The Stefanie Pratt Team - Coldwell Banker The Real Estate Group

Champaign County Short Sales & Foreclosures

What Is A Short Sale? 

A short sale is a type of sale in real estate where the sale price of a property is below the balance that is owed on the loan. It is typically a negotiated sale to prevent the homeowner from going into foreclosure and the bank from losing the balance on the property's loan.

In the event that a mortgagor can not meet payment on his/her loan, they can try and sell the property for less than what is owed on the outstanding balance. The lender will approve or disapprove of the sale based on the circumstances of the property, balance on the loan, and sometimes the mortgagor's financial situation. The bank will allow a short sale if they believe that the sale's end result will be less than the home being foreclosed. When a property is foreclosed, there are more costs that the bank will have to take on, so a short sale may be a better financial choice for them to recover the loss. Once the homeowner sells the property the house is out of their hands and they any black marks on their credit associated with being foreclosed on.

There are advantages and disadvantages to a real estate short sale. The advantages include the homeowner avoiding foreclosure, the homebuyer buying a home for a price less than its worth, and the bank for recovering at least some of the loan the borrower used on the property. The disadvantages include the bank taking a loss on the loan and the homeowner having to sell their property.

Short sales can be a very profitable type of sale for a homebuyer if an agreement is met by all three parties. It is a sale that is commonly misunderstood from its name, "short sale," which generally refers to the properties sale under what is owed and not the time period it takes to complete the sale. While short sale can take up to several months to complete, the sale can be very profitable in the end.

 A homeowner losing a home to foreclosure may be a very painful experience. A foreclosure can affect a person's credit history and become a problem if they ever want to borrow money to own something again in the future. Most foreclosures tend to be the result from owner/owners losing their job, illness, divorce, accidents, and many other factors.  

What Is A Forclosure

A foreclosure is the result of a lender taking the borrower's house after they can no longer make mortgage payments. There are many types of foreclosure with the two most widely types being a judicial sale and a power of sale. A foreclosure by judicial sale is the sale of the property under order of a court. A foreclosure by power of sale is the process that involves the sale of the home without the court's involvement.

The mortgage lender and borrow can avoid foreclosure by attempting a negotiated sale of the property called a short sale. A short sale is a type of real estate sale where the homeowner can try and sell the property for less then the amount owed on the loan balance to avoid foreclosure. This type of sale requires approval from the bank or lender. The bank will consider this type of sale only if the sale cost will result in fewer costs than the home going into foreclosure. If the home goes into foreclosure, the bank acquires costs with the loss on the loan, plus the costs that accompany the vacant foreclosed home.

Short sales have many benefits and can be very profitable for a homebuyer. A potential buyer can negotiate a sale on a home for less than what the home is worth. The sale of the home must first be approved by all three parties; the bank, the homeowner, and homebuyer.  

More about Short Sales

Short sales have many benefits and can be very profitable for a homebuyer. A potential buyer can negotiate a sale on a home for less than what the home is worth. The sale of the home must first be approved by all three parties; the bank, the homeowner, and homebuyer.
 
In a short sale, the bank or mortgage lender agrees to discount a loan balance because of an economic or financial hardship on the part of the borrower. The home owner/debtor sells the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender. Neither side is "doing the other a favor;" a short sale is simply the most economical solution to a problem. Banks will incur a smaller financial loss than would result from foreclosure or continued non-payment. Borrowers are able to mitigate damage to their credit history, and partially control the debt. A short sale is typically faster and less expensive than a foreclosure. It does not extinguish the remaining balance unless settlement is clearly indicated on the acceptance of offer.

Lenders often have loss mitigation departments that evaluate potential short sale transactions. The majority have a pre-determined criteria for such transactions, but they may be open to offers, and their willingness varies. A bank will typically determine the amount of equity (or lack thereof), by determining the probable selling price from an appraisal or Broker Price Opinion (abbreviated BPO or BOV).

Lenders may accept short sale offers or requests for short sales even if a Notice of Default has not been issued or recorded with the locality where the property is located. Given the unprecedented and overwhelming number of losses that mortgage lenders have suffered from mortgage failures that in part triggered the Financial Crisis of 2007 - 2010, they are now more willing to accept short sales than ever before. For "under-water" borrowers who owe more on their mortgage than their property is worth and are having trouble selling, this presents an opportunity for them to avoid foreclosure as a result. 

Multiple levels of approvals and conditions are very common with short sales. Junior lien-holders - such as second mortgages, HELOC lenders, and HOA (special assessment liens) - may need to approve the short sale. Frequent objectors to short sales include tax lien holders (income, estate or corporate franchise tax - as opposed to real property taxes, which have priority even when unrecorded) and mechanic's lien holders. It is possible for junior lien holders to prevent the short sale. If the lender required mortgage insurance on the loan, the insurer will likely also be party to negotiations as they may be asked to pay out a claim to offset the lender's loss in the short sale. The wide array of parties, parameters and processes involved in a short sale makes it a relatively complex and highly specialized type of real estate transaction. Not surprisingly, short sale deals have a high failure rate and often do not close in time to prevent foreclosure when they are not handled by a knowledgeable and experienced professional. Short sale negotiators, Realtors who are short sale certified (a National Association of Realtors designation), loss mitigation specialists, and real estate lawyers who specialize in short sales are often brought in to handle these deals. Quite often, the average consumer is not aware that the lien holder pays the Realtor commissions, often exacerbating the difficulties.

Short sales are different from foreclosures in that a foreclosure is forced by a lender, whereas both lender and borrower consent to a short sale. However, this consent may change at any time, and negotiations may be ongoing between the lender and borrower even while the short sale is on the market. The borrower may decide to remain and refinance their house, or become obstinate and force foreclosure. The bank may renege as well if they decide to stick with the current borrower, or if they disapprove of the sale price. Any short sale contract includes a contingency where the bank must approve the sale.

Changing consent can present a perilous situation for potential buyers. It can waste considerable time and money for a prospective buyer who anticipated a sale. Typically, deposits with the bank will be refunded but money for paid inspections or other services cannot be.

There are several defenses against this. If the seller has moved out of a property, that is a clue that they have no intention of staying or negotiating further with the bank. "Bank Approved Short Sales" are advertised by real estate advertisements, indicating that a real estate broker has verified the selling bank's position. This still does not guarantee acceptance, and it often does not take junior lien holders into account, but it is better than situations where the bank holding the mortgage has only been lightly involved in the borrower's decision.

Short sales are a type of settlement, and they adversely affect a person' credit report. The negative impact may be less than a foreclosure, but in some cases the effect is the same. Like all entries except for bankruptcy, short sales do not show on a credit report according to the Distressed Property Institute. The credit will restore within 18 months or so. Depending upon other credit information, it is possible to obtain another mortgage 1–3 years after a short sale, or less if the borrower is current at the time of the sale.
While lenders sometimes forgive the remaining loan balance, other lien-holders likely will not. Further, it is possible for a lender to omit updating mortgage balances zero balance after a short sale. However, willfully misrepresenting information on a credit report can constitute libel in some jurisdictions, and lenders may be sued in civil court for engaging in this behavior.’
Short sale success rates vary from state to state and from bank to bank. Bank of America short sales, as of 2009, had the longest approval times and the highest failure rate. Smaller "local" banks tend to have their own rules, but will typically approve the short sale in days, not months.

Short sales are common in standard business transactions in recognition that creditors are not doing debtors a favor but, rather, engaging in a business transaction when extending credit. When it makes no business sense nor is economically feasible to retain an asset, businesses default on their debt. It is common for commercial debt to trade on the secondary market for a small fraction of their face value in realization of the likelihood of these future defaults. This is known as distressed debt.

CNBC reported that some lenders have been accused of engaging in fraud during the short sale process. The fraud involves lenders in second position demanding kickbacks in the form of cash payments from the home buyer or real estate agent, and that are not disclosed anywhere on closing documents or HUD-1 statement. This is in violation of RESPA rules, which require disclosure of such payments. 

By nature, all short sales will have a deficiency balance. Laws governing the right of the lender to pursue a borrower for the deficiency balance vary state to state. States considered recourse states allow the lender to pursue. Non-recourse states generally prevent this, though some allow pursuit of deficiency though set forth limits on the amount that can be pursued.

If a lender can legally pursue the deficiency and does not specifically waive its right to pursue the deficiency, the borrower is at risk for a deficiency judgement.

Nevada law potentially grants lenders a six year window of time to sue for the deficiency based on breach of contract in contract law, not foreclosure law. Other states may differ.

Borrowers considering a short sale should be aware of this risk and ask every party involved in the process (Realtor, lender, third party, ...) what can and will be done to protect against a deficiency judgment. Consult an attorney in the state where the property resides to determine specific risks.

Once a short sale has been completed, a Chapter 7 bankruptcy is a possible remedy the borrower can use to remove the risk of the deficiency or discharge the judgment itself.

 

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