You might have heard of Dave Ramsey. He has a popular radio program where he talks explains the benefits of getting out of debt. He's a zealot for the debt free life. "You don't need to see the inside of a restaurant unless you are working there," he tells people in financial trouble.
So what does Dave recommend that someone should do in order to get out of debt? Reduce spending, eat at home, pay off high interest debt first, etc. A short sale is a great way to reduce debt. Where else can you wipe out $100,000, $200,000, and even more in debt? That will make up for eating a lot of rice and beans.
Do you have a house that is underwater to the tune of $50,000 or more? Try a short sale. It's a great way to erase all that upside down debt. You can rent another home for 2-3 years and buy your next house at the bottom of the market and save on a lower house price. You will also save on the interest over the life of the loan. Did you know that on the average 30 year mortgage, you pay as much in interest as you pay for the house? If you wiped out $100,000 in upside down debt, that means you actually wiped out another $100,000 in interest. I think Dave might be proud.
Some buyers think that since it is a buyer's market, then they can make any crazy demand of a seller. And they can't understand when the seller isn't excited by their low ball offer.
Here is an example of a recent story where this happened: A buyer makes an offer on a short sale.
- The buyer puts no money in deposit for the home. In other words, they have about zero risk. (Meanwhile the seller is still risking foreclosure.)
- They are putting $150,000 down on the property but won't bother putting any more than $1,000 in escrow and only after the short sale is approved.
- They are only allowing 30 days for short sale approval. (Most short sales take an absolute minimum of 60 days to be approved.)
- They are demanding the seller take the property off the market and not accept backup offers.
If you are a short sale seller, then they agent representing you should ask for a better offer. You need the buyer to have a little skin in the game. If not, then you dramatically reduce the odds of successfully short selling your property.
I am thinking about a short sale, but I am behind on my property taxes. Will I still have to pay them if I short sale my home? -Max.
Hey Max. In most cases your lender will pay those property taxes. Property taxes are a first priority lien on a property. That means that if a property is foreclosed upon, then they still have to be paid. They don’t go away for any reason. This is also why most lenders want to charge you monthly and then pay the property taxes themselves. They know that the taxes are a big bill that only comes once a year.
Not everyone can afford that big bill. Because your lender knows they will still have to pay the taxes after a foreclosure, they are willing to pay them during a short sale. A foreclosure is a liquidation of the property to simply get what they can and move on. A short sale has been proven to net them more money than a foreclosure.
So if they are liquidating the property, why net more money from the sale with a short sale and avoid a foreclosure? That’s why they will pay the taxes when you short sale. Every short sale the Stop Foreclosure Institute has sold resulted in the lender paying the property taxes that were owed. In some cases they paid 2-3 years of property taxes.
Some agents hate short sales. Why? Because they don't understand them. So, don't believe them when they tell you that short sales are impossible. I will explain what causes their problems in today's post. There are two things you must understand if you are doing short sales. They are BPOs and HUD-1s. A BPO is what the short sale lender uses to determine the value of the property.
BPO stands for "Broker's Price Opinion." They are what another real estate agent (Broker) thinks a property is worth. Basically the agent gives their opinion of the value of the property. "I think it is worth 300k", they put on the report. Lenders accept or reject short sale offers based on the BPO value.
If the agent has given a value of 300k, then a short sale lender will not accept a sales price of 250k. The problem is that, in my opinion, sometimes the values are inaccurate. I have seen agents drive 50 miles away to evaluate a property. They go to a place where they do not sell real estate. As a result they are not familiar with the local marketplace.
Because of this I always try to meet the agent doing the BPO at the property. I explain the market value to them and tell them what is happening with the property. I explain exactly why the property is selling for the sale price. I tell them what buyers have said about the property and why it isn't selling for a higher price. This helps them to give an accurate value. The lender gets an accurate value and is able to make a better decision on the short sale.
Here are a few things you should not be surprised to see crop up during the short sale process.
Unscrupulous Debt Collection Tactics: If you are facing financial hardship, then paying credit cards and other unsecured debts is your lowest priority.
An unsecured debt is a debt where they can’t take away your car or house. A secured debt has something as collateral, such as your car, house, or anything else of value.
The most common unsecured debt is a credit card. When you stop paying them, they will call you non stop. The reason is because they don’t have any other way to collect from you. They can’t come get your car or take your house. So, they make up for that by blowing up your phone with harassing calls. In addition, they use deceptive tricks to get you to pay them.
For example, there are Federal Laws that regulate what they can do or say. They aren’t allowed to threaten to sue you, but then not follow through and actually file suit. To get around this rule, they will use language that sounds legal, but isn’t. In one situation, a debt collector in Buffalo, New York named their firm Hoffman, Weinberg & O’Brien to make it sound like they were a law firm.
They would then leave messages on people’s answering machines. They would say they were with the office of Hoffman, Weinberg & O’Brien and then say they may resort to future legal action. In addition, they would reference case number 8306042. If you didn’t know any better, you would think the case number was for an actual lawsuit against you. That is scary. Don’t you agree?
Most credit card accounts never sue (despite the constant threats.) Even when they do sue and get a judgment, they rarely ever attempt to garnish wages. A lot of judgments expire without getting paid. But, a lot of them get paid off when a person’s income increases, or that person sells a valuable asset such as a house.
It might seem like the process takes a long time. Some short sales only take a few months. Before you know it you are moving out of your house and onto the next place. However, some short sales will take a lot longer. We have some files that we have been working on for a year or even longer. It’s not the end of the world. Just stay put and keep on saving the money you would be using for rent. In most cases the short sale will eventually be approved and you can move on with your life.
Your lender may attempt to collect money from you when they aren’t legally entitled to do so. We have heard several stories of some lenders asking for a promissory note when the state the property was in did not allow the lender to pursue the homeowner after a short sale. The stories in question were for short sales of properties in California and Washington. Don’t sign a promissory note a lender sends you after a short sale when you are in a non-recourse state. Talk to a lawyer to see if you are obligated to repay the debt. You could probably get out of repaying it if you tried.
I just received a full price offer on my house. My main concern is that I don't get stuck having to pay off the deficiency. I have a first and 2nd with Chase and owe 270K on the home. The buyer's loan is also with Chase. How can I work this out so that I can walk away from this without owing any money? Is it even possible with such a large difference between what the house is worth and what is owed? -John
John, you need to read through the short sale approval letter. See if is contains any language like “Payoff,” “Forgiven” or “agrees to release the debt.” Have an attorney read it over to make sure that it says the debt will be released. If it doesn’t say the debt will be released, then here is how you can re-negotiate for them to issue a complete release.
- Request that the deficiency be waived. Tell the lender you will not short sale the property unless they give you a complete release.
- Show proof that you cannot afford the deficiency payment. A debt from an absolutely broke person is worthless. The lenders know this and will be willing to waive a deficiency if that is the case.
- Show proof that the lender will net more money from the short sale compared to a foreclosure. This is your agent’s job to do. They will put together a calculation showing how much the lender is netting from the short sale, and project what they would net from a foreclosure.
If you cannot prove that you income doesn't cover your bills, then you may need to look into other avenues. You can look into getting a forensic loan audit to see if the lender broke any lending laws on the loan.
I like to call this the "Nuclear Option." It is what you do when your lender demands a promissory note or they will not approve the short sale. A promissory note is not the end of the world. It will take a lot of work on their end to collect from you.
If the lender forces you to sign a promissory note, then sign it and never make a payment. It takes time for the lender to move your file out of the collections system. This will last for anywhere from one month to six months.
The rest of this post is simply my opinion. It is not legal advice. I am just telling you what I would do if I was in this situation. Simply tell the debt collectors that you are trying to avoid bankruptcy. Do not give them any more information. Don’t dispute that you owe them money.
And definitely don’t agree to pay them anything, or tell them that you might be able to pay them. In my opinion, you are better off just hanging up on any collector that calls you. Anything you say can and will be used against you. This is why you are better off not saying anything. After a while the phone calls and mail will stop. Hopefully you will never hear from your lender again.
In order for the lender to get you to pay, they will have to garnish your wages or your bank account. That isn’t easy to do. There are many legal defenses you can use to stop them from garnishing your wages. One of our short sale clients had an unpaid credit card that was trying to garnish her wages. Here is what she told me that she did to stop the garnishment. She was in Florida and Florida law stipulates that if someone has children living in their home, then a creditor cannot garnish their wages.
She had a daughter that lived with her, found the rule, and stopped the garnishment. There are many other strategies you can use to stop garnishments. Talk to a lawyer as they will know the different ways you can stop a garnishment under your state’s laws. Now for one last strategy to stop a garnishment: Protesting. Yes, that’s right. Stand out in front of the local bank branch. Hold up a sign telling your story. Just make sure your sign appeals to most people driving past.
In most cases, the lender will stop the garnishment. They don’t want the bad publicity.
It always amazes me when I hear the stories of agents who talk about horrible short sales are. "Don't waste your time on a short sale," they tell homeowners. "They are a waste of time. The lenders won't approve them and the process is horrible. The last short sale I worked on took nine months," they say.This gives short sales a bad name. Homeowners mistakenly believe that a short sale is impossible
. I am here to tell you that is not true. The Stop Foreclosure Institute has sold and closed many short sales. There are two keys to being successful. First, you have to understand how the process works. Second, you have to keep an eye on the transaction from start to finish.
Here is the closest comparison I can think of on why some agents hate short sales. Let's say that you are a brand new driver. You hop into a car, accelerate to 70 mph, turn on cruise control, and then start reading a book. Every five minutes or so you look up to check on what is going on with your car. You aren't successful at driving a car. Later on you see your friend who is thinking about learning how to drive.
"Don't even think about driving a car. Driving just doesn't work and it is impossible to get anywhere," you tell them. But is that correct? Is driving a car impossible? No, it's not, but many agents make the same claim about short sales. They have never studied and learned the process. They have never successfully sold a short sale. But, they are sure ready to tell you that it doesn't work.
Here is what they missed about short sales.
- You need to be knowledgeable about the process.</strong> You need to have a solid understanding of HUD-1s, BPOs, and the short sale guidelines of the entity that owns or insures the loan.
- You have to stick with the transaction.</strong> You need to follow up with the short sale lender regularly. You can't check in on the short sale every week or so.
A lender will often ask for something and want it back within 24 hours. If they don't get what they need, then they will close the file. If your agent isn't checking in regularly, then the lender will close the file. In addition, your agent needs to be able to make sure the HUD-1s and BPOs are accurate. I don't have time to explain those acronyms today. Maybe I will explain them in my next post. Ask the agent you are interviewing why they are important. That will give you a clue into whether or not they know what they are doing.
Short Sales can be tough. Many buyers don't understand the process and think that since it is a buyer's market, then they set the rules. That's not the case.You as the seller sets the rules. After all, you still own the property. But more importantly, you must set the rules for offers. If you don't, then you dramatically reduce your odds of successfully short selling your property.
Here is what you should think about before you take your home off of the market.
- You should only accept and work with one offer at a time. If you accept more than one offer at a time, then the buyers get may get mad. The primary offer might get angry because you accepted a backup offer. In addition, multiple offers confuse everyone involved including the short sale lender.
- You should make sure the buyer can get financed for a loan. That means the buyer should give you genuine proof of that, whether a pre-approval or pre-qualification.
- We recommend that the buyer inspect the home before the sales contract is signed. If any unexpected problems come up (and they do), then you can adjust the offer price that is submitted to the short sale lender. This saves from having to negotiate the price again if a problem is found after the short sale is approved. Besides, the lender is more likely to accept a lower price if you send them a copy of the inspection.
- The buyer agrees to wait the necessary 60-90 days for an answer on the short sale. That time will depend on the lender. Some lenders are fast and some are slow.
- The buyer should put a reasonable deposit in escrow to keep them on board for the necessary time required for the short sale to be approved.
These are what we have determined to be necessary for a successful short sale. If you don't have a serious buyer then you are wasting your time and your agent's time as well. Many buyers and their agents think that since a property is a short sale, then offers can be treated very casually. This only hurts the home sellers trying to avoid foreclosure when the buyers can't get a loan or back out after the inspection.
The biggest reason people short sale their house is to avoid foreclosure. They cannot afford the house anymore and the bank has said they will foreclose soon. If the short sale is not successful, then their lender will foreclose on the house. We at the Stop Foreclosure Institute have successfully closed short sales for several years.
We’ve made it our business to know what we are doing. But, we see many agents that have no clue about short sales (or the short sale process) listing short sales.
This gives short sales a bad name. Many agents have been involved in short sales where the listing agent didn’t know what they were doing. Because of that, the short sale wasn’t successful and that agent and their customer wasted time. In the future they are going to think twice before showing a short sale. This hurts other short sale sellers.
It really gets on my nerves that people who don’t know what they are doing can ruin it for everyone else. If you are thinking about short selling your home, make sure you hire a competent, experienced short sale agent. (A competent, experienced agent will be successful at 80-90% of all the short sales they take on.)
Here are a few of the things that agent should avoid:
1. Submitting multiple offers to the short sale lender. Only the best offer should be submitted. A confused mind says no. Most short sale negotiators have between 50 and 200 short sale files on their desk. To ask them to weigh the benefits of 3 short sale offers on just one of those 50 files is probably more than their brain can handle. No, I’m not saying their brain is stupid. It’s just that a human brain can only handle so much information before it stops working.
2. Realtors submitting incomplete paperwork to the short sale lender.</strong> There is a method to follow. Every good short sale realtor understands stacking order, and the importance of easy to read paperwork.
<strong>3. Submitting low offers to the lender. </strong>All this does is waste time. If a lender is not likely to accept the offer, then don’t waste 45-60 days negotiating it with them.
Get an offer at (or near) fair market value and submit that to the short sale lender. That helps avoid wasting everyone’s time.