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.
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Great article. I am interviewing attorneys and receiving drastically different opinions (and price quotes).
I am reluctant to try a short sale because there is already a foreclosure in my small building that has been sitting for 6 months, and it’s a high crime area so not a lot of interest anyways.
A bigger reason is that my problem HOA has been telling banks/REOs that investors/rentals are not allowed, thus blocking all cash buyers. (This isn’t true per bylaws, but they’ve scared away at least 2 investors, found this out through the REO company)
One attorney is pushing for a short sale attempt ($4k fee) the other says I should initiate a deed in lieu and involve him once I have papers from the bank (leass than $1k quote). I’m confused. FYI: I also havent defaulted on my payments yet.
Have you had any luck working with Harris Bank? Do you consider them one of the problem “small lenders?”
JC,
On short sales a lender can be easy one time and then terrible the next. Generally, Harris Bank is pretty easy to deal with. I’ve closed a number of short sale with them.
They are a not in the small lender category who might pursue you. They are just like the other large lenders like Chase, B of A, Wells Fargo and they are unlikely to pursue you.
Best of luck and let me know if you want to discuss it further.
Tom
I am currently underwater on my mortgage and I want to sell my home. To make matters worse, my lender is ING Direct. Just talking to them on my own, I found them very inflexible, so a short sale with them looks to be out of the question. They leave me no recourse except foreclosure. In your short sale with them, did they pursue a deficiency judgement against the borrower? Thank you.
Hi Ron,
I just closed a short sale with GMAC and it was a breeze. ING DIrect is the opposite. There is no reason why one lender is easy on short sales and another is living hell. The problem with ING is they use their own title company and they allow no attorney’s fees. In the one I closed with them the client paid the attorney’s fees out of pocket and there was a waiver of deficiency, but he had to pay ING $8k to get it. The amount you have to contribute will depend on your income and assets. Hope it works out for you.
Tom
We have just had a loss of more than 1/2 our income due to job loss. We live in IN in a home BUT still have our home in IL (we have tried to sell for 3 yrs) that is currently rented (with a property management firm) until May 2013. The rent does NOT meet our monthly home payment that is scheduled to go up in December (escrow deficit). We cannot continue to make this payment at the current rate. We have filed a hardship with PHH and are waiting to hear from them. We did receive a confirmation letter that they have received all necessary paperwork. We are just sick about this and really do not know what to expect at this point. Any words of wisdom, comfort, support, caution will be welcome. Reading about short sales and strategic default is mind-boggling at this point and we feel lost. Best, Kim
Kimberly, It sounds like you applied for a loan modification. They are difficult to obtain, but that’s a good first step. Give me a call and I’ll be happy to go over your situation. Thanks. Tom