full letter and reconveyance.

Release of lien would accept the $353,586.75 and have the Seller sign a note for $$$$$$(an unknown amount) could be as high as the actual shortage of $42,413.25

  Related reading:

• Why do banks take so long to approve a short sale?

• Confessions of a short sale expert

• To short sale or foreclose? I share my experiences
  

• Randi Bennett talks about short sales and foreclosures