Short Sales and Foreclosures – A general overview

SHORT SALES

A short sale happens when the proceeds from a sale of a home are not enough to pay off the seller’s mortgage balance.  In other words, the seller has come up short of money.  The seller’s lender(s) must approve this type of transaction, as the bank loses money on the loan. 

Property values have dropped since their peak in 2005, and that means that many sellers cannot recoup what they paid for the house several years ago.  The best option for homeowners would be to hold on to the property until the home appreciates in value, but sometimes the home must be sold quickly due to relocation, death, divorce, etc.  

Sometimes the homeowner can no longer afford the monthly mortgage payments due to the rising interest rates of Adjustable Rate Mortgages (ARMs), job loss, illness, unforeseen expenses, and the general downturn of the economy.  Many of these sellers were qualified for no-downpayment (100% financing) loans in which they have no equity in the property.  In this circumstance, the owner has limited choices, one being to refinance the home (which is not always possible), another being to sell the home, or to let the home go to foreclosure.

FORECLOSURES

When a mortgage goes unpaid, the bank starts proceedings to terminate the borrower’s right to the home.  I call these homes pre-foreclosures.  Often, a bank will hire a trustee or law firm to conduct the proper advertising, paperwork, and sale of the home.   Many times, the home goes to public auction, and is either purchased by an investor or, if no one bids on the home, it is taken back by the bank to re-sell on the retail market.

I’ll talk more about pre-foreclosures in another blog, but most “foreclosures” that buyers see listed on the Multiple Listing websites are homes that have already been foreclosed upon and have been taken back by the bank.  These are also known as Bank-Owned, or Real Estate Owned (REOs).  These are generally listed with local realtors, and buyers can go visit them.

FOR SELLERS

  • Both short sales and foreclosures will significantly affect the seller’s credit.  It may also affect the ability to purchase another home; typically the waiting period for a person with a short sale on their credit report is less than if they had a foreclosure on their record.
  • If doing a short sale, sellers must not walk away from the transaction with a profit.
  • The “forgiven debt” on a short sale may be considered taxable income.  Check with your local tax professional.

FOR BUYERS

  • Be aware that when you buy a short sale or foreclosure, you are typically buying the property in as-is condition.  Depending on how you write your offer, you can still have a home inspection and cancel the contract if you change your mind.  However, the bank will typically refuse to make any improvements to the home. 
  • When writing an offer on a foreclosure, you can expect the bank to respond to your offer in about 3 business days.  They will either accept, counter, or reject your offer. 
  • When writing an offer on a short sale, I always tell my clients not to expect any updates for months.  It’s pretty typical for a bank to not even review an offer for 4-6 months (sometimes longer!) .
  • Make sure that your agent stipulates in the contract that your contingency periods/earnest money deposit do not start/get cashed, until the third party (the bank) delivers written approval.
  • If the seller of a short sale property were to damage or remove items from the property,  it may be difficult to penalize the seller because they are not profiting from the transaction.  You should talk to your realtor and local real estate attorney about your recourse.  However, DC area contracts state that the property must be in generally the same condition as when you wrote the offer, otherwise, a buyer could refuse to proceed with the sale.
  • You can select your own settlement attorney, but sometimes going with the bank’s settlement attorney can save you money.
  • When dealing with multiple offer situations in both short sales and foreclosures, the bank only wants to look at the top offer, so make sure you submit your highest and best.  They will not tell you the amount of the other offers.

MY OPINION ON SHORT SALES AND FORECLOSURES

I love selling foreclosures.  The price listed in the MLS for a foreclosure has already been approved by the bank.  However, you CAN negotiate a lower offer.  You get a quick response from the bank and they are generally easy to work with.  Banks want to minimize their loss and sell it quickly.  They are not emotionally tied to the property.  It takes about 1 to 2 weeks for the bank to deliver the written approval (bank addendums), but after that has been received, they can go to settlement quickly.  Often within a week, if a cash deal, and a month if getting financing.  No one from the bank attends settlement, so the process takes half the time.

I think short sales are a waste of time.  I have written many offers on short sales, and none of them have been accepted, even if the offer is fair market value.  The price in the MLS has NOT been approved (there are some pre-approved short-sales, but it is still a lengthy process).  It is a frustrating process for everyone involved — buyers, sellers, and agents — because of the lack of communication from the bank.  As I mentioned earlier, it can sometimes take 4-6 months before an offer is even reviewed.  It’s hard for the buyers and sellers not to get their hopes up.  At this time, the home may still remain on the market and other offers can come in.

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7 thoughts on “Short Sales and Foreclosures – A general overview

  1. Quick Question for you Dawn,
    is the contract considered null and void if we did not settle on a agreed upon date due to sellers inablity to deliver a clean and clear title? The seller is still working on getting the previous some liens cleared dating back to 1992. We had put in ~4.12% EMD of the sale price at the time of ratification and we were suppose to settle yesterday. The previous lien issue still has not been resolved from the seller’s part and we now want to know whether from a “life of the contarct” perspective, is it dead and we are “outside” of the contract now?

    • Hi Ashish,

      Sorry that you are going through this right now. Unfortunately, I can’t give you a definite answer. You’ll need to contact a real estate contract lawyer in your jurisdiction. Often, with short sales, the banks put in their own addenda that is favorable to them. Each bank has a different document, with different rules. You’ll want to re-read this addendum to see what it says if a settlement date is not met. Good luck!

      Dawn

      • Hi, Thx for ur response. It is not a short sale. It was a standard va contract between another individual and us- does that change ur response?

        Sent from my iPhone

      • Oh, I thought that since you commented on the post “Short Sales and Foreclosures” that it was a short sale or foreclosure. In any case, read the contract paragraph about settlement. Often, if a settlement date is not met by fault of the seller, and there is no agreement to extend it, then the contract becomes void. However, I do not practice law and cannot confirm that this is the case. Consult the settlement attorney about your options.

      • Will do. Thank u so much for ur quick responses. Should’ve hired u as my agent to begin with, hope fully next time 🙂 Thx again.

        Sent from my iPhone

  2. i PUT MY HOUSE LOCATED IN NW WASHINGTON DC.. I RECEIVE AN OFFER/CONTRACT FOR MY PROPERTY FOR AS IS CASH. I JUMPED ON THE OPPORTUNITY BECAUSE I HAVE NOT MONEY TO PUT TOWARDS CLOSING OR ANY FURTHER REPAIRS.

    THE CONTRACT WAS RATIFIED AND AN EARNEST MONEY DEPOSIT WAS GIVEN TO THE TITLE ATTORNEY IN GOOD BY THE BUYER.

    I WAS THEN INFORMED OF A SETTLEMENT DATE HOWEVER TWO DAYS BEFORE SETTLEMENT MY AGENT INFORMED ME THAT THE BUYER WOULD LIKE TO EXTEND THE SETTLEMENT FOR TWO MORE DAYS TO ENABLE THE BUYER TO LIQUIDATE ASSET TO BE ABLE TO COVER THE SALE AMOUNT OF THE PROPERTY. AN ADDENDUM WAS CREATED FOR THIS CONTINGENCY AND BOTH PARTIES AGREED AND SIGNED THE ADDENDUM.

    ON THE DAY OF SETTLEMENT I WAS INFORMED THAT THE BUYER NO LONGER WANTED TO GO WITH THE CASH OPTION AND HAD SOUGHT FINANCING TO PURCHASE MY HOUSE.

    SO I’M LIKE WHAT????….

    THE BUYER THEN REQUESTED AN EXTENSION FOR TWO MORE DAYS SO THAT HER FINANCING COULD BE OFFICIALLY APPROVED AND WIRED.

    SO NOW I AM THINKING WAIT A MINUTE… IF YOU ARE NOW OPTING FOR FINANCING THAT MEANS WE WILL NEED AN APPRAISAL. RIGHT? I WAS THEN INFORMED AT THE SETTLEMENT TABLE THAT THE APPRAISAL HAD ALREADY BEEN COMPLETED. THIS WITH ANY CONSENT FROM ME THE SELLER.

    HOW CAN THAT BE?

    FIRST OF ALL, I DISCLOSED TO MY AGENT THAT I HAD NO MONEY TO PUT TOWARDS THE SALE OF THIS PROPERTY. NOT EVEN FOR APPRAISAL OR INSPECTION. I MEANT NO MONEY AT ALL.

    FURTHERMORE, I KNEW THAT THIS PROPERTY WOULD NEVER APPRAISE FOR THE AMOUNT OF WHICH THAT THE CONTRACT WAS RATIFIED.

    KEEP IN MIND… THE BUYER IS A REAL ESTATE AGENT WHO IS PURCHASING MY HOUSE FOR HER SON.

    I READ SOME WHERE THAT IF THE TWO PARTIES DO NOT ACTUALLY SETTLE ON THE DAY PROPOSED VIA CONTRACT DO TO FINANCING THAT THE EARNEST MONEY DEPOSIT IS FORFEITED.

    IS THIS TRUE?

    OK SO I GAVE THE BUYER THE BENEFIT OF MY DOUBT DUE TO THE FACT THAT OTHER OFFERS TO BUY WERE NOW BACKING OUT.

    SO NOW WHAT HAPPENS IF HER FINANCING DOES NOT GO THRU BY THE TWO DAY EXTENTION.

    I HAVE LOST PERSPECTIVE BUYERS AND SHE MAY NOT BE ABLE TO SETTLE.

    WHAT DO I DEMAND FROM MY LISTING AGENT AND BASICALLY HOW TO I REMEDY THIS PROBLEMED BUYER.

    PLEASE ADVISE.

    MS. KELLEY
    SELLER WHOSE IS CONFUSED ABOUT THIS WHOLE PROCESS.

    THANKS IN ADVANCE FOR ANY FEED BACK THAT YOU CAN OFFER.

    • Hi Kadija,

      First of all, I’m sorry for your circumstance. Regarding the appraisal, the buyer always pays the appraisal fee, so it costs you nothing. Even if you have a cash buyer, they have the right to an appraisal to make sure that they are not overpaying for the home. The question is: did the buyer make the contract contingent upon the appraisal? Meaning, if the appraisal came back below the sales price, do they have the right to void the contract? My guess is that the appraised value met or exceeded the contract price (otherwise you probably would have heard from the buyer about wanting to back out or renegotiate the price). Since the buyer wants to proceed towards settlement, then my guess is the appraisal is no longer an issue.

      The big question is whether the buyer now has a financing contingency. Originally, it was all-cash, so there was no need for a financing contingency. However, when the buyer asked you to extend the settlement so that the buyer could obtain a loan, did they add an addendum to the contract to include a financing contingency? What having a financing contingency means is that if the buyer cannot obtain a loan, then they are able to void the contract and keep their earnest money deposit. You’ll want to ask your listing agent if it is contingent on financing. If it is, then you could be in a situation where the buyer can back out and you do not keep the earnest money. That is the worst case scenario. However, even with a financing contingency in place, if the buyer doesn’t make the new settlement date, and they didn’t provide you with a notice to void in addition to a letter from their lender stating that the buyer was unable to obtain financing, and you did not agree to extend the settlement date, the buyer may be in breach of contract and may risk their earnest money deposit.

      Remember, any changes to the contract need to be agreed to by both the buyer and the seller. So review the amendments in your contract (or ask the settlement attorney since they are a neutral 3rd party familiar with real estate law). It may be that the buyer just wants a little extra time to secure the financing, but they might not have added a financing contingency. In that case, the buyer must settle on the settlement date, or their earnest money is at risk.

      Good luck!

      Dawn

      On Thu, Aug 14, 2014 at 4:47 AM, DC Metropolitan Real Estate wrote:

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