The Difference Between Foreclosures and Short Sales for Buyers

Let me break down the difference between foreclosures and short sales and how they both differ from traditional home sales. I make one caveat that when I use the terms like “usually”, “typically” or “rarely”, it means while there can be exceptions, exceptions, in my experience, are unlikely.

Foreclosures:  Really these are misnamed. Foreclosure is actually the process by which the lender takes over ownership of the property per the terms spelled out in the Deed of Trust (the mortgage) when a borrower is delinquent on their mortgage.  Part of the foreclosure process is what you may have heard of and that is the property gets auctioned off at the courthouse steps.  This really does take place.  However, when the borrower owes more than the home is worth, what typically happens is the lender places an opening bid at the auction for the amount owed and no one else makes an offer (because it isn’t worth that much).  The bank essentially buys back the house and it becomes Real Estate Owned, or REO.  This is the proper name for what people are usually talking about when they speak of buying a foreclosure. 

So, once the lender owns it, they put it up for sale with a real estate agent and that’s what you see in the MLS/on my website.  Important facts about buying an REO property are: #1 they are sold AS-IS and the bank will normally not pay for any repairs.#2 you must use the bank’s contract, not the standard one we use.  This contract is weighted entirely in the banks favor; there few obligations and few repercussions for them yet there are a lot of demands and repercussions for you the buyer.  On the positive side, these homes can be purchased 10-40% below market value.  As long as the value is there, you love the house, and you have me helping you adhere to all the contract requirements, you should be ok.  REO sales will generally participate in paying some or all of your closing costs.  They typically do not accept offers that are net (including asked for closing costs) 5% below their current asking price.  A bank may start an REO listing at one price, say $200,000 and lower it 30 days later to $194,000 and 30 days after that to $188,000 and so on until it sells. It will usually not, however, accept an offer of $187,000 while it is listed at $200,000. 

Short Sales:  These are sales that are attempted by the seller before foreclosure has taken place.  In these situations the seller is forced to sell due to some hardship/inability to pay but owes more than the home is worth and cannot make up the difference in cash.  These sales require the third party approval of the seller’s lien holder to release the lien for less than the full amount owed so that it can be sold to the new buyer.  Short sales are AS-IS sales, too, but that is where the similarities to REO cease.  Because the bank already owns an REO, they determine what they will sell the home for and put it for sale with a list price.  With a short sale, the bank does nothing until they are presented an offer.  The list price is usually not an “approved” list price and is merely the best guess of the seller and the agent of what it will go for. If you offered full price on an REO you could be reasonably confident in getting your offer accepted within a few days, with a short sale, you will be waiting up to 4 months before finding out if your offer is acceptable or not.  The joke in the industry is there is nothing short about a short sale.  The seller’s lender will order an independent appraisal of the property and compare your offer to their estimate of “fair market value”.  Lenders will rarely accept offers that are more than 12% less than “fair market value”.  There are additional requirements to getting a short sale offer approved other than the terms of your offer.  The seller actually has to be approved for a short sale, just like you have to be approved for a mortgage only in reverse.  The seller’s bank must convince themselves that the seller really cannot pay or come up with the difference and they do that by making an extensive inquiry into the seller’s finances.  Finally, the terms of the short sale approval, if obtained, have to be satisfactory to the seller.  I’ve seen short sales get “approved” that required $30,000 cash contributions from the seller or where the shorted lender would not waive their right to a deficiency judgment.  A seller may elect to let the home go to foreclosure rather than accept such harsh terms.  All this is to say, there are a lot of ways short sales can fail and you had better count on a long wait before you close.  Unfortunately, there is less incentive to put up with all negatives than there is with REO.  Short sales (that get approved) are usually sold at between an 8-17% discount.

A note on AS-IS sales. You can get into a catch 22 with both REO and short sale if the house is in need of work.  Besides your inspection, the house you buy must pass two other inspections: the appraisal and the termite/moisture inspection.  The appraiser is going to evaluate the homes worthiness as collateral for your loan.  Therefore, it must not only be valued properly but it must meet some minimum standards.  A conventional loan appraisal will have less stringent criteria than a government backed FHA or VA loan.  Still, the home you buy cannot have a hole in the roof (or siding more commonly), or any other major problems that compromise the safe, sound, and secure nature of the dwelling.  Also, your lender will not loan money on the house if it has active termites or unrepaired termite damage.  If the house you want to buy has any of these issues (and you may not find out until you’re already under contract) you are in a difficult situation.  You can’t buy the house unless the items are fixed and the bank or seller’s lender won’t pay for anything to be fixed.  With REO, the bank will not permit you the buyer to make repairs prior to closing if you wanted to (something I strongly discourage anyway).  On short sales, there is more latitude since the seller still owns it not the bank and may authorize work to be done.  The trick is finding someone to pay for it.  For required repairs that exceed $1,000, it is often hard to find that money.  Under $1,000, there’s usually a way to get it done.  What this amounts to is that there are going to be some homes which, due to their condition, you cannot purchase even if you wanted to because they need too much work.  The best way to determine if this is the case or not is for me to first call the listing agent.  They have probably already made an evaluation and in some cases determination whether the property will pass the required inspections.  Other times, we just have to go look for ourselves. 

Now you are an EXPERT at knowing the difference between REO and Short Sales!  If you want extra credit, you can watch this video I made about a year ago that details many of the same points.   http://youtu.be/MkE56sZr7Ts

Brad Anderson
RE/MAX Peninsula
Office phone: 757-816-2968
Email: brad@peninsulahousesforsale.com
Website: http://brad.peninsulahousesforsale.com

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Public education cuts for Virginia

Newport News schools take another hit as the governor seeks to punish the best teachers.

http://www.dailypress.com/news/dp-local_ga-crossover-impact_02feb18,0,7991125.story

Cutting the stipends of coaches, club leaders, and sponsors of extracirricular activities is the reverse of merit based pay. It penalizes the teachers willing to put in extra effort while the teachers who do nothing extra pay no price. I really don’t oppose cutting the public education budget, but I’d rather see an a…cross the board pay cut than to see the state abuse the few teachers willing to go above and beyond for our kids.

Short sale and foreclosure IRS tax implications

Short sales and foreclosures have serious IRS tax implications Virginians should be aware of.  Many people get very worried when they hear that typically, the IRS views forgiven or cancelled debt as taxable income for individuals. In an era where a third to half of all real estate closings are short sales and foreclosures, where banks are in essence forgiving tens of thousands of dollars worth of debt, sellers of these homes want to know: will I have to pay income tax on the shortfall?

The answer is yes unless you meet one of the following four exceptions.

#1) You are in bankruptcy.
#2) You are insolvent according to the IRS. This occurs when your debts exceed your assets. To put it another way, you have negative net worth.
#3) You are dead.
#4) The debt that was forgiven was original purchase money to buy the house or money that can be documented as being put back into the house.

Number four is a recent addition to what used to be just three exceptions. This is the one that helps out many people who bought at the height of the bubble and now for whatever reason have to move or cannot stay in the house. Number four does not, however, help the vast number of people who did cash out refinances or took out home equity lines of credit to pay for things other than home improvements. Many people tapped into the equity of their home to pay off credit card debt, to buy cars, to pay for college for their kids, etc. If the money that was taken out on the home was spent on something other than the home, than the amount that was spent on other things IS taxable income.

There’s no way of avoiding this either. When the debt is forgiven or “cancelled” by the lender, the lender must issue an IRS 1099-C (cancelled debt) form to the borrower. Thus, the IRS is notified of the “income” and it will be up to the individual to file appropriately.

Chimney repairs and home inspections

One home inspection repair that is almost guaranteed to be asked for by a buyer is anything to do with the chimney or fireplace. There are few things that stike such a chord of fear in a buyer than the potential hazard a fire in the fireplace poses to their home if the fireplace and chimney are not in perfect working order. Even cracks in the decorative ceramic tile inside a fireplace (which usually have no effect on containing the fire, the metal firebox behind it does that) will be asked to be fixed.

Preventative maintnance is best and you should have your fireplace inspected and swept at least once every two years (once a year if you have more than 15 – 20 fires per year).

Only trouble is, a home owner can be taken advantage of from unscrupulous, fly-by-night chimney companies. After all, most of us don’t know and wouldn’t know the difference between a major chimney problem requiring thousands of dollars worth of work and a small problem requiring only a few dollars.

Your realtor, as your trusted real estate advisor, is a great source for a chimney inspection referral.

Brad Anderson, REALTOR
Keller Williams Realty
(757) 816-2968
brad@bradsmyagent.com

FHA increases affect home buyers in Hampton Roads

It’s going to get harder to get a loan to buy a home in Hampton Roads now that the Federal Housing Administration (FHA) is raising the mortgage insurance premium buyers must pay in order to get an FHA mortgage according to the Wall Street Journal. Even though most buyers elect to have this fee rolled into the loan amount rather than paying it in cash at the closing table, the effect will be that borrowers qualify for less. For example, a borrower may have been approved for $200,000 before and now only qualifies for $195,000.

More significant will be the effect of legislation currently proposed in Congress to increase the downpayment requirement for FHA loans from 3.5% to 5%. While sellers are allowed to assist home buyers by covering their out of pocket closing costs, sellers are not allowed to assist buyers with paying their downpayment. The proposed move would require a buyer to put a downpayment of $10,000 down on a $200,000 house instead of the current $7,000.

While I agree in principal that it is better and safer for home owners to “have more skin in the game”, the effect of raising the down payment requirement will decrease the pool of potential buyers. If fewer buyers qualify, there will be fewer buyers to buy all the houses for sale. This will add to the downward pressure on prices.

Home sellers should take particular note. If you plan to sell a home in Hampton Roads this year, you may want to do everything you can to get it sold sooner rather than later. The hit you take in sales price to get it sold in the next 30 days may likely be smaller than the hit you’ll take later. It could be a rough ride starting this summer as the $8,000 and $6,500 tax credits end, FHA increases the MIP, and Congress increases the downpayment requirement.

Realtors often get accused of pushing sellers to list their homes at lower prices, presumably under the assumption that it will be an easier sale for them with nothing in it for the seller. When I suggest a list price lower than the one the seller had in mind, it is because I believe it will be a win-win, where we get the home sold faster and the seller nets more money. This news paints a vivid scenario of how that may exactly be the case.

If you have questions about real estate in Hampton Roads, I’d be happy to discuss them with you.

Brad Anderson, REALTOR
Keller Williams Realty
(757)816-2968
brad@bradsmyagent.com
Licensed in the state of Virginia

Analogy for Hampton Roads home prices

This being a nautical town, I thought I’d share this analogy on pricing a home for sale.

Remember, the price your home ultimately sells for will be the market price for your home based on the current market for homes like yours as dictated by the number of buyers and the number of homes for sale. That said, here is the analogy. Think of the list price you set on the home as a fishing net. You set the price and then cast the net out into the marketplace. You give it a few weeks and then you pull the net in to see what you’ve caught. If your net was the right mesh, you attracted a good number of qualified buyers to your home and may have received an offer. If you didn’t attract many buyers or any at all, your mesh (price) was not right. You need to adjust the mesh and try again.

Don’t waste a lot of time casting the net if you’re not catching anything and don’t waste your time with too small adjustments either. Fact is, there ARE fish out there and you need to catch them before they swim away!

If you are considering selling your home, consider me your fishing guide. I know what’s biting, where they’re biting, and which bait to use! Call me.

Brad Anderson, REALTOR
Keller Williams Realty
(757) 816-2968
brad@bradsmyagent.com

Home prices in Newport News

What is happening with house prices in Newport News, Virginia? We all know it’s a buyer’s market but what exactly does that mean for a buyer? First, let me say that whether its a buyer’s or seller’s market really depends on the specific neighborhood and price range. For instance, the market for 3 bedroom 1 1/2 bathroom townhouses in Courthouse Green may be a strong buyer’s market, but the market for a nice, updated 4 bedroom 2 bathroom homes in the B.C. Charles elementary school district may be more balanced. It all depends on the months supply of homes.

The months supply of homes is the total number of homes for sale divided by the average number of homes sold per month. A 6 month supply of homes is considered a balanced market with no advantage to buyer or seller. A 9 or 10 month supply of homes would indicate a buyer’s market, whereas a 4 month supply of homes indicates a seller’s market.

Believe it or not, there are some pockets in Newport News where it appears there is a seller’s market. Second to location, property condition is the biggest determining factor. Pardon my language, but I am surpised at how much crap there is for sale, even in price ranges over $200,000. If you looked at just the number of houses that were NOT in poor or “needs work” condition, the number for sale is actually quite small. Since most buyers in this market are still spoiled to an extent, they tend to rule out completely the listings which are in anything less than “move in” condition. Therefore, in reality, there are more buyers for fewer homes than there appear to be.

This makes it tough to negotiate home prices. While it may appear that given the general market conditions, a buyer should be able to negotiate as much as 10% in seller consessions, the reality is, it may be much less. A buyer can get into trouble by looking at homes just above their target price range in hopes of negotiating lower. If the house they end up liking is also the one in the best condition (and it usually is), that particular seller may feel they are in a stronger negotiating position and stick to their price.

If there are several buyers in a particular market, all of whom have rejected the current listings based on condition or have not made a successful low bid on a house just above their price range, the minute a home in good condition comes on the market that is IN their price range, more than one of those buyers will be interested in making an offer. Doesn’t this sound an aweful like a seller’s market. When this is the case, the seller will certainly stick to their price and may not even give any closing cost concessions.

I actually had an outright bidding war on one of my listings last year. My market analysis suggested a price of $170,000 – $175,000 for a small house in Lee’s Mill. We listed at $174,000. Due to this home’s incredible condition we received 7 (SEVEN) written offers by the end of the first weekend. The house sold for $180,000 with no seller paid closing costs.

Please let me know if you found this article useful.

Brad Anderson, REALTOR
Keller Williams Realty
brad@bradsmyagent.com
www.bradsmyagent.com
(757)816-2968
Licensed in the state of Virginia

Short sale and foreclosure bargains?

Short sale homes and homes in foreclosure may sell at 10% to 20% below market value but that savings comes at a price some buyers may not be prepared to pay. Sure, it’s still a buyer’s market and I get calls all the time from people looking to take advantage of the bargains short sales and foreclosures seem to present. Here are a few of the costs you should examine before you decide to pursue purchasing one of these homes.

* Time & Uncertainty – because these transactions have to be approved by third parties, there is no telling how fast or slow the purchase process will take. Banks are simply overwhelmed with files for potential sales. They are not equipped with the staff or systems to handle their current load. (Not being a profit center for them, it seems unlikely that banks are working hard to increase their staff in these departments.) Even once your file gets looked at 30 or 60 or 100 days after being submitted, there’s no guarantee the bank will accept.
* Property Inspections – Usually, short sale and foreclosure homes are sold in AS-IS condition, meaning the sellers will not pay for any repairs prior to closing. More often, a property inspection is allowed as a contingency only, giving the buyer a legal “out”, perhaps with the option to re-negotiate the offer price but without the option of asking for repairs. Here’s what this means for buyers: First, if cash is scarce for the buyer, she may not have the funds to make the repairs right away, and who wants to move into a house with unfixed “issues”. Second, to stand any chance of negotiating on price (or possible repairs), the buyer has to do the inspection prior to getting bank approval. This presents the possibility that the buyer is out the $300 to $400 inspection fee if the deal doesn’t get approved.
* Appraisal fees – The same thing goes for the appraisal fee $400 to $500 that the buyer pays so that his loan can close. If, after the buyer’s appraisal has been ordered and completed, the bank refuses the deal, the buyer is out the $400 to $500 he spent on the appraisal.
* Property Condition – Even if these properties don’t have major home inspection issues, they are typically in poor condition, especially foreclosures. A buyer should expect to replace all flooring and repaint the house at a minimum. Kitchens and bathrooms tend to be gross, too, so expect to spend a good deal of time with a suds bucket and a sponge.
* Getting a mortgage – This has to do with condition problems, too. Part of an appraiser’s job is to make sure a property meets some minimum standards for safety, soundness, and security. Appraisers, especially on VA and FHA loans, will look for things like broken windows, missing siding, and even peeling paint. If a home has any of these problems, the appraiser will issue an appraisal of value “subject to”. The “subject to” is subject to problem items being addressed. Since banks typically will not approve money to be spent on a house prior to closing, this potentially puts the buyer in a very bad position of having to pay for repairs prior to taking ownership of the house. If you are a big time cash buyer house investor, you may be able to handle this level of risk, but it’s not for the typical home buyer looking to purchase a primary residence.

These are some of the biggest costs associated with purchasing a short sale or a foreclosure, but there are others. Yes, the bargains are out there, but they come at a price.
If you still feel like it’s worth pursuing a short sale or foreclosure there are ways to mitigate some of these costs. In my business, I belong to a group called the Home Rescue Institute. This is a group of like minded real estate attorneys, bank negotiators, credit counselors, bankruptcy attorneys, and of course real estate agents dedicated to helping struggling home owners no matter what their situation. As part of that group, I offer a short sale program for sellers that is designed in part to offset the above mentioned factors that make it so hard to sell short sales and foreclosures. This program can be used by buyer’s I represent, too, that is, as long as the seller agrees to have a law firm negotiate the sale on their behalf at no cost to them (no brainer). In practice, it still requires a lot of patience, but it does eliminate a lot of the uncertainty associated with the process. Additionally, if done correctly, there is a way to negotiate repairs from the banks.

I hope this blog has provided some good information. It’s probably nothing new to agents who’ve been doing a lot of business the last 18 to 24 months, but for potential buyers and sellers, I hope it’s been useful. Please feel free to contact me directly at brad@bradsmyagent.com or visit my website bradsmyagent.com.

I am licensed in the state of Virginia and serve Hampton Roads.
Brad Anderson, REALTOR
Keller Williams Realty
(757) 816-2968

How will a Short Sale affect my Security Clearance?

How will a Short Sale affect my Security Clearance?

I am asked this question all the time. While I can’t universally answer the question, the best approach is to educate the homeowner on the impact of a short sale and provide them with enough information to properly avoid any preventable consequence. Allow me to explain.

A short sale is a negative credit event and has an immediate negative impact on an individual’s credit score. This is true whether the homeowner continues to make payments on their mortgage prior to the short sale or stop making their payments prior to the short sale. The credit score is a real time reflection of circumstances and can fluctuate dramatically at any moment based on a variety of short term factors and variables (positive and negative credit events).

An individual’s credit history is a historical collection of data about behavior over measured periods of time, both short term and long term. It provides insight into the predictable nature of an individual’s future actions based on past performance. Reviewers of credit history data use this information to determine whether they can expect the individual to act in accordance with their past performance.
In summary, a credit score is a reading from a moment in time while a credit history is a predictor of behavior.

Eligibility for a security clearance or government contracting position is dependent on a review of an individual’s credit history. The level of trust determined for the security clearance or government contract determines the thoroughness and extensiveness of the review. A credit report is just one of many resources considered as part of the normal inquiry process to a security clearance. The value of a credit report when applying for a security clearance is that it includes the credit history which provides insight into an individual’s past performance, choices, judgment and behavior over measured periods of time. It allows a reviewer to predict whether an individual would be vulnerable or susceptible to outside influences (such as bribery or extortion.

Therefore, credit scores based on recent negative events such as a short sale, should not influence or impact an individual’s eligibility for a security clearance or government contract when that negative credit event was not caused by the individual and is contrary to the patterned behavior reflected in that individual’s credit history. At worst, it may cause a reviewer to make an inquiry to gain more insight into the circumstances surrounding the negative credit event. The negative credit event must be the exception and not the rule for the individual and the overall credit history must demonstrate favorable behavior.

Also, short sales are generally viewed more favorably than a foreclosure or bankruptcy because the individual made a pro-active attempt to assist the lender and limit their losses. A foreclosure or bankruptcy, while sometimes unavoidable, often implies that an individual gave up, or quit, on their obligation. The distinction is important when using past performance to indicate future behavior.
A short sale will result in a lower credit score which may trigger an inquiry from a reviewer. Here is an example of a reasonable response to such an inquiry. The phrasing is generalized and should be adjusted based on facts and circumstances and whether the event has already happened or has yet to happen.

To Whom It May Concern:
I’m writing to address a recent event which may affect my short term credit score. On October 28, 2009, I sold my property located at 123 Main Street, Anytown, VA, 12345. Due to a significant decline in home values I owed more money to my mortgage lender(s) than my home was worth which required me to do a short sale. A short sale means that my lender(s) agreed to accept less money than they were owed in order to release their lien on the property. They agreed with me that the current value of the property was significantly less today than when they approved my mortgage in 2005. They also agreed that my personal hardship (see attached letter) sufficiently explained why I had to sell the home now and was not able to pay the balance of my mortgage(s) after the proceeds from the sale of the home.

Unfortunately, it was necessary for me to stop paying my mortgage in order to qualify for the short sale approval. As a consequence, my lender(s) had to report me to the credit bureaus for being late on mortgage payments and not paying as originally agreed. These negative reports, while true, have temporarily lowered my credit score.

I’m aware that my credit history is a consideration in approving/maintaining my security clearance. Please understand that my current credit is not in keeping with my overall credit history which reflects excellent performance, choices, judgment and behavior. My credit is very important to me, as is my current job/position and my security clearance. While I accept the credit consequence of my recent short sale, I also understand that I was not the cause of the circumstances creating the short sale. My credit score will improve quickly but my credit history remains the best indicator of my (continued) eligibility for my security clearance.

I ask that you consider this explanation in your review process and (look favorably on my application for a security clearance or government contract) or (do not revoke my current security clearance or government contract) for all the reasons set forth in this letter. Thank you for your time and consideration. I am happy to provide any additional information upon your request and look forward to your favorable response.

Sincerely,

Carl Consumer

There is a saying that it’s sometimes better to ask for forgiveness than permission. That rule does not apply to this example. Protecting a security clearance is too important and I always recommend seeking the prior consent and approval of a supervisor or authority when considering a short sale. I realize that the short sale will continue even without prior approval but it’s much better to know what lies ahead. I have helped dozens of individuals with this very concern and not one has lost their security clearance when using this approach.

Please feel free to share this information with clients, customers and interested parties. As always, I am available to provide any assistance when helping our Neighbors in Need.

Jerry Boutcher, President
Home Rescue Institute, LLC

This article was reprinted with permission by Brad Anderson, REALTOR Keller Williams Realty, and Certified Home Rescue Expert, working in Hampton Roads, Virginia. Brad can be reached at (757) 816-2968, brad@bradsmyagent.com and www.bradsmyagent.com

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