Lately, I’ve been on fire getting short sales closed. They’re getting approved right and left and I feel like LeBron in the fourth quarter of the NBA finals with James Harden trying to guard me.
Usually about 60% of short sales actually close and the rest go down the chute to foreclosure. Lately, it’s been more like 80% of short sales are closing to 20% short sale failure. It reminds of a recent trip to a casino. I don’t gamble much, but I started winning at blackjack and convinced myself that I had developed special blackjack powers. Note to self: Anytime one thinks one has special powers, head for the exits. About an hour later, I lost my mojo and went limping out of the casino way in the hole.
Like blackjack, I don’t have special powers to get short sales closed. It takes some knowledge and skill, but anyone who says that they have a special system or all the answers to closing short sales is goofy.
I’m glad that the shorties are closing at a decent rate, but I realize that it is basically luck and the convergence of positive circumstances, like a patient buyer, a favorable valuation (BPO) and a decent negotiator, that makes it happen.
As a threshold matter, I find that clients have a hard time deciding whether or not to try a short sale or to just bail out altogether and do a strategic default.
Here are the benefits of trying a short sale:
1. Shortens the foreclosure timeline so credit recovery is faster than foreclosure.
About 99% of clients who try short sales stop paying their mortgages when they list the property as a short sale. In Cook County, that means it will be 6 months of missed payments and 14 months in court with the foreclosure until it ends. That’s a long time. Thereafter, it will take another two years until the client’s credit recovers. If the client tries a short sale, the time that the mortgage is in default will be less than in a foreclosure. Most short sales close in 3 to 6 months after getting a sale contract. While credit scores drop about the same amount in a foreclosure or a short sale, the recovery is faster after a short sale and this is a major benefit of trying to short sell.
2. Get a full release and provide finality. For every short sale that’s closed this year, we’ve been able to get a full release of deficiency for the client. The short sale that closed yesterday required the seller to contribute $1500 to get a release, but it was money well spent. That means the lender can’t pursue the client for collection or get a deficiency judgment. This is very important to clients because it provides complete closure on the issue. Clients want finality. If a client strategically defaults and doesn’t try a short sale, the client will have an open liability for 10 years on the note. Some people can live with this, but most cannot. I tell clients over and over that first mortgages will not obtain a deficiency judgment against them in a strategic default, but almost every client asks “what if they do get one against me?” It never happens, but try living for 10 years with only my assurance to back you up.
3. Mortgage Debt Forgiveness Act (MDFA) is expiring, so try to slip it in before that happens. The MDFA says a foreclosure or short sale is not taxable if the property foreclosed or short sold is one’s primary residence. Unfortunately, that law expires December 31, 2012. If this expires, then homeowners in foreclosure will owe income tax after the foreclosure. It’s a good idea to at least try a short sale of your primary residence before the MDFA expires. That way you can avoid a hefty income tax bill if the MDFA is not extended.
Sometimes a short sale may not be worth trying. Some reasons you may NOT want to try a short sale are:
1. Big second mortgage and/or high credit card debt. You are better off filing a chapter 7 bankruptcy than doing a short sale if you have a large second mortgage and/or a lot of credit card debt. You can clear the decks of credit card debt and liability on the second mortgage and start over. A short sale is unnecessary.
2. High income. I’ve written before about high income homeowners and their reluctance to do short sales. Still true.
3. Property is rented. If you rent out a property it will be difficult to impossible to do a short sale because the tenant will not cooperate.
4. Difficult lender, FHA loan or PMI. I did a short sale with ING Direct. They allow no attorney’s fees and require that you use their title company. They are a nightmare to deal with. I would never do another one with them. FHA short sales follow a different pattern than conventional mortgages and can be very difficult to close. Also, if you have PMI on a conventional loan, it is likely the PMI company will hit you up for a contribution or promissory note.