California Sunset
Los Angeles homes being offered as short sales may be a good opportunity.
A short sale is a sale of real estate in which the proceeds from the sale fall short of the balance owed on one or more loans secured by the property sold.
In a short sale, the bank or mortgage lender agrees to discount a loan balance because of an economic or financial hardship on the part of the mortgagor. This negotiation is all done through communication with a bank’s loss mitigation or workout department. The home owner/debtor sells the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender. In such instances, the lender would have the right to approve or disapprove of a proposed sale. Extenuating circumstances influence whether or not banks will discount a loan balance. These circumstances are usually related to the current real estate market and the borrower’s financial situation.
A short sale typically is executed to prevent a home foreclosure, but the decision to proceed with a short sale is predicated on the most economic way for the bank to recover the amount owed on the property. Often a bank will allow a short sale if they believe that it will result in a smaller financial loss than foreclosing as there are carrying costs that are associated with a foreclosure. A bank will typically determine the amount of equity (or lack thereof), by determining the probable selling price from a Broker Price Opinion BPO (also known as a Broker Opinion of Value (BOV)) or through a valuation of appraisal. For the homeowner, advantages include avoidance of a foreclosure on their credit history and partial control of the monetary deficiency. A short sale is typically faster and less expensive than a foreclosure. In short, a short sale is nothing more than negotiating with lien holders a payoff for less than what they are owed, or rather a sale of a debt, generally on a piece of real estate, short of the full debt amount. It does not extinguish the remaining balance unless settlement is clearly indicated on the acceptance of offer.
Negotiations
Lenders have the department (typically called “loss mitigation”) that processes potential short sale transactions. Today, lenders may accept short sale offers or requests for short sales even if a Notice of Default has not been issued or recorded with the locality where the property is located. Given the unprecedented and overwhelming number of losses that mortgage lenders have suffered from the 2009 foreclosure crisis, they are now more willing to accept short sales more than ever before. This is great news for borrowers who are “under water” — in other words, those who owe more on their mortgage than their property is worth and are having trouble selling to avoid foreclosure as a result.
Lenders have a varying tolerance for short sales and mitigated losses. The majority of lenders have pre-determined criteria for such transactions. Other distressed lenders may allow any reasonable offer subject to a loss mitigator’s approval. Multiple levels of approvals and conditions are very common with short sales. Junior liens – such as second mortgages HELOC lenders, and HOA (special assessment liens) – may need to approve the short sale. Frequent objectors to short sales include tax lien holders (income, estate or corporate franchise tax – as opposed to real property taxes, which have priority even when unrecorded) and mechanic’s lien holders. It is possible for junior lien holders to prevent the short sale. If the lender required mortgage insurance on the loan, the insurer will likely also be party to negotiations as they may be asked to pay out a claim to offset the lender’s loss in the short sale. The wide array of parties, parameters and processes involved in a short sale makes it a relatively complex and highly specialized type of real estate transaction which is why unfortunately short sale deals have a high failure rate and often do not close on time to save homeowners from foreclosure when they are not handled by a knowledgeable and experienced professional.
One thing a buyer should know about a short sale is there is no necessary commitment by the bank to sell the house. When the bank completes a short sale they have to write off the difference between their loan amount and the lesser proceeds from the escrow, something they wish to avoid. You may go through all the paperwork to make an offer on the house, pay for inspections, and put down a deposit to start the sale process. After you have made your offer, the bank may try to convince the seller to refinance their loan and stay in the house, which avoids the bank having to take the write off. Any short sale contract includes a contingency where the bank must approve the sale. If the bank persuades the seller to refinance the house, the bank doesn’t approve the short sale and the buyer gets their deposit back. In this situation the bank has tied up several months of the buyers time and now the buyer must start the buying process over again. So if you have a fixed time period to get in a specific city or neighborhood you may be better off with a foreclosure (the bank formally took possession of the property) or a situation where the seller has equity. In a short sale situation look for clues like has the seller moved out. This reveals the seller has no intention of staying in the property or working with the bank to make the mortgage more affordable. You are now seeing statements in Real Estate ads that say “Bank Approved Short Sale” or “Single Lender on Short Sale” (telling you that only one bank has to approve the short sale, not a 2nd and/or Home Equity lender). After doing due diligence with the selling realtor about how much the selling bank has approved, a Bank Approved Short Sale is much better than one where the bank holding the mortgage has only been lightly involved in the decision by the selling home owner to short sell the property.
