Question: I am thinking about conducting a short sale on a condo I have in Palos Verdes. I have a home in Orange County that has some amount of equity, and I’m doing alright in my 401k. Doing a short sale with my mortgage lender will not risk my other assets, will it? If I am unable to do a short sale with the condo and end up having to lose it in foreclosure, what will happen? And will the tax liability be the same for either outcome?

Answer: If you bought the Palos Verdes condominium with a mortgage loan, a foreclosure will terminate the bank’s rights to any of your other assets. If the mortgage lender agrees to let you do a short sale, you should also end up with no liability to the lender, unless part of the agreement was reimbursing the lender the discrepancy of your loan and the sale.

Basically, you shouldn’t have any liability for the short-sale-difference unless that was originally part of the agreement.  Then of course you’ll be responsible to those payments in  whatever form you agreed to make them.

As for the tax issues, keep in mind that the IRS doesn’t recognize any tax liability whatsoever for forgiving non-recourse debt.

An important thing to keep in mind when considering a short sale to avoid foreclosure- your lender is not technically obligated to sell your house in such a manner. For them, it is a pure cost-benefits calculation. When they allow a real estate short sale, they have to swallow the discrepancy between the amount you owe on your mortgage and the money your house brings in when it sells. They don’t like doing this unless the alternative is even less profitable.

You may even have a potential buyer who has put down all the paperwork to make an offer, and they still won’t cave. On the plus side, this can go two ways- the bank may say you have to go into forclosure, but they may also try to convince you to stay in your house and refinance your mortgage.

You may even be able to settle it with a loan modification.

If that doesn’t work, though, and your bank is willing, a short sale may be completed. In order to comfort potential buyers, you may want to think about moving out of your house while going through the shortsale process- this will make it seem less likely that you may decide to simply refinance. And be sure to get official approval from your bank. “Bank Approved Short Sale” is much more likely to get takers than one that doesn’t yet have expresss permission. a

The National Association of Realtors has introduced a new certification system designed to make sure real estate agents get more training in foreclosure sales and short sales.  Called “Short Sales & Foreclosure Resource”, the program is being offered because recent member surveys have shown that these types of properties make up more than one-third of all home sales nation-wide. A real estate agent can’t afford not to be comfortable with the process.

Many real estate agents have had to do with on-the-fly, on-the-job training through experience with these types of sales.  They all require more paperwork than a regular home sale and more patience, but they’re not impossible. Private companies often offer training programs and certification labels to show clients that an agent has ‘official’ skills in the ‘distressed’ property field.

Sellers forced into a foreclosure and/or a short sale are often panicky and more difficult to deal with, but they need to keep in mind that they can stary in their homes for quite some time. Receiving a notice from the bank does not necessarily mean you have to move out right away. The bank doesn’t own a home until it has been officially foreclosed, a long and difficult process.

In this window, a skilled real estate agent can intervene and get the ball rolling on a shortsale instead. The seller must prove financial hardship, but it is not impossible.

The key factor in selling a house, especially one in foreclosure or a shortsale house, is to choose good pricing. You need to put the house up for a price that is competitive with other for-sale homes in the area and in similar areas. Asking for too much will leave you sitting on a house with no bids, wondering what happened. Asking for too little will raise the ire of your lender/bank.
It’s difficult, but lenders want their real estate short sale houses to go for as close to their appraised value as possible- in this current recession, that means a lot of legwork. And if a buyer makes an offer thati s crealy far too ow, it may be better not to report it to the lender at all. Clearly, the bank will say no, wasting ime and effort that could be spent on trying to get the house sold for more.

If a realistic offer is made, your real estate agent submits a big packet of paperwork to the lender/lenders for them to approve the deal. This is a crucial step that requires high precision- even one piece of paper out of place in that packet can result in a no-deal and big waste of time. Lenders have limited time to work through these packets with you- if there’s something wrong, they’re likely to just put your back at the bottom of the pile, so to speak.

In the last quarter, the average sale price went down 11.2% from last year, and according to reports almost a third of all homes sales are either foreclosures or short sales. In more than seventy-five percent of metropolitan areas, home prices fell.
Foreclosures and short sales –classified as distressed sales- put downward pressure on prices, despite the Obama administration tax credit. A week ago, the President decided to extend the eight thousand dollar tax credit for families trying to buy their first homes.
Leading economists have said that the decreasing inventories of houses could have been moderating price declines during the year, but that a new wave of foreclosures could upset that balance, pushing down prices again.
Already existing home sales, which include single-family homes ad well as condominiums, actually went up in the third quarter in some areas, but on the whole, major city areas are still sliding backwards.
What does this mean for those in trouble on their mortgages and looking to sell? It means, on the surface, that foreclosures and short sales are more common, making it more difficult to successfully complete them. However, if you look deeper, these types of sales increasing in volume means the infrastructure in companies and regulatory bodies for dealing with them will improve and become more efficient. So there are pluses and minuses.

The Treasury Department unveiled sweeping rules this week to help financially troubled homeowners who need to sell but can’t get a price high enough to pay off their mortgages. Homeowners will even get $1,500 to help cover their moving costs.

The plan is designed to help homeowners who don’t have the income or debt levels to qualify for a loan modification under the Obama administration’s $75 billion Making Home Affordable program. The plan establishes timelines, a standard process and documents, and cash incentives for participation.

Short sales, as these deals are known, reduce the damage to the borrowers’ credit record and save the lenders the cost of foreclosure. Short sales also help neighboring property values because the sales price is usually higher than what the house would fetch in a foreclosure auction.

About one in 10 home sales this year was a short sale, or an estimated 500,000 sales, according to the National Association of Realtors. In areas like Las Vegas, southern Florida and California, the ratio is far higher.

Fifteen United States Senators, including Senator Jack Reed from Rhode Island, wrote to Secretary Shaun Donovan of the Housing and Urban Development department, calling for some sort of plan to help/incentivize lenders and bankers to be more responsive to homeowners.

They say a particular issue is those who have been told by HUD-approved counselors to talk to their lenders and have been turned away or put off for months. One of the first steps to getting a loan modification, counsel most specialists, is to get a hold of one’s mortgage lender and begin working out a solution. If they can’t even be reached in the first place, there’s not much you can do.

California loan modifications in particular require a lot of paperwork. One family put together a ‘workout’ package that was more than two hundred pages long, and then was informed, three months after they sent it in, that it was outdated and they would have to re-do it. In the end, they had to re-do it four times over five months.

Legislators are trying to introduce bills that will take measures to help banks hire more service people and loss mitigation specialists.

Banks in today’s market are made to deal with higher demand for mortgages and mortgage/loan services, including but not limited to refinancing and loan modifications, than ever before. The backlog at lending and banking companies is starting to effect everyone’s ability to access loss mitigation services.

In areas where unemployment is booming, mortgage delinquencies and foreclosures are also on the rise, and even those who manage to successfully secure loan modifications could be in trouble again in home balues continue to fall, or incomes continue to drop.

Lenders are doing their best to expand their loss mitigation services as requests skyrocket, but officials in the industry have commented that the delays are greatly hindering everyone’s efforts to revive the housing market. Loan modification programs are suffering, and short sales are taking way longer than they should. Banks were not prepared for this.

Senators have written to the Secretary of Housing and Urban Development, Shaun Donovan to help formulate a new strategy to help and coerce lenders to help homeowners quicker and more often. Even HUD-approved counselors are having a hard time getting homeowners access to loss mitigation departments.

It takes a very savvy counselor or professional to get banks’ attention and expedite the process. California loan modifications especially are on the rocks.

Short sales tend to be very reasonably priced, much cheaper than a normal home sale. If you see a home listed for a price that seems oddly low for the neighborhood, it’s likely that the home is in the process of a short sale.

However, very few pre-foreclosure houses can close within a month, and you may have to wait longer as there is a lot of red tape and logistics to get through in the process of buying a house like that. Also, buying a short sale home means negotiating with a lending body instead of a private homeowner, since the lender has taken over the property in exchange for forgiving the original homeowner’s debt. So just because the seller accepts an offer for a price on a short sale home doesn’t mean that hthe lender will accept it.

A seller in such a situation is not necessarily in default (that is, not making mortgage payments) just that they are in danger. A lender may even be willing to consider a shortsale situation if the homeowner is current but the value of the home has dropped by a large margin, or f the homeowner owes more than the home is worth on the current market. A discounted price in that case wouldn’t necessarily even be lower than the market value.

When a loan modification just doesn’t make sense, avoiding real estate foreclosure means getting pretty savvy and creative with different options: namely, the shortsale.

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A shortsale is the idea that a lender will be willing to accept all the proceeds from the sale of a house in exchange for forgiving all of the homeowners debt, even if the house is no longer worth enough to pay off the principle and interest. It definitely requires the cooperation of the bank or lender in question, but why would they agree to this if they are taking a loss?

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The entire transaction is anything but simple- these types of short sales can take months to negotiate, selling them at the market value of what they are worth today, instead of what they were originally purchased for. (The average time to complete such a transaction is anywhere from two to six months.) And in the end, it often makes financial sense for lenders to accept this, because on average real estate foreclosures result in about forty percent loss to the lenders, and short sales on average only lose about nineteen percent.

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However, one technique that lenders have begun to do to try to get more money is a ‘deficiency agreement’, in which the lender requires that they mortgagee needs to eventually pay back the difference, or the loss, in full. It is better to try to negotiate a situation in which the bank itself will ‘eat’ the discrepancy.