Maryland Real Estate Consultant

BIG NEWS FOR THE HOUSING INDUSTRY:  President Bush signed the new housing rescue bill into law this morning. 

Some of the highlights of the bill are:

v     Assistance will be given to people who are trying to stave off foreclosure

v     Tax refund will be given to first time homebuyers

v     Ban on down payment assistance from sellers on FHA loans

v     Helping save Fannie Mae and Freddie Mac

I will post updates as they occur.

Frank Harris

Seller Considerations.

A seller has many different options other than a Short Sale in case the seller finds itself in a hardship or in a default situation.  This seminar just evaluates a Short Sale.  Short Sales are not necessarily good for all sellers from a tax or financial perspective, so you have to urge the seller to get professional tax advice or financial advice regarding its particular situation.  The seller's credit will be affected by a Short Sale, but not nearly as much as it would be by a foreclosure or a deed in lieu of foreclosure. 

The seller may also be liable for income taxes on any deficiency that the seller's lender forgives after the short sale has occurred.  The seller's lender may not forgive any of the debt deficiency, and the seller then will be liable for said deficiency amount after closing. 

The lender, in its sole discretion, determines whether or not it will pursue a deficiency judgment.  Congress has passed, and the President has signed, into law limitations on, and, in some cases, elimination of, income taxes owed on forgiven deficiencies.   I strongly urge Realtors not to give any tax or financial advice.  The seller must understand that it requires a lot of work to obtain a Short Sale approval, and the seller must be willing to devote the necessary time and effort.  If your seller is not willing to do a lot of work, then it is not worth your time.

Short Sale process in order for a closing to occur.  Most lenders will not even consider a Short Sale process until a contract is submitted.

 Final approval from all lenders must be obtained in order for the closing to occur.  This includes negotiating the amounts that are to be repaid at closing in order for each lender to release their liens and therefore make the property marketable for sale to the buyer.  Most lenders have specific departments and personnel to handle these Short Sale processes and negotiations, and most of the time authorizations must be obtained from several different levels of a lender's management to receive final approval.  A final approval must be obtained in writing from each lender in order for the closing to proceed to completion.

All parties have to allow the lender a reasonable time to review and approve or disapprove a proposed Short Sale.  Every Short Sale lender has different procedures, and therefore their time frames are all different.  It typically takes a minimum of sixty (60) to ninety (90) days to obtain approval from a Short Sale lender; however, if there are multiple lenders, it could take longer because further negotiation is necessary.  You as a Realtorâ can help your seller expedite the process by assisting the seller to prepare a Short Sale package for the lender that is complete.  The longer the seller waits to send the package to the lender, the longer it will take to receive the final approval.  The purpose of the package is to make sure that:

(a) the reason for the default was unavoidable, involuntary, and beyond the seller's control;

(b) the seller has truly experienced financial hardship;

(c) the seller will not earn enough money to pay the deficiency in installments over time; and

(d) the seller does not have enough money to pay some or all the deficiency in a lump sum.  Some short sales are very frustrating in the time it takes to complete them.  Therefore, create reasonable expectations with the buyers and sellers up front that a Short Sale is a time-consuming matter, since the seller and Realtorâ must deal with lenders that are outside of the seller's control.  Again, setting reasonable expectations up front is important.  Remember that the lenders are all experiencing a large volume of Short Sale approval requests, and this adds additional time to the final approval process.

The seller and the Realtor must work hard and be patient but persistent because lenders are not only reluctant but also overwhelmed.  It is important to follow-up with every document, every submittal, and every other action.  Let them know the sale needs to happen as quickly as possible.  You and your seller want to make sure the right people get the right information and want to "bug" them for approval without annoying them.  It is important to set the contract up with the right time frames so as not to allow the buyer to back out too early.  This would be very frustrating for you and the seller, since both of you would have spent considerable time, money, and effort.

The Process.

There is no universal set of rules or set process regarding a Short Sale, and each lender performs their Short Sale process differently.  However, there are some basic general steps that can be expected and considered:

(1) The seller has to prove the seller is experiencing some financial hardship or other type of hardship and will be unable to continue making loan payments.  In most cases, the lender will want to see that the seller has been in default.  A lender will require the seller to provide a specific package of information regarding tax returns, financial statements, bank statements, and pay stubs; complete a loan application; provide title report; and possibly prepare a draft settlement statement, as well as sending a marketing plan from the Realtorâ, which will be submitted as a Short Sale application package along with the real estate contract.

(2) The lender has to determine the value of the property.  Once a seller has proven a hardship as set forth above, then the seller has to demonstrate that the property is worth less than the total amount that is owed to the seller's lender and other lien holders.  The lender may require a broker's price opinion, a comparative market analysis, or, even in some cases, an appraisal of the property.  The seller will be responsible for the costs of these items.

(3) The seller has to find a buyer and enter into a contract because, without a contract, a Short Sale cannot occur.  Each lender of the seller has to approve the contract and the

Why consider a Short Sale?

Short Sales do allow a closing to occur and, therefore, a commission to be paid.  A Short Sale also allows the seller to sell the property upon its own terms, subject to the lender's consent, and possibly includes forgiveness of the deficiency amount. 

The effect of a Short Sale on a seller's credit report is much less damaging than a foreclosure, deed in lieu of foreclosure, or bankruptcy, since the negative entry on the credit report shows up as a pre-foreclosure and redemption matter, rather than a deed in lieu of foreclosure, or a foreclosure itself. 

The lenders do not wish to pursue a foreclosure or seek a deed in lieu of foreclosure because they do not want the property back, which would be the result of such a foreclosure or deed in lieu.  They do not want the property back because they incur considerable costs in marshalling, restoring, maintaining, re-marketing, and selling the property.  The lender is more apt, in this day and age, to work with a seller in a Short Sale or other workout situation, as it is better for the lender. 

In addition to a Short Sale having a less negative impact on a seller's credit rating, a seller who participates in a Short Sale can quickly sell a piece of property and cut its cash outflows and liability and/or invest in other properties in a quicker manner than they could in the aftermath of a foreclosure. 

The listing broker is also helping a seller who has financial problems as well as earning a commission.  Buyers benefit because they can typically purchase a piece of property for less than fair market value and contract directly with the seller subject to the lender's approval, which means the buyer has some control of the property.  If the property went through a foreclosure, a buyer would just typically be one of the bidders on the foreclosure steps or would have to wait a lengthy period of time while the foreclosure proceeded and negotiate with the lender's Realtor, and, meanwhile, the property would be falling into further disrepair.

A Short Sale is one of many alternatives that sellers have available to them.

If a seller is in trouble with a particular loan on a particular piece of property, the seller, depending on the seller's ability, can:

(1) reinstate their mortgage;

(2) arrange a loan workout or re-payment plan;

(3) pay off the loan in full;

(4) refinance the loan;

(5) allow a foreclosure to occur (do nothing);

(6) do a deed in lieu of foreclosure, or lastly;

(7) declare bankruptcy.

A Short Sale may or may not be the best deal for the seller or the buyer and the Realtorâ should always recommend a credit, legal, and/or financial advisor to help the Realtorâ's client evaluate the options available and to determine whether there are any other factors that may be positive or negative for their current circumstances.  The ideal candidate for a Short Sale is still making loan payments and has a credit rating worth preserving.

What is a Short Sale?

            A Short Sale means the seller's lender is accepting a discount of the loan payoff to release an existing mortgage to allow a sale to occur.  Typically, a seller most likely needs to be in default and have stopped making mortgage payments before a lender will consider a short sale.  Just because the seller is requesting a Short Sale for seller's lender(s), it does not mean the lender(s) will accept the Short Sale terms.  In the Short Sale scenario, the mortgage payoff exceeds the contract price, and the lender may either forgive all or a portion of the debt and release its mortgage lien on the property, therefore allowing the sale to occur or the lender can agree to release its mortgage on the property and not forgive the deficiency, but have the seller sign a new promissory note for the balance or, in the alternative, the lender can do a combination of the two.

Find your home.

You may think that shopping for homes starts with jumping in the car and driving all over town. And it's true that hopping in the car to go look is probably the most exciting part of the home-buying process. However, driving around is fun for only so long - if weeks go by without finding what you're looking for, the fun can fade pretty fast. That's why we say that looking for your home begins with carefully assessing your values, wants, and needs, both for the short and long terms.

Questions to ask yourself

1. What do I want my home to be close to?
2. How much space do I need and why?
3. Which is more critical: location or size?
4. Would I be interested in a fixer-upper?
5. How important is home value appreciation?
6. Is neighborhood stability and priority?
7. Would I be interested in a condo?
8. Would I be interested in new home construction?
9. What features and amenities do I wasn't? Which do I really need?

Secure financing.

While you may find the thought of home ownership thrilling, the thought of taking on a mortgage may be downright chilling. Many first-time buyers start out confused about the process or nervous about making such a large financial commitment.

From start to finish, you will follow a six-step, easy-to-understand process to securing the financing for your first home.

Six steps to Financing a Home

1. Choose a loan officer (or mortgage specialist).
2. Make a loan application and get preapproved.
3. Determine what you want to pay and select a loan option.
4. Submit to the lender an accepted purchase offer contract.
5. Get an appraisal and title commitment.
6. Obtain funding at closing.

Hire your agent.

The typical real estate transaction involves at least two dozen separate individuals - insurance assessors, mortgage brokers and underwriters, inspectors, appraisers, escrow officers, buyer's agents, seller's agents, bankers, title researchers, and a number of other individuals whose actions and decisions have to be orchestrated in order to perform in harmony and get a home sale closed. It is the responsibility of your real estate agent to expertly coordinate all the professionals involved in your home purchase and to act as the advocate for you and your interests throughout.

Seven main roles of your real estate agent

A Buyer's Real Estate Agent:

1. Educates you about your market.
2. Analyzes your wants and needs.
3. Guides you to homes that fit your criteria.
4. Coordinates the work of other needed professionals.
5. Negotiates on your behalf.
6. Checks and double-checks paperwork and deadlines.
7. Solves any problems that may arise.