Short Sales and Foreclosures

What is a Short Sale?

A Short Sale means the Sellers lender accepted a discounted payoff to release an existing mortgage.

Owners that can no longer afford to keep their mortgage payments current often choose the Short Sale alternative as a means to avoid bankruptcy or foreclosure. In some cases, an owner that is current on his or her mortgage payments will seek Short Sale due to falling property values, especially if the property was purchased at the height of the market. In today’s struggling economy and downturn Real Estate market, short sales as a means to avoid foreclosure have become increasingly common.

Sellers in today’s market often advertise as a Short Sale, however, until the offer and the required documentation detailing the Sellers situation is presented to the lender, it is unknown as to whether the property qualifies. The majority of Short Sales on the market do not have approval by the lender to sell short, and many do not get accepted. A property for sale as an Approved Short Sale means the discounted price has already been approved by the Bank, although you will want to see the details of the approval. Regardless of whether a short sale is approved or not, you have to work with a Bank which can be time consuming and frustrating.

Advantages of a Short Sale;

The overall positive in pursuing a short sale purchase is the purchase price. If accepted by the Bank, it can be considerably lower than the market value.

Drawbacks of a Short Sale:

  1. Seller paid too much – Although the asking price is discounted from what the owner paid, it may have been purchased at the peak of the market and now that the value has fallen, the discount shows no equity.
  2. Seller borrowed too much – The borrower’s loan balance may exceed the current value of the home. Banks were eager to lend at the peak of the market.
  3. Tough to Qualify for a Short Sale – Most Short sales are not Pre-Qualified as such. Seller’s must submit evidence of the hardship to the Lender for approval.
  4. Properties sell “As Is” – Lenders typically do not pay for any inspections or repairs. They will not guarantee interior finishes will be included with the purchase price. Lenders are not familiar with the physical property.
  5. Lenders accept “Market Value” price – A lender will insist on a CMA (comparative market analysis) or a BPO (Broker Price Opinion). If a better price can be obtained through a foreclosure, the bank may hold out for a higher price.
  6. Length of time involved – Due to the backlog of foreclosures and paperwork, it can take weeks to get a response on an offer and months to actually Close on the property.
  7. Last minute Changes – Some lenders will re-negotiate the terms of the sale up until the Closing, often at the last minute.
  8. Higher Closing Costs – You may be required as a Buyer to pay for a few additional costs at Closing that a typical Seller may take care of.
  9. Lender calls the shots – You are not in control of the transaction. If you need to close escrow by a specific time, you may be in trouble.
  10. Little incentive for the Seller – A short sale can have the same effect on credit as a foreclosure. A Pre-foreclosure, as it will state in the credit report, has the same effect on your credit as a foreclosure if you are more than 2 months in arrears. The derogatory credit will remain on your credit report for 7 years.
  11. Condition of Property - Sellers act as typical Sellers and must keep property in good condition for showings. This is also a benefit for the Buyer as the property is maintained versus a Foreclosure that are often neglected properties.

Whether to voluntarily vacate through a Short Sale or to be forced out in a foreclosure is the question. What are the advantages to a Short Sale for Buyer and Seller?

Positives of a Short Sale versus a Foreclosure;

  1. Time frame to buy a new Home - For Sellers, under Fannie Mae guidelines, you will be eligible to buy a home in 2 years, versus 5 years with a Foreclosure. If you were not late in your payments, you will be able to buy a new home immediately.
  2. Less humiliation – You will not suffer the social stigma of being the Seller in a Foreclosure. The entire process can be less intense.
  3. Condition of Property – Short sale properties tend to be maintained by owners versus most foreclosures that are typically vacant and neglected. Some foreclosures are even stripped of interior finishes by former owners.

In an attempt to avoid the costly foreclosure process, Banks may accept a substantially discounted price depending on the cost of the mortgage

FORECLOSURES AND REO PROPERTIES

Florida is a Judicial State. It carries out Foreclosures through court proceedings. The foreclosure process in Florida takes about 5 months.

The Foreclosure Process

  1. Pre-Foreclosure – Due to unpaid mortgage payments, lender files court action and records notice of pending lawsuit (lis pendens) against borrower. This is public record for those interested in the property. No response from borrower within a specified time will result in borrower default with lender asking court for final ruling.
  2. Notice of Default (NOD) - If the court rules against borrower, a Notice of Default is filed and borrower is notified of the date of sale, or Auction. The borrower can stop the foreclosure up until the date of sale.
  3. Auction/ Notice of Sale – In Florida, typically 30 days after the court ruling, the clerk of the court will issue a notice of sale with the location (usually at the county courthouse), date, and time. It must be published for 3 consecutive weeks up to 5 days prior to date of sale. The bidder must pay a 5% deposit to the clerk with the remaining balance due by end of day. Minimum bid includes the loan balance, any accrued interest, attorneys fee’s, and any costs associated with he foreclosure process. Upon 10 days of sale, with no dispute, the clerk transfers ownership to the winning bidder. After the Certificate of Sale has been issued, there is no right of redemption in the State of Florida.
  4. REO – (Real Estate Owned) - If the property fails to sell at auction, it reverts back to the mortgage company and becomes an REO. Since what is owed to the bank is almost always more than what the property is worth, very few foreclosure auctions result in a successful sale.

An REO is not considered a foreclosure as the Bank has already tried to sell it at auction and was not successful.

What does Pre-foreclosure mean?

A property is considered to be in pre-foreclosure when the owner starts missing payments and receives notification from the lender, but before formal legal action has been taken. This pending lawsuit (Lis Pendens) is typically filed after 90 days. Up until the property is officially foreclosed with a Notice of Default (NOD), the property owner and/or lender are more likely to consider any offer and make a deal to save their credit and avoid full foreclosure.

Advantages to buying a Pre-foreclosure;

  1. Motivated Sellers – Depending on how much they owe on their mortgage, Sellers are likely to be very flexible to avoid a major strike on their credit and the humiliation of foreclosure.
  2. Property Inspection – Properties are often still occupied and/or utilities are still on so a thorough inspection can be done. There is also more time to inspect versus an Auction.
  3. Competition – Less competition than formally listed and advertised REO’s and Auctions as they can take some effort to locate.
  4. Down Payments and Financing – As the properties in Pre-foreclosure are typically owned by individuals versus the financial institutions or Banks in an REO, financing and down payments usually follow the standard purchase and sale financing flexibility and payment schedules.

What is a Foreclosure?

A foreclosure is a legal process in which a lender takes over ownership of a property when the borrower is in default of payment.

This court ordered termination of a mortgager’s equitable right of redemption is known as the Notice of Default (NOD). This is when the opportunity for the Buyer to deal directly with the owner in the Pre-foreclosure status ceases. Florida is not a “redemption period” state that allows for the property owner to pay the full balance of the loan plus fee’s and get the title back after the NOD is filed.

What is an REO?

An REO (Real Estate owned) is a property that goes back to the mortgager after an unsuccessful auction. The loan no longer exists and the bank may need to handle an eviction, and in some cases, some repairs. REO’s typically sell close to market value. The Bank is not in the business of “dumping properties”, so they are not usually as cheap as the media frequently represents.

As a purchaser of an REO property, you will receive a title insurance policy (clear title) at Closing, as the Bank will negotiate and remove the tax liens, and all unpaid HOA (Homeowners Association) fees and assessments from 6 months up till Closing.

Advantages of an REO purchase;

1. Substantial Savings – Foreclosures can mean a substantial savings as lenders are not in the business of being landlords and will do whatever necessary to sell them. Banks, like individuals, also have a credit rating that needs increased. Unloading the “bad loans” allows the Banks to free up the reserve funds and reinvest (up to seven times the value) thus increasing their federal credit rating. Of course, the savings for the purchaser depends on the Bank’s urgency to unload the property.

2. REO price versus Foreclosure price - Once a property is an REO, the purchase price is usually less than if it was sold at Auction. Banks base the opening bid on the total of the mortgage, liens, and all fees associated with the foreclosure, which in most cases far exceeds market value. Thus, most foreclosure auctions do not result in bids. As an REO, the bank assumes the liens and fee’s from 6 months to Closing and Buyer will receive clear title.

Drawbacks of Foreclosure and REO Properties;

  1. Emotional drain – Foreclosures are a result of someone losing their home.
  2. Condition of Property – Often foreclosed properties have been left empty, neglected, and sometimes vandalized. They are typically sold “As Is”, usually without guarantee of the interior finishes/appliances, and can be costly for the new owner.
  3. Inspection – If purchased at Auction, there is little to no time to inspect the property. Although foreclosure and REO properties are sold ‘As Is”, it is best to do a complete inspection at your expense in order to be clear on the condition of the property and the estimated costs of repairs prior to Closing.
  4. Not typical Seller – It must be understood, the Bank is not a typical Seller. The sales process in on their terms, including the forms associated with the Purchase Agreement. It can be a lengthy, time consuming process. The Bank does not follow the same time constraints as a typical Seller. Most Banks do not work weekends or after work hours. There is no face to face negotiation.
  5. Price – Not all foreclosures and REO’s are great deals. When a property has been acquired by the Bank, its price is will generally be at market value. The Banks assumes high costs throughout the foreclosure process due to liens, high mortgages, unpaid assessments and fee’s, etc, and may try to recover as much as possible. The urgency to unload the property will determine the price. A property purchased at Auction us usually higher than an REO as the starting price is the mortgage plus the costs associated with the foreclosure, and there may be liens in addition to the auction price. A bidding war may result in a price that exceeds market value. Do your homework and know the comparable price points and the estimated costs of repairs.
  6. Legalities – Purchasing a foreclosed property can be more complex and challenging than a traditional Real Estate sale. It is always best to consult with an attorney and work with a real estate agent well versed in the foreclosure process and experienced with REO properties.
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