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Taking a long look at short sales.

HISTORICALLY, short sales have a bad reputation among homeowners and the real estate community and, in many ways, this negative perception has grown during today's down economy along with feelings of frustration and loss. Simply heating the words "short sale" can put a homeowner's blood pressure through the roof, and the decision to proceed with a short sale often is made with trepidation and even embarassment. Yet, these negative perceptions often are based on misinformation and a lack of knowledge about the short sale process.


When it comes to short sales, there are a few things every homeowner needs to know. Very simply, a short sale is when a lender agrees to discount a loan due to an economic hardship on the part of the homeowner. Typically, a short sale is used to prevent a home from being foreclosed. Usually, a bank will allow a short sale if it believes it will result in a smaller loss than the expense required to foreclose.

Short selling real estate is a technique real estate investors (and some realtors) do to help homeowners avoid the damaging effects of foreclosure. For example, if a homeowner owes $200,000, a short sale might allow them to sell for $180,000, and the lender accepts $180,000 as payment in full. In some cases, the homeowner still would be responsible for the remaining $20,000.

In several states, the foreclosure process takes place via the court system, which can be lengthy and time consuming. In most cases, it can take as long as nine to 12 months--and the process can be delayed further if the homeowner has the proper legal representation in court who can make a case for prolonging the foreclosure.

Along with the time and cost of such cases, lenders do not like excess inventory or foreclosures on their books, especially in this market, and they can risk losing more money if the property goes to auction. It also is important to understand that lenders do not have any motivation other than recovering or halting their losses. They are not in the property management or real estate brokerage business, and have no motivations in that direction. Their goal is not to loan money on properties and men take them back via foreclosure to resell them for a discount. This would not be a very profitable business model, and one thing most banks do well is make money. Hence, lenders often have some of the same goals as homeowners and, when a deal does not pan out, all they want to do is stop their losses. Short sales often are the best and quickest way to make sure that happens.

When deciding to go into short sale, most homeowners do so primarily to avoid foreclosure, which can be extremely damaging to an individual's credit report and have long-term effects on anyone seeking credit. In some cases, filing for bankruptcy can be less damaging than having a foreclosure on your credit. Since we live in a credit-driven society, keeping a good rating can save a family thousands of dollars in attractive finance rates for vehicles, home mortgages, and other large items. A negative credit report and poor score can affect everything you do from renting an apartment to buying a car.

When faced with foreclosure, some individuals may turn to bankruptcy as an option to solving the problem. Filing for bankruptcy will consolidate your debt and can wipe out liabilities, but it will not prevent an eventual foreclosure if the bank already has started the process. A bankruptcy only delays it.

However, if all you need to do is delay a foreclosure and there is little to no other major outstanding debt that has to be settled, there are other methods which may be more suitable. Trying to conduct a short sale while in bankruptcy requires strategy and a plan. It is best to consult with a knowledgeable bankruptcy attorney prior to making any decision in order to gain the proper information and make an appropriate plan. If your home is the only debt that is creating an uncontrollable situation for you, a short sale option likely is your best option.

Another reason why homeowners resist short sales is because many people do not understand if they qualify. Though the process differs based on the individual, it is broadly understood that in order to qualify for a short sale, the seller or homeowner must show legitimate hardship. Yet, hardship does not necessarily have to be impending financial doom.

Here are some examples of the more common legitimate hardship situations: borrowers unable to keep up with current mortgage payments; divorce; death; relocation; homeowner's property overvalued; predatory lending situations or mortgage fraud; job loss; homeowner unable to sell property due to market conditions; and loan amount is higher than the homeowner currently can sell property.

Just because a homeowner has filed for bankruptcy does not mean he or she cannot do a short sale. Bankruptcy can cure a homeowner's debt and liabilities, but it will not save one's credit. Whether you file for a Chapter 7 or 13 bankruptcy, you still can do a short sale. There certainly is more paperwork involved and it will take a bit longer to complete, but it is a viable option.

In such situations, a strategy should be mapped out among the individual's bankruptcy attorney, agent, and processor (the individual who will actually negotiate the short sale) to determine the right course of action for the homeowner to take. As for property taxes that the homeowner did not pay, they get paid at closing from the lender since the title has to be free and clear when transferred to a new buyer.

One of the major benefits of a short sale is that it ends the financial and emotional nightmare quickly. From the day a homeowner accepts a contract to the time the property will close can take up to 90 to 120 days. (However, if negotiations go poorly the process may be extended and no two short sale deals are alike.)

Best of all, a short sale costs homeowners nothing. When conducting a short sale, or any deal, the property owner always must deliver a free and clear title to the new purchaser but, while conducting a short sale with a lender, all costs are taken into account and paid for by the lender. Part of the amount that the homeowner is short-selling to the lender includes all of the closing costs typically associated with selling a home. These costs are viewed as a "wash" for any lender because, if they took the property back, they would be responsible to pay them in any case.

Such closing costs include property taxes, title costs, attorney fees, back assessments, and even commissions, which is how realtors are paid. Once in a while, a homeowner may be shy of reaching the lenders requested net amount and, in that case, he or she will have to go into their pocket to pay the difference, but this is rare. In most cases, if you use the right representation, you can avoid this situation.

Still, keep in mind that not all short sales will be accepted. The lender must believe they will net more money for your property through a short sale than taking the property back as a foreclosure/REO (real estate owned). This is not always the case, but many lenders do encourage short sales over foreclosures, which explains why this is becoming a growing trend in today's market.

Ultimately, losing one's home is a painful process, but short sales can help families to decrease the lime and frustration they spend in financial limbo---and maintain their credit while moving forward. As long as this current financial crisis continues, short sales will keep growing in popularity, as more and more homeowners become educated and empowered to undertake the process as circumstances dictate.

Mike Cuevas is a real estate agent with Exit Strategy Realty, Barstow, Calif.
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Title Annotation:Business & Finance
Author:Cuevas, Mike
Publication:USA Today (Magazine)
Geographic Code:1USA
Date:Nov 1, 2011
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