Starting Your Short Sale Process on the Right Foot

 

The first step in the beginning the short sale process is for you to determine and document your reasons for falling behind in your mortgage payments. Most often the hardship is due to the loss of a job, medical expenses, divorce or the sharp increase in the interest rate. Once it has been determined that you have a legitimate hardship then there are two steps that can be taken simultaneously; the first is to call the lender and the second is to call a realtor.

Calling your lender takes time and patience but is necessary to begin the short sale process. Because short sales are so prevalent, banks have entire departments dedicated to handling incoming calls from homeowners on this issue.  Once you have a bank representative on the phone, express your desire to begin the short sale process. There are so many programs that you may qualify for and I will begin to discuss each one in subsequent posts; so just know that you have options as you begin this process.

At the same time that you are calling your lender, you will need to find a realtor that has experience with short sales. Your home must be listed with a realtor in order for the bank to process your short sale request. Because short sales are a specialty area, you need to find a realtor that is experienced with the process. There is a widely recognized certification for realtors – the Certified Distressed Property Expert or CDPE – whcih means that the realtor went through intense training to understand the short sale process. Often times, realtors will team up with attorneys and allow the lawyers to process the short sale once a contract is received. In either case, ask the realtor what process they use and what are the results. You have to be very comfortable with this realtor because as you will see, they will have access to personal family documents.

At your initial meeting with the realtor, they will assemble the ‘short sale’ package.  Included in this package are the following documents:

• Hardship Letter & Supporting Documentation
• Two Years Tax Returns
• Two Months Bank Statements
• Two Months Pay Stubs
• Listing Agreement
• Homeowner’s Association Contact Information
• Last Monthly Mortgage Statement

Be prepared to sign off on the following documents at the initial meeting:

• Authorization letter – authorizing the realtor (and attorney) to discuss your account
• Financial Worksheet detailing your monthly income and expenses
• IRS form 4506T- EZ authorizing the bank to pull your tax returns on file with the IRS
• Short Sale disclosure form – detailing the issues surrounding the short sale

This can be an overwhelming process. It may seem like a lot of forms to sign and documents to bring but the lender wants to be able to evaluate your total financial picture when determining the strength of your short sale request. Also, remember the lender can refer back to your initial financial documents presented when you originally applied for the home loan as well as any refinance documents submitted at the time. Make sure you present a consistent financial picture.

The key to starting your short sale process on the right foot is twofold. First, notify your lender right away if you are falling behind or anticipate falling behind on your mortgage. Sometimes the lender will notify you if a previous program did not work and they will initiate a short sale. But don’t assume that no news is good news – they can foreclose quickly in the state of Georgia.  Second, get your documents ready for your first meeting with the realtor. Different lenders want information in various stages so you want your realtor to be prepared to hit the ground running from the first day of the listing. Don’t make them have to call and wait for you.

There are several types of short sales and I will begin to cover each one in subsequent posts. Bookmark this blog and tell others.

Do You Qualify for a Short Sale?

 

For the past few years foreclosures reigned supreme in the real estate market. As a realtor, I had to get used to the bank’ additional paperwork and timetables for closing a foreclosure transaction. Every bank was different not to mention the paperwork on the government or HUD properties. But we all learned the system and got used to the new foreclosure normal.

Now we have another ‘new normal’ – short sales. As I said in a previous post, short sales are overtaking foreclosures in the real estate marketplace. Given all of the other options for the homeowner, a short sale can actually be a ‘win-win.’  How do you know if you qualify for a short sale? It all begins with the nature of the hardship.

Your lender will want to know why you can no longer make your mortgage payment. Here is where it gets interesting… the answer can not be:   1) my house is not worth what I paid for it, 2) I no longer like the neighborhood or  3) I just want something else.  I am not making light of a very serious situation but sometimes people want to use the short sale process to dump one home and move into another. That will not work.

An example of a real hardship is as follows:

• Loss of a job
• Job relocation
• Reduction in income
• Serious medical issues
• Dramatic change in interest rate
• Death of a family member
• Divorce or separation

The lender will want to see proof of the hardship such as a divorce decree, death certificate, termination notice, medical bills, etc.  This will provide proof that you are in a very serious situation and that while you would like to continue to make your mortgage payments, you are no longer in a position to do so.  A defined hardship is the first step in researching your eligibilty for a short sale.

“Short Sales” are the New Norm

   Back in 2003, when I first got my real estate license, times were good. The prices of homes were going up, sellers were getting a great return on their investment, buyers were getting homes with ‘no money’ down and life was wonderful. But as everyone now knows, the housing bubble has burst and we are all left to pick up the pieces.

The first clear sign that the real estate market was tanking was the rash of home foreclosures. There have always been foreclosures but not in the sheer volume that we saw in 2008, 2009 and forward. In some areas of Metro Atlanta, whole communities were going under. New construction halted as we were seeing builders go out of business and their home inventory go into foreclosure.

But foreclosure is a “no-win” for everyone. The homeowner looses their homes, ruins their credit and is left to face the devastation that comes with it. Every homeowner in the community is affected by their neighbors’ foreclosure in the loss of property values and community cohesiveness. And finally, the lender looses in attorney fees, loss of value in the home, cost to resale the home and so on. The only winner that emerged in the foreclosure arena were the homebuyers with credit good enough to purchase. As with any crisis there is a silver lining and great home deals are the silver lining now.

Then along comes a different solution. What if the homeowner could sale their home prior to foreclosure and work out a settlement with their lender? Everyone knew that property values were declining so fast that virtually all homes sold today that were purchased in the last 5-10 years would sell for less than owed on the mortgage. That is the definition of a short sale. Sounds like the perfect solution… the homeowner agrees to sell the house for as much as they can reasonably get, the bank agrees to accept less for the outstanding mortgage than is actually owed and foreclosure is avoided. Everyone wins… sort of.

Not so fast.  Initially, the banks were not really on board with short sales. First of all, nobody knew what the heck they were. The banks were not staffed to handle any type of short sale volume or answer questions, Realtors were not prepared to facilitate a transaction between the homeowner and the bank and the buyers were not willing to wait until everyone figured this out.

It has taken a couple of years until everyone involved in a real estate transaction – homeowner, lender, realtor, buyer and attorney – has come to a clear understanding of how to complete a short sale transaction. All of the major banks are fully on board and many offer training to the real estate community. There are reputable companies offering comprehensive education to Realtors who want to offer short sale services to their sellers. The most recognized designation is the Certified Distressed Property Expert or CDPE.

Short sales are now the new norm and in some areas are surpassing foreclosures in volume. It can be a win-win for all parties involved but there are pitfalls for both buyer and seller. I will discuss those in subsequent posts.

Turning a Fixer Upper Into a “Dream Home”

Dream Home

 

Have you ever walked into a home and thought “this would be perfect if it just didn’t need work”? Well, I hear that comment all the time from buyers because there are so many foreclosures on the market. Many of these homes need carpet, paint, kitchen & bath remodeling, new flooring, etc.  In the long run, all of these repairs are minor if the home is in a great neighborhood, good school district and has a desireable floorplan.

What stops most buyers from turning a fixer upper into their dream home is work and vision. Some buyers simply can’t see past dirtly green carpet and riped tile floors. It takes vision to see hardwood floors and granite countertops in a home that has orange paint on the wall. For other buyers, the idea of calling 18 different contractors and getting bids for the work is overwhelming. They would just rather buy the house in the next community that doesn’t need all that work. Makes sense to me.

Now imagine this. I have two homes on the market; one for $36,900 and the other for $39,900. Both need no more than $20k in fixup work – carpet, paint, appliances, etc. ( I am not an inspector so this is what I can see). So can you imagine designing your kitchen, baths and living room according to your style? All of this for under $60,000 and a really low monthly payment. Does it become worth it to you?

Also, imagine three other things. One, the costs of the repair work can be rolled into your loan to purchase the home. You will only have one payment. Two, a renovation specialist will come out at no cost to you and help you visualize and price out the cost of your upgrades. This information is sent to the lender for review. Finally, the work can be completed within 60 days after you close on the house. The renovation specialist hires the contractors and supervises the work. You move in!

Now when you go househunting, don’t shy away from the fixer uppers. Start looking at them with vision. Look in magazines if you can’t visualize what you want. Turn that fixer upper into your dream home.

BTW, call me if you want more information on the fixer uppers that I have listed. I can make this work for you!

Can I Still Sell My Home in Today’s Market?

Not in recent history has there been a more uncertain time in the real estate market. We have record numbers of foreclosures, some of which are being challenged because of unclear documentation and possible fraud, as well as the introduction of short sales on a massive scale. Short sales bring uncertainty because none of the parties involved know exactly what the bank will do as far as accepting the terms of the contract and releasing the homeowner from any future liability. We have homeowners “under water” meaning that they owe more on their homes than the homes are worth and many of these people are simply choosing to walk away. We have home sitting on the market longer and selling for less if they sell at all. When was the last time that the terms ‘house’ and ‘depreciate’ were mentioned in the same sentence?

It is in this environment that I am frequently asked by homeowners if they can still sell their home given today’s market. My answer is “YES” but only in certain circumstances. If the seller can answer ‘yes’ to three of the four following questions, then they are in a position to sell their home; otherwise they have to stay put and wait for the market to fully recover. (Whatever that means).

Question #1 – Do you have sufficient ‘equity’ in your home? We used to include appreciation in our calculation of equity meaning that your equity was the difference between what the home could be sold for on the open market and what was remaining on the loan. This is still the calculation of equity but now we have to be realistic about the value of the home. Very few people have any equity if they purchased their homes in the last 5-8 years and marginal equity if they purchased in the last ten unless they had a substantial down payment. However, if you have owned your home for a while and know for sure that you can answer ‘Yes’ to having sufficient equity, then you are one step closer to being able to sell your home.

Question #2 – Do you have substantial savings to cover a shortfall? If you did not answer ‘yes’ to the first question but can answer ‘yes’ to this one, you are still in business. Perhaps you have enough money saved to cover any shortfall at the closing table meaning that if your home sells for less than your loan balance, you can make up the difference. Some people will pay the difference because they are getting a tremendous deal on the home they are moving into.

Question #3 – Can you price your home aggressively and continue to adjust the price until the home is sold? When a home is priced correctly, it will attract buyers and ultimately an offer. When it is priced above the current market, it will sit without notice. As a matter of fact, an overpriced home will actually help to sell other homes as buyers will use it for comparision purposes. If you can afford to price your home aggressively (at or slightly below market) and can also afford to adjust the price until an offfer is received, then you can still sell your home. By the way, price adjustments are usually in increments of at least $5,000 per adjustment depending on the price point of the home and community.

Question 4 – Can you afford to modernize/update your home? One of the hardest jobs of a realtor is to market a home that is not in ‘show ready’ condition particularly in this market. Outdated wallpaper, light fixtures, personal photos, massive collections all amount to clutter and expense to a potential homebuyer. If you can not afford to have the home professionally cleaned (particularly carpet) and freshly painted, then at a minimum remove all clutter including personal photos, collections, etc. When a buyer goes through a home that is outdated, they begin to see massive costs in modernizing it. As realtors, we used to be able to offer allowances but many lenders will not allow this. If you have lived in the home so long that you can no longer be objective, bring in a friend or ask a realtor for an evaluation. Be ready for the truth and be ready to take action. Remember your overall goal.

If you have answered ‘Yes’ to three of the four questions, then you are in a position to sell your home. A properly priced updated home will draw attention and offers. In this world of uncertainty, a buyer may welcome a chance to purchase a home without the risk associated with a foreclosure or the wait associated with a short sale.

WHAT YOU SHOULD CONSIDER BEFORE YOU ACCEPT A ‘LOWBALL’ OFFER

We live in a real estate environment where two factors are true – one, it is a buyer’s market and two, values are declining. It is in this environment that “lowball” offers have become the norm. Buyers are always wondering what a seller ‘will take’. In addition, no buyer wants to purchase a home today at $200,000 only to watch the value decline to $150,000 within six months. This does not mean that we don’t see full price offers and even multiple offers, but the home has to be priced aggressively and the buyer has to be certain that this is a ‘good deal’ given the current market.

Given all of this, how do we, as Realtors, prepare our sellers for ‘lowball offers’. I ran across this article on Inman News and it addressed the issue perfectly.

5 TIPS FOR ASSESSING A LOWBALL OFFER

Know when to counter, when to ignore

By Mary Umberger, Wednesday, September 8, 2010.

Your house is for sale for $350,000, and you’re confident it’s well-priced. You get an offer, but it’s for $300,000, and you’re stunned and disappointed by how low it is.

If your first instinct is to feel insulted and to hurl an epithet — don’t, said Jeffrey Stanton, a real estate instructor based in Modesto, Calif., and Staten Island, N.Y. Stanton’s company, Your Professional Development, teaches courses in negotiation techniques.

That seller might still end up with an acceptable sale price, Stanton said: The key is being ready.

Five things for home sellers to know about lowball offers:

1. It’s critical in this market for sellers to be prepared for the possibility of an unacceptably low offer, Stanton said.

This is the job of the seller’s agent — managing expectations and emotions — and too often this particular educational task is overlooked, with uncomfortable, potentially time-wasting results for all, he said.

“Most agents wait for an offer and say, ‘Oh, shucks, now I’m going to have to present this to my seller,’ ” he said.

Not only should the agents tell the homeowners to be prepared for a low offer, they need to come to agreement on just what constitutes “lowball.”

“Each market is going to be totally different. In one, it may be 5 to 10 percent below list. In a different market, it may be 30 percent below list,” Stanton said. “That’s a unique conversation that has to happen between agent and seller.”

2. Lowball offers may have any number of motivations, and sellers shouldn’t automatically presume they stem from somebody’s desire to be insulting.

“A lot of times, a lowball may be all the buyers can afford,” he said. “It could be an investor or a buyer looking to steal the property, or a buyer who really likes your property and is just taking a shot at it, never knowing if you’re going to say yes or no.

“Just don’t take it as them disrespecting you.”

3. If the initial offer seems out of the question, should the seller just ignore it or make a counter?

Stanton said that some negotiators suggest making no written response at all, which tells the would-be buyer that the offer isn’t even being considered, in order to get across the point that the offer must increase considerably. The thinking is that the most powerful thing an individual can say is, “If it’s that low, I’m not selling,” Stanton said.

But he suggests that buyers in such cases make a counteroffer.

“You want to keep the negotiation lines open, so come back with something,” he said. “If the house is listed for $350,000 and the offer is $300,000, the seller may want to counteroffer at $345,000, just to see what the buyer is going to say.”

4. In such a case, the next move will be revealing, Stanton said.

“One of the signs in negotiations is how much of a move they make,” he said. “The smaller the move, the closer that person is to his goal.”

Take the aforementioned counteroffer of $345,000, he said. If the buyer responds to that one with $305,000, usually it can be interpreted as the buyer not having much price flexibility.

But if that (buyer) response is $320,000, that’s a big move, Stanton said. And if the countering continues but the buyer goes up only to $322,000, he’s probably near his limit, he explained.

5. Another technique right at the beginning of the whole process might save everyone time, Stanton said.

If the buyer’s agent tells the listing agent that he or she is going to present an offer that’s significantly below the asking price, “then I absolutely would require that the other agent present that offer in person — I’d say, ‘Be here tonight at 7 o’clock,’ ” Stanton said.

If it’s a true lowball offer where the buyer is just fishing for a price and the agent knows it, it might speed things along if the agent’s presence is required, rather than just faxing the offer, Stanton said.

“The buyer’s agent will say, ‘Let me get back to my buyers,’ ” Stanton said. “It’s called a problem transfer. I’m going to take my problem — that lowball offer — and transfer it to the agent. All of a sudden, that $300,000 offer has turned into a $320,000 offer.

“You’d be surprised how often that actually works,” Stanton said.

Mary Umberger is a freelance writer in Chicago.

WAYS TO IMPROVE YOUR CREDIT SCORE BEFORE YOU SEARCH FOR A HOME

I get calls everyday from prospective buyers asking what they need to do to get into a home. The answer is always the same – they have to start with a lender, pull their credit, talk about their debts and then get “pre-qualified”. Once I get this information from the lender, we can begin the homebuying process. If you believe that there are ‘issues’ on your credit, the following article by Paige Tepping will give you some great tips to straighten them out before you begin the home search.

RISMEDIA, September 8, 2010–Many prospective homeowners find out the hard way the importance of a good credit score when they apply for a home mortgage, especially after the subprime loan crisis. If you are considering buying a home in the near future, it is a good idea to give your credit score a check-up and then take positive steps to improve your credit score if you find problems. Ideally, it is best to begin working on improving your credit score at least six months before you plan to start shopping for a home.

According to the experts at Buy-and-Sell-House-Fast.com, the following tips will help you improve your credit and should be taken before you begin your home search.

The first critical step in taking care of your credit is to check your credit report. Unfortunately, many people fail to take this all important first step. Instead, they wait until they have applied for a mortgage loan to find out from the lender that there are problems with their credit scores.

By checking your credit score before you apply for a mortgage loan, you gain the opportunity to find out if there are problems which you can correct and discrepancies that need to be removed. When you check your credit report, make sure you check all three of the national credit reporting agencies: Experian, Trans-Union and EquiFax.

Review your credit report carefully for items that may be erroneous. If you believe that an item on your credit report is reported in error, you have the right to contest it. To do so, you will need to contact the credit reporting agency and explain why you believe the item is inaccurate. Supporting documentation such as receipts and cancelled checks can help your claim. Alternatively, you can engage a credit report repair services firm to fix your credit report.

If there are derogatory items on your credit report that are accurate but which could cause problems in your loan application, you cannot have them removed; however, you can take positive steps to counteract them. In the event that you have missed payments in the past, take steps now to get your bills current. Even if it means tapping into money that you might be planning to use for a down payment, it is essential that you get your accounts current and keep them that way. Begin by immediately making your payments on time. There is nothing which can lower your credit score more quickly than late payments. Ideally, make an attempt to begin sending in your payments a few days ahead of time to make sure they arrive on time and you do not have any more late payments on your record. If necessary, begin taking advantage of electronic payments in order to make sure your payments are made on time. Over time, this can make significant difference.

Keep in mind that eradicating all of your credit balances is really not the solution. In fact, credit can be your friend when you are looking to make a big purchase such as a home. The key is to make sure your credit is positive, not negative. Toward that end, avoid actually closing out your accounts. Instead, make an effort to pay down your balances and keep them paid down well below the minimum or completely paid off, but do not close the account. When your lender runs your credit to make a decision on your mortgage application, he or she will want to see that you have had a long credit management history.

After reviewing your credit history, if you see that most, if not all of your credit cards are maxed out or nearly maxed out, it is time to sit down and plan an aggressive strategy for paying some of them down. One of the critical factors that often determine your ability to be approved for a mortgage loan is your debt to income ratio. In addition, high credit card balances can drag down your credit score. Therefore, it is important to look at paying off some of your balances.

It is generally better to begin with your highest-rate balances first. Many consumers are tempted to move around balances when they receive an offer from another bank that is good; however, before you do this, remember that the worst thing you can do when you are trying to make a major purchase is to open new accounts.

By following these guidelines, you can improve your credit score and improve your chances of being approved for your home mortgage loan.

HOME “UNDER WATER”? REFINANCE IS POSSIBLE!

Short Refinance Program InitiatedPosted: 06 Sep 2010 02:01 PM PDTIn an effort to help homeowners who owe more on their homes than they’re currently worth, the government will initiate its “short refinance” program on Tuesday, September 7, 2010. According to an August 6 Mortgagee Letter released by HUD (click here to download the entire letter), the program will allow “borrowers who are current on their mortgage to qualify for an FHA refinance loan provided that the lender or investor writes off the unpaid principal balance of the original first lien mortgage by at least 10 percent.” While lender consent is required and program participation voluntary, the FHA has stated the program could modify between 500,000 and 1.5 million upside-down mortgages. Following are a few of the eligibility requirements detailed in the Mortgagee Letter: Homeowner must have negative equity, be current on the existing mortgage, and have a FICO score greater than or equal to 500 It must be for the homeowner’s primary residence Existing loan can’t be FHA-insured First lien holder must write off at least 10 percent of the unpaid principal balance Refinanced mortgage must have a loan-to-value ratio (LTV) no greater than 97.75 percent Second liens must be re-subordinated so the new loan does not exceed a combined LTV of 115 percent Because of this last requirement, this program may have difficulty when confronted with situations involving second lien holders. Reposted courtesy of CDPE blog – Certified Distress Property Expert Institute

DEPENDS ON WHAT “Is” IS

The foreclosure market at this level is a relatively new phenomenon. I have sold real estate in Metro Atlanta for over six years and in my first four years, I never sold one foreclosure. I didn’t even know of anyone whose home was lost to foreclosure. And then the chickens came home to roost, so to speak, and homeowners began to go under. Now the term “short sale”, pre-foreclosure and foreclosure are a regular part of our vocabulary.     

In a couple of years we have moved from a “seller’s” market to a “buyers’ market” which means that we have more homes to sell than we have buyers to purchase them. Buyers are being told by the media that they are in the drivers’ seat in the homebuying process and the sky is the limit. I have seen stories about sellers offering cars, vacations, plasma televisions, etc. just to get their home sold. I have also read where sellers are finishing basements, upgrading appliances, painting and re-carpeting  also as a means of getting the home sold. While these stories might be true in the competitive world of traditional resale or antsy new construction, here is the reality in the Metro Atlanta foreclosure market.

Banks sell their foreclosures “AS IS”.  No matter how many times I tell this to a potential buyer, I will still have someone ask if the bank will replace the carpet or paint the master bedroom. Usually the answer is “no”. Here is the reason. Banks have already lost a great deal of money on every foreclosure stemming from lost mortgage payments, attorneys fees, utilities, household maintenance and the general drop in value due to the economy. Every bank asset manager is asked to manage their bottom line and recoup as much as possible on the sale of the home. For this reason, bank managers are reluctant to make repairs, do cosmetic upgrades or replace appliances in the home. It is much simpler to set a marketable “as is” price and sell the home. What buyers have to understand is that the banks have already taken the homes’ condition into consideration when setting the list price.

So if you are a buyer looking for a foreclosure in the Metro Atlanta area, consider the following:

• If the carpet is dirty and in need of repair … AS IS
• If the walls desperately need painting … AS IS
• If there is no stove, refrigerator or dishwasher … AS IS
• If there are no light fixtures … AS IS
• If the kitchen center island is missing … AS IS
• And the list goes on ….

There are times when the bank does some basic maintenance to the home prior to listing it with a Realtor. This move only makes good sense because a “move in ready” home attracts more buyers and top dollar. Also, a bank may be prepared to do some minor repairs when the lender requires them prior to closing on the loan. Usually buyers applying for FHA financing will find that their lender is more strict on the condition of the home because FHA requires that the home is “livable”. 

There is much to consider when purchasing a home. One big consideration is that when it comes to purchasing a foreclosure – the home is sold AS IS. Whether you purchase one foreclosure over another …. well, that depends on what “is” really is.

SITTING ON THE HOME BUYING FENCE? BUY NOW & SAVE ‘REAL’ MONEY!

FHA Gives Home Buyers One-Month Window

September 1, 2010–The Federal Housing Administration (FHA) is giving homeowners and buyers until October 4 to lock in a low monthly insurance premium, according to Gibran Nicholas, chairman of the CMPS Institute, an organization that trains and certifies mortgage bankers and brokers. “After October 4, the monthly insurance premiums on FHA loans will increase by over 63%.”

What does this mean for home buyers?
A home buyer purchasing a $200,000 home using a $193,000 FHA mortgage before October 4 would pay an insurance premium of $88.46 per month. If the same home buyer waits until after October 4, the insurance premium would jump to $148.01.

“In this example, the home buyer would lose $59.55 per month, or $7,146 over a 10-year timeframe,” Nicholas said. “Although the upfront mortgage insurance premium is going down after October 4, the real impact to the home buyer is actually a net increase in their out of pocket costs because the monthly premium is going up by 63%. Remember, sellers can pay the upfront premium or it can be financed into the loan amount, so homebuyers rarely pay the upfront premium out of pocket. On the other hand, the increase in the monthly premiums will be paid right out of the home buyer’s pocket with their mortgage payment each month.”

Ironically, home buyers who plan to be in the mortgage for less than three years and decide to pay the upfront fee themselves (instead of having the seller pay it for them), may actually save money by waiting until after October 4 to apply for an FHA loan.

“Home buyers with a short term time horizon may actually benefit from this change because the upfront premium will be reduced to 1% from 2.25%,” Nicholas said. This change will impact over 30% of the home buyers in today’s market who use FHA-insured financing. Home buyers considering an FHA loan should find and contact a CMPS professional in their area to discuss their options and what this means for their situation.

Taken from an article in the Daily Real Estate News.