Short Sale vs. Foreclosure- 10 Mythbusters!

It’s likely you’ve heard the term “short sale” thrown around quite a bit. But what, exactly, is a short sale?

A short sale is when a bank agrees to accept less than the total amount owed on a mortgage to avoid having to foreclose on the property. This is not a new practice; banks have been doing short sales for years. Only recently, due to the current state of the housing market and economy, has this process become a part of the public awareness.

To be eligible for a short sale you first have to qualify!

To qualify for a short sale:

• Your house must be worth less than you owe on it.
• You must be able to prove that you are the victim of a true hardship, such as a decrease in wages, job loss, or medical condition that has altered your ability to make the same income as when the loan was originated. Divorce, estate situations, etc… also qualify.

Now that you have a basic understanding of what a short sale is, there are some huge misconceptions when it comes to a short sale vs. a foreclosure. We take the most common myths surrounding both short sales and foreclosures and give a brief explanation.

LET’S BUST SOME MYTHS!!

1.) If you let your home go to foreclosure you are done with the situation and you can walk away with a clean slate.  The reality is that this couldn’t be any farther from the truth in most situations. You could end up with an IRS tax liability and still owing the bank money. Let me explain. Please keep in mind that if your property does go into foreclosure you may be liable for the difference of what is owed on the property versus what is sells for at auction, in the form of a deficiency balance! Please note this is state specific and in most states you will be liable for the shortfall, but in some states the bank may not always be able to pursue the debt. Check your state law as it varies widely from state to state.

Here is an example of how a deficiency balance works

If you owe $200,000 on the property and it sells at auction for $150,000, you could be liable for the $50,000 difference if your state law allows it.

Not only could you be liable for the difference to the bank, but in some situations you could also be liable to the IRS! Although there are exemptions (mostly for principle residences) under the Mortgage Debt Forgiveness Act, there are times when you could be taxed on both a short sale and a foreclosure, even in a principle residence situation. Since the tax code on this is a little complicated and I am not a CPA, I advise always talking to a CPA when in this situation as you are weighing your options. Hard to believe?  Well, believe it or not, the IRS counts the difference between the sale and the charged off debt as a “gain” on your taxes. That’s right-you lost money and it’s counted as a gain! (I didn’t make that rule, that’s a wonderful brainchild of the IRS). Banks and the IRS can go as far as attaching your wages. Not to mention if you let your home go to foreclosure you will have that on your credit, as well.

Guess What?  A short sale can alleviate your liability to the bank, in most situations. There are also exceptions to this, but in most cases banks are releasing homeowners from the deficiency balance on a short sale.

2.) There are no options to avoid foreclosure. Now more than ever, there are options to avoid foreclosure. Besides a short sale, loan modifications along with deed in lieu are also examples of the many options. In most cases (but not all) a short sale is the best option. Either way, there are more options today than there have ever been to avoid foreclosure.

3.) Banks do not want to participate in a short sale, or, it is too hard to qualify for a short sale. Banks would rather perform a short sale than a foreclosure any day. A foreclosure takes a long time and creates a huge expense for the banks; a short sale saves both time and money. Banks have more foreclosure inventory than ever before, and certainly do not want any more. Banks more than ever welcome short sales. Qualifying for a short sale is easier than you think, you need to have a true financial hardship, or a change in your finances and your house has to be worth less than what you owe on it. Not only do consumers, but banks also now have government incentive to participate in short sales.  With all of that being said, it is true that some banks still make this process harder than it should be. Hopefully that will get better soon, for everyone’s sake.

4.) Short sales are not that common. At this present time, short sales range from 10-50 % of sales in various markets and it is predicted that in 2012 we will have more short sales than any other year, to date. Due to economic changes in the last few years, this is something that is affecting millions of Americans. Short sales are in every market, and are not just limited to any particular income class. This has affected everyone from all facets of life. A short sale should be looked at as a helpful tool, not a negative stigma. That is why the government is offering programs that actually pay consumers to participate in short sales. It is not just affecting one community; it is affecting communities and consumers across the nation.

5.) The short sale process is too difficult and they often get denied. Though the short sale process is time consuming; it is not as difficult as the media would have you believe. The problem is that most short sales are denied because of a misunderstanding of the process.  It is true that if the short sale process is not followed correctly there is a good chance of getting denied. An experienced agent knows how to avoid this. Short sales require a lot of experience, and a special skill set. If you are looking to go the option of a short sale make sure your agent is skilled and experienced in this area.

6.) Short sales will cost me money out of pocket.  A short sale should not cost you any out of pocket money. In fact, you could get between $3000-up to $30,000 to participate in a short sale. In many ways, a short sale may put you in a better financial position than prior to the short sale. Almost every short sale program now has some type of financial incentive for the home owner, as long as it is a principle residence, and we are even seeing relocation money being paid on some investment/second homes. As a seller of a property you should never have to pay for any short sale cost upfront to any professional service. Realtors charge a commission that is paid for by the bank. In most communities there are also non-profits and HUD counselors who can help you with foreclosure prevention options for free. The only potential cost you could incur is if the bank would not release you from a deficiency balance in the short sale, which is happening less and less now.

7.) If I am behind on my payments, I can perform a short sale any time. The farther you get behind on your payments, the harder it is to get a short sale approved. The closer a property gets to a foreclosure the harder it is to convince the bank to perform a short sale. As they get closer to a foreclosure sale more money is spent, thus deterring them from doing a short sale. If you think you need to perform a short sale, time is of the essence; the sooner you start the process, the better. Waiting too long can trigger the ramifications of a foreclosure, losing the ability to do a short sale as a viable option.

8.) I have already been sent a foreclosure notice so I can’t perform a short sale. For the most part just because you received a foreclosure notice or notice of default it does not mean that you do not have time to perform a short sale. The timeline and specifics do vary from state to state, but having done short sales all over the country, I have seen banks postpone a foreclosure to work a short sale option as close as 30 days prior to the scheduled foreclosure auction, but the longer you wait the less chance you have. If you have received a legal foreclosure notice, please reach out to a professional right away. The longer you wait, and the closer you get to foreclosure, the fewer options you have. If you have received a notice to foreclose this means the bank is filing paperwork and starting the process to take legal action to repossess the house. You still have time at this point to prevent foreclosure, but do not hesitate! The closer you get to the foreclosure date the harder it becomes to negotiate with the bank for whichever option you choose.

9.) I was denied for a loan modification, so I know I will get denied for a short sale. Short sales and loan modifications are handled by two separate departments at the bank. These processes are totally different in approval and denial. If you got denied for a modification you can still apply for a short sale; in some cases you can get a short sale approved faster than a loan modification, as some loan modifications are denied because they cannot reduce the loan low enough based on the  consumers income.

10.) If I go through a short sale I cannot buy another house for a long time. The time to buy another house depends on your entire credit picture and can vary from 12-24 months. There are even a few FHA programs that allow for a purchase sooner than that. I have worked with clients who went through a short sale and bought another house in less than 12 months. For instance, Starkey Mortgage has a program that can get a buyer approved to buy another home at any time after a short sale, as long as the borrower was never behind on payments on the home that was short sold. For more information, visit Starkey’s website today.

These are just a few of the common myths surrounding short sales and foreclosure. With the options available today, no homeowner should ever have to go through foreclosure, and hopefully this information can help a few more homeowners think twice before walking away from their home not realizing the possible long term ramifications a foreclosure can have.

Contact me today for more information on short sales and foreclosures in the Greater Savannah Area, or visit my website.

When is the best time of the year to put your house on the market?

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When is the best time of year to sell your home in the Savannah GA area? Spring fever, summer doldrums, holiday interruptions, winter icicles, there is always something going on when you are thinking about selling your house. Which leads … Continue reading →

How does a “lease purchase” or “rent to own” work when buying a home?

What is a lease purchase or rent to own?

In these “special” economic times we are currently in, it is hard to find a REALTOR who truly understands the dos and don’ts of the lease purchase or, as some say, the “rent to own” real estate market.  When I was newly licensed, I learned to specialize in the lease purchase market in Savannah, Pooler, Effingham, and Richmond Hill areas. I  constantly get calls asking me how a lease purchase or “rent to own” works. 

Well, if you are wondering the same thing, below is an explanation that can help:

What is a Lease Purchase?

A Lease Purchase Agreement allows the Seller to rent the property to the Buyer until closing. A Lease Purchase Agreement is generally used when the potential buyer is serious about purchasing the property but is not immediately ready and/or able to close. I REPEAT: a potential Buyer who is SERIOUS about buying the property!  This is not a lease “option” and should not be considered unless you are serious.  This is also not an owner finance situation or a straight rental.  Everything is negotiated up-front, including purchase price, closing date, money down, monthly rent, closing costs, etc..  If a Buyer decides he/she does not want to buy the home after this agreement is in place or can not close on the agreed upon closing date he/she loses all money down and will likely be out of a place to live as well.

Does any of the monthly rent go towards the purchase price?

Simply put: “It depends.”  Since all terms are negotiated up front, you just need to make sure you relay your terms to your REALTOR so he/she can negotiate accordingly.  Buyers, please keep in mind that the Seller very likely still has a monthly mortgage payment and is taking the home off of the market and holding it for you.  Because of this, you may or may not get a portion of that monthly amount credited to the purchase price and that will likely vary depending on how much rent you are willing to pay.

How Long Does The Buyer Have To Close?

The maximum term of the agreement is negotiable (one of the fill-in-the-blanks spaces on the contract), but a common length is 12 to 24 months. The contract does allow the buyer to close sooner.  I currently do have one for 5 years but that required a lot of money down by the buyer and isn’t something most Sellers or Buyers are in a position to do.

Does The Buyer Put Down a Purchase Deposit?

Yes. The contract calls for the buyer to make a purchase deposit (earnest money), which shall apply toward the buyer’s down payment or closing costs; but is non-refundable in the event the buyer defaults. Three percent (3%) of the purchase price is suggested as a reasonable purchase deposit. However, the amount of the purchase deposit is negotiable. It is not uncommon for this amount to be significantly higher or lower.

Is The Purchase Price Today’s Value or The Future Value?

Most Buyers and Sellers prefer to set the purchase price up front. However, the Seller is relying on the Buyer to close with cash or a loan before the deadline they both agreed to in the contract. Therefore, if the seller agrees to extend the contract, the lease purchase agreement could call for an increase in the purchase price.

What Are The Advantages For The Buyer?

Buyers love it because it gives them time to save up for a larger down payment, clean up past credit problems, or time to sell another home. Buyers can also receive a “forced savings plan”, since a portion of the monthly rental payment is usually credited toward the purchase price. The amount of the monthly rent credit is one of the negotiable terms of the agreement.

What Are The Advantages For The Seller?

Since they are allowing the buyer some flexibility on the closing date, Sellers generally get today’s top market value for the property. Monthly lease payments may exceed market rents and the buyer is typically required to handle all the repairs and maintenance, since they are the future homeowner.
And obviously the seller gets relief from paying the mortgage on a vacant property.

Lease-purchase agreements can be an excellent way to sell a home. If the Seller is capable of waiting for a delayed closing, and the Buyer is capable of finally making it to a closing table, a lease purchase can be highly beneficial to all parties.

Again, while I am a big proponent of lease-purchase contracts, I will advise  a seller to proceed with caution. This solution provides the benefits of receiving a top sales price, positive cash flow, it increases the Buyer pool for the home when marketed that Seller will consider a lease-purchase, it reduces Seller maintenance costs, theoretically does not require the Seller to become a Landlord, and can be the source of a large, non-refundable deposit if exercised properly.

DISADVANTAGES: There are ways of getting burned that the Home Seller (and Buyers alike) needs to prepare against.

For the Seller, the biggest disadvantages are that the Seller is locking in the purchase price at today’s going rate, not knowing if the market will support a higher price on the future closing date.  There are multiple other risks that any homeowner typically takes when renting to anyone.

For the Buyer, the biggest disadvantage is the fact that their are very few homes on the market that a seller is willing to lease purchase.  You have such a limited selection that it begs the question: “Why would you settle?” Why settle on a house that doesn’t have everything you need, or in a location that you really want to be in?  Why not wait until you can choose from a multitude of homes instead of a few? This is a question you really need to ask yourself before you decide to put a hefty deposit down that you can lose.

I am sure that the skeptical reader will call this self serving, but I must warn that you need to work with a trusted, branded, Real Estate Broker who you know you can trust. There are too many ways a home seller can be deceived by a non-licensed real estate investor that might end up costing the Home Seller even more than the equity in the home, and the same goes for a Home Buyer.

A standard lease-purchase agreement can be downloaded from the internet, but a savvy investor or Seller can prepare it in a manner that does not protect the equity or security of the property or Buyer. There is so much that I do to protect you in a lease-purchase situation that it would take hours to write it all out in a format like this.

If you are an interested Home Buyer or Seller, please give me call. I would love to explain this process to you in greater detail when you’re ready. www.greatersavannahhomes.com

Trisha Cook, Realtor
Keller Williams Realty Westside
(912) 844-8662 cell

trishacookrealtor@gmail.com

 

Great idea when building your house

Tonight, we wrote bible verses on the concrete floors downstairs and on the subfloors upstairs. We also wrote the 10 commandments on the stairs. what a wonderful bonding experience it is to bless your home with your loved ones like this.

Why Stage your home when you’re trying to sell?

According to the National Association of Realtors®, 89% of all Buyers start their home buying search online.  Because of this, your pictures need to be amazing.  Make sure you list with a Realtor® who offers professional photography and ask to see some examples of their work.

Before the money is spent on professional photography, make sure your home is staged.

• Fact: A Home Sells more Quickly.  Consider these facts from the National Association of Realtors®:

Buyers spend approximately five minutes looking at your home & already have their opinion within the first two minutes. Your house needs to be practically perfect in every way.  THERE ARE NO SECOND CHANCES FOR A FIRST IMPRESSION.

Staging sets your house apart from most other homes.

Multiple price reductions stink. The more quickly your home sells, the more profit that is made on the house. Look at the graph below. The top line of percentages is quite interesting. According to the NAR (National Association of Realtors) Profile, for homes sold within one week, 89% of sellers never had to reduce their asking price. For property sitting on the market longer than 17 weeks, 94% of sellers reduced the price at least once, and 1/4 of those sellers reduced their price at least four times.

Longer time on the market means additional efforts to market your home. And you’ll also have to keep in it showing condition longer.

Simple home improvements are worth it.

Your home’s assets must be captured with fantastic photos of beautiful, bright rooms so that buyers WANT to come see your house, not SKIP it. You want the Realtors who bring their prospective buyers through your home to have nothing but positive feedback for your house.

For more information on Selling your home, contact me

Call Trisha Cook today to help you sell your home anywhere in the greater Savannah area

 

Great House for Sale in the Godley School District

http://homesofsavannah.com/index.cfm?action=propdetails&id=134361&brochure&runadlist=no&source=facebook.

Georgia Southern named one of America’s best colleges

Georgia Southern named one of America’s best colleges.

Bring a Digital Camera & a Notepad when looking at houses!

How to choose the right home

 

 

When viewing a home, bring a digital camera and begin a series of photos with a close-up of the house.  Also, pay attention to the home’s surroundings.  What’s next door?  Do the neighbors take care of their property? I  encourage my Buyer clients to make notes and rate each property on a scale of 1 to 10.  This will help you categorize the ones you think may be worth a second glance.  Another helpful hint is to write down the pros and cons of each house you see.  Don’t be afraid to take your time.  Buying a home is a large investment.

The number one tip when buying a home is to ALWAYS ALWAYS be represented by a REALTOR!  Its our job to look out for your best interests.  Your REALTOR can help you in so many ways.  Don’t make such a large investment without your own representation.  Even if you are building a home/buying new construction.please remember that YOU NEED YOUR OWN REALTOR!  The on-site sales agent works for the builder, NOT for you. No matter how nice you may think they are, there role is to get the builder the highest price possible for that property.  Having your own Buyers agent is a free service in the state of Georgia.  Don’t be caught without one!

When you’re ready to begin your home buying process, give me a call. I’d be honored to help you.  In the meantime, please feel free to search all homes for sale in the greater Savannah GA area.  www.GreaterSavannahHomes.com

Trisha Cook, Realtor * Keller Willilams Realty Westside * (912) 844-8662  (912) 748-4600 * www.GreaterSavannahHomes.com