How do you get good advice when considering a short sale? First, make sure your trusted advisor has extensive experience in the short sale world. Research the process and the advisor, ask tons of questions, and be wary of anyone who thinks they know it all. Each bank has several short sale programs each with their own set of rules and requirements for participation. You should understand what the Making Homes Affordable short sale program is and whether you qualify. This program is known as HAFA or Home Affordable Foreclosure Alternative.
Moreover, understanding the players, their role and motivation within a short sale is critical. There are several people involved who must work in tandem for the sale to be successful:
Sellers: Home sellers are motivated to participate in short sale because a foreclosure is a real possibility if the short sale is not approved. Also a seller faces potential tax consequences for any amount that is forgiven by the lender. There is also the possibility of the lender attempting to collect the deficiency amount (the amount of the difference between what the lender was owed and the net amount the lender received from the short sale or the amount determined at a foreclosure). Many mistakenly believe there is no possibility of a deficiency after a foreclosure. At least in Colorado, lenders can still attempt to collect on deficiencies post foreclosure.
Buyers: Home buyers struggle with the waiting game before they know whether a lender will approve their offer. Their concerns include the counterproposal from the bank, the home sellers could change their mind by deciding not to sell, or the sellers could accept another higher offer after the buyer has been patiently waiting. Even if the sellers do not accept any other offers, there is a huge question of how long it will take the bank to approve the short sale or whether the bank will approve the short sale.
Lenders: Lenders are primarily concerned about the amount of the loss they will suffer in either a short sale or a foreclosure of a home. In a short sale, a lender can avoid the costs of a foreclosure (which can amount up to $40,000 and beyond) and the possibility of having to evict the current occupants, hold the property after they have possession, and sell it themselves.
Processors: There are potentially two or three processors involved in a short sale. The seller, lender and oftentimes mortgage insurance companies may have a processor involved, along with various negotiators for each party. For example, a seller’s short sale processor may be talking with the lender’s processor (such as Bank of America) who must obtain approval from the processor or negotiator for the investor (such as Fannie Mae or Freddie Mac). There is a lot of work to get a short sale approved and, in the end, even if it is approved, there is no guarantee it will close.
Mortgage Insurance Companies: Most sellers do not realize that their lenders have mortgage insurance on their loans. I hear from sellers all the time when they are shocked that a mortgage insurance company that they did not know existed has denied the short sale request. In a short sale of a home, mortgage insurance companies must approve the sale as they are ultimately responsible to pay out on a loss due to the short sale.
Brokers: You have seller’s brokers and buyer’s brokers. Most of the time, a buyer’s broker is in the dark. A lot of times, seller’s brokers have processors who handle their short sales. There can be a lot of mystery involved due to a lack of information. At Alaris, we process our own short sales. In fact, we even process short sales for others. The bottom line is that the brokers are not getting paid if the short sale is not approved. Of course, a good buyer’s agent can show the buyer other properties, and still get paid a commission. We must all remember that our duty is to our clients, not our commissions. Our responsibility as Realtors© is to provide complete and accurate information to our clients so that they can make good decisions then we must follow the client’s instructions.
Attorneys: Attorneys may be involved in all sorts of ways. The foreclosure attorneys for the lenders file the foreclosures and make certain that the lender receives a deed at the end of the process. There are bankruptcy lawyers who are serving the needs of the sellers to clear away debt and provide a fresh start. Some buyers and sellers have their own attorneys helping them understand the legal implications of short sales and foreclosures. Some brokers have their own attorneys helping them understand what they should be saying and not saying, and what they should be doing and not doing – and there’s a lot.
So, what’s in it for you? A win, so long as you understand the numbers, have some patience, have good advisors, ask good questions, and make good decisions.
Where can you get additional information? I recommend using various law firm blogs (be wary of non-lawyers giving you legal advice), lender’s websites, and any resources the state websites may provide. Here are a few to help get you started:
Making Homes Affordable: (http://www.makinghomeaffordable.gov/pages/default.aspx)
The Colorado Foreclosure Prevention Task Force website (http://www.frbsf.org/community/resources/ncrc08/comdev_track/bestpractices_urban.pdf)
Chase Home Ownership Centers website (https://www.chase.com/chf/mortgage/hrm_otheralt).
Be careful generalizing any information you read. Know that every single short sale program is different, and just about every lender processes differently.