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Distress Sales: Short-Sales & Foreclosures – What are They? |
Most reporting either glosses over these terms, as if everyone understood them, or explains them in terms that are less than accurate. Short Sales, are simply a type of transaction that occurs when the homeowner-seller is “equity deficient.” That is to say, they owe the bank more than the home could be sold for. In a short sale, the seller and buyer agree on price and terms and execute a contract which is contingent on the bank agreeing to the sales price. The bank’s agreement to approve the transaction will include permitting allowable selling expenses, with the remainder of the sale proceeds going to the bank (none can go to the seller.) The bank will accept the partial, or “short” payment as satisfaction of the debt and allow the title to be passed to the new buyer. In a “short sale” the homeowner-seller cannot receive any monies from the sale. Further, the seller must demonstrate, with documentation, that they cannot otherwise pay the bank what is owed, or additional amounts over and above the sales price of the contract. In making this determination, the bank conducts exhaustive “due diligence” to become certain that the proposed “short sale” is not a sham transaction, or even a scam to extricate the borrower from a loan they simply “don’t feel like repaying.” Because of the thoroughness of this due diligence, a much longer period of time must be expected by all parties to get the sale to settlement. Typically, a short sale transaction takes about two (2) months, and often longer. Most lenders are severely backlogged with short sale cases, which further contributes to processing delays. There are a number of actions that experienced listing agents for short sale properties can do to expedite the process to a successful conclusion. However, most self-proclaimed “short sale experts” are not the experts they claim to be. Bank directives and procedural requirements usually are not completed by the agent in a timely fashion. This not only causes further delays, but in many cases can result in the lender simply proceeding to formal foreclosure and trustee’s sale of the property. For these reasons, a significant number of short sale transactions fail, turning into Bank Owned properties. Truly a “lose-lose situation. The homeowner-seller also loses as their credit is tarnished for 7-10 years, where the negative credit effects of a short sale (late payments, etc.) are remediable in a few years of responsible performance.
The buyer also loses, as they have wasted months of waiting, and sometimes, hard dollars for appraisals and inspections, that cannot be recovered.
If you are buying a short sale property, or selling one on these terms, be sure your agent knows what they are doing. Check their references and certifications. What they don’t know, can cost you a lot. The most highly recognized authority in this market is the Distressed Property Institute. They have developed an extensive training program and cirriculum on all aspects of distrerssed property situations. Upon successful completion of the course work, the Institute awards the designation of Certified Distressed Property Expert (CDPE) to members who remain in good-standing with the Institute.
Foreclosures. Typically, the foreclosure process is initiated by the First Trust holder. They are endeavoring to mitigate their losses by disposing of the property and removing the non-performing loan and asset from their books. But the bank cannot simply take over the property. There are formal procedures that must be followed. Most people have seen the legal notices, placed in the newspapers, announcing a sale of certain property by the Bank’s substitute trustee at a certain date on the steps of the courthouse. Folks showing up for the auction, in search of a great deal, are surprised to find that the lender usually sets the opening bid at the amount the previous owner owed. Finding no bidders willing to make that high an offer, the Bank then formally becomes the “owner” of the property, and now has full legal rights to do as they wish with the property. It is the legal process, through which they must go.On rare occasions, the bank may elect to take a calculated loss at the auction and set the starting bid at less (sometimes much less) than was owed, and the property is sold to an individual or investor. As a note of caution, many homeowners become quite angry with the bank throughout the foreclosure process and inflict significant damage to the property prior to or upon eviction. This can range from removing or damaging appliances to letting sinks and tubs overflow (causing ceilings to collapse and mold to grow), to broken doors and windows, holes in walls, etc. Regardless of the childish vindictiveness of such actions, if you buy one of these at a trustee sale, you may be getting all of these headaches (expensive to repair headaches) along with that “great deal.” Be careful! When the bank “buys” the property at trustee auction, the responsibility for disposing of the property is transferred to the bank’s REO (Real Estate Owned) department. An Asset Manager is assigned to manage the property (make repairs and see that the property is preserved/maintained) and list the property with a local Realtor to be sold to the general public as quickly as possible. Buying Bank-Owned properties is a quick process. The banks will usually negotiate offers to purchase, within 2-3 days. |
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