Short sale can be alternative to foreclosure
Some lenders are softening to the plight of homeowners down on their luck, and behind on their mortgages. They're reducing monthly payments, modifying interest rates, and refinancing, all in an effort to keep people in their homes.
But sometimes the only way to fend off foreclosure is the sale of the property -- and, more frequently, the ''short sale'' of the property.
A short sale occurs when a lender agrees to allow a homeowner to a sell the home for less than the mortgage owed on it. The lender either absorbs the difference or requires a borrower to pay it back in a lump sum judgement or payment plan.
In South Florida, where home sales have slowed to crawl and values are slipping, the short sale is increasingly being attempted by people who must sell in a market where only the most avid bargain-hunters are buying. And lenders, eager to cut their losses, are receptive.
More than 3,675 properties are listed on the Multiple Listing Service as short sales in Miami-Dade, Broward and Palm Beach counties, according to the Realtor Association of Greater Miami and the Beaches.
''The entire lending industry is receiving more inquiries about it,'' said Richard Purdy, a senior vice president at BankUnited who oversees special assets and default administration.
Lenders aren't in the business of owning real estate, as it is often said. Since the foreclosure process can cost them $40,000 or more, they have a financial interest in getting rid of properties as soon as possible. In a slow market, they don't want to risk getting stuck with the property for months. It may make more economic sense to reduce their losses by cutting a borrower loose in a short sale.
The process is complicated and offers no guarantees, according to Jeanette Escudero, an attorney who recently opened a firm specializing in short sales. ''Some banks aren't willing to negotiate at all,'' Escudero said.
When they are, these conditions must be met: First, the bank needs to know the borrower cannot make the loan payments. Lenders require that homeowners write a sincere hardship letter explaining their adverse financial circumstances. Reasons often include the loss of a job, divorce or the fact they were never able to afford the home in the first place.
Borrowers also need to support their story with pay stubs, bank account information, W-2s and anything else that paints their financial picture. Escudero said most lenders will try to modify a loan before considering a short sale. A common myth about short sales is that borrowers must be behind on payments. That's not necessarily true, meaning those who can see problems ahead can take early action to save their credit.
BankUnited's Purdy said the bank was getting requests for short sales to avoid foreclosure. ''A lot of those folks start talking to the bank before foreclosure is even a possibility,'' Purdy said.
Kevin Hernandez said he was able to work out a short sale deal on his vacation home in Miami Beach before he became delinquent. But it wasn't easy, and the process took about 60 days.
''It was a lot more difficult to get them to talk to me because I was current,'' Hernandez said.
Hernandez said the downturn in the economy had hurt his manufacturing business and crimped his cash flow, making it difficult for him to pay for his primary home and his vacation condo, which he purchased for about $1.05 million three years ago. A year later, Hernandez took out a $200,000 home equity loan on the property.
Earlier this year, the real estate market well into its slump, Hernandez listed the condo for sale, knowing there was little chance of selling it at a value covering the mortgages. But he did find a buyer at a price covering, at least, the first loan. Since he could not bring the cash to pay off the second mortgage at closing, he approached the second mortgage holder with a short-sale deal: He would agreed to continue paying the second mortgage as unsecured debt as long as the lien on the property was released.
The second lender wasn't going to take all the risk, though, Hernandez said. After many calls, the deal eventually involved the first-mortgage holder taking a loss of a few thousand dollars and his real estate agent taking a cut in his commission, Hernandez said.
He will be responsible for paying off $150,000 on the second loan in monthly payments, an amount he can afford. He will also avoid foreclosure on both loans.
''Most people feel like you can't pick up the phone and negotiate with your mortgage company, but the bottom line is you can,'' Hernandez said.
In deciding whether to negotiate a short sale, a lender will usually require the property to be worth the amount owed, or less. David Etienne, a real estate and mortgage broker in Pompano Beach who offers short-sale seminars to real estate agents and mortgage brokers, said a lender will never agree to cut someone a break when a property is worth more than the mortgage.
In a short sale, the seller walks away empty-handed, he said.
To determine the property's value, a lender will want to see that a property has been listed on the multiple-listing service at the total amount owed, with no bites from buyers. Etienne said several of his short-sale clients came to him after months of reducing the listing price.
Once you find a price that attracts a buyer, it's time to approach the bank with an offer.
Yvette Betancourt, who works with Escudero as a closing agent, said a good rule of thumb is not to ask a lender to accept more than a 20 percent loss.
''It's absurd to think that you're going to walk in, give a package to the bank, and the offer is 40 to 50 percent of the loan amount,'' Betancourt said. She added that investors who think they can buy short sales to flip for big profits in today's market are mistaken.
''Banks aren't dumb,'' Betancourt said. They also get their own appraisals.
You can't have a short sale without a buyer. But buyers are few and far between in the current market, so it's important to start looking for a buyer.
''You can't do that two days before the foreclosure sale,'' said Betancourt. ``As soon as you get that lis pendis [notice of foreclosure], or you know you are not going to pay your loan, you have to start working on it.''
In addition, Etienne said banks are being inundated with short-sale requests, creating months-long delays to process deals.
''It can take up to six months to get an answer,'' Etienne said. If they agree to a deal, it could be another 30 to 45 days to close.
Purdy, on the other hand, said if a buyer is ready, a short sale closing shouldn't take more than 30 days, the same as most other closings.
''If everyone is working together and information is flowing,'' Purdy added, also saying that the location of the lender and administrative procedures could lengthen the process for some.
In the meantime, if a borrower has fallen behind, the foreclosure clock is ticking.
There are any number of potential pitfalls in negotiating a short sale. While an individual can do it, Betancourt said it's better to have professional representation.
''A lot of people facing financial hardships have tax liens, employment taxes, they owe homeowner associations,'' Betancourt said.
Homeowners should be aware of the various liens that can derail a short sale, including unpaid taxes. Once you flub a short sale, Betancourt said, it could be harder to get the bank to work with you a second time.
When they agree to a short sale, lenders generally do one of three things, said Escudero. They can write off the difference as a loss and issue a borrower a 1099. This means the borrower will have to pay taxes to the IRS on the forgiven debt.
The lender can also issue a promissory note or a deficiency note, requiring the borrower to pay off the difference in monthly installments.
A third thing a lender can do is demand the borrower pay off the difference after the short sale in a deficiency judgement. Betancourt said that a deficiency judgement becomes part of the public record and can hurt a consumer's credit score for years.
She also said short sales can still mar a credit report, since they are reported to consumer credit bureaus as settlements, but that's nowhere near as bad as foreclosure.
''A foreclosure can be devastating and prevent someone from getting approved for credit for many years,'' Escudero said.