Posts Tagged ‘short sale’

Troubled homeowners who have gone through a foreclosure or a short sale may have a lurking problem that could cause them problems years down the road. Even though you think you may have put a bad chapter in your life behind you, the lender can still come after you with a deficiency judgment.

A deficiency judgment is when the lender sues you for the difference between the loan amount and the amount they (the lender) realized when the house was sold. Whether it was through a short sale or sold as a bank owned property may not matter.

Yahoo finance published an article that illustrates the problem with several examples. In one, a borrower even signed a document at a short sale closing that gave the lender permission to come after him.

If you are in a short sale, make sure you get agreement (in writing) that the lender will not pursue a deficiency judgment against you. If you have lost a house through foreclosure, whether the lender can come after you will depend on the state the house was in.

If you are in a recourse state, the lender can pursue a deficiency judgment against you. Per The New Republic blog, the non recourse states are Alaska, Arizona, California, Iowa, Minnesota, Montana, North Carolina, North Dakota, Oregon, Washington and Wisconsin. However, even iin these states, a lender may have recourse with second liens and refinanced loans. Regardless, consulting an attorney is needed for advice on your specific situation.

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Short sales would appear to be the best answer to a bad situation. The borrower can’t carry the mortgage payments, the loan is more than the house is worth. With a short sale, the lender agrees to take less than the loan in exchange for a buyer that keeps the house off their hands.

Seems like a better solution all around. Short sales reportedly are not as damaging to a credit rating than foreclosure, the legal costs of a foreclosure are avoided, and the bank typically gets more money (especially when the buyer is a retail buyer) than they would through foreclosing on the property, carrying the property and paying the holding costs, and then selling it as bank owned.

However as Robert B. Jacobs writes, the best solution isn’t always what happens. In one case the lender refused to release the seller from being liable for the difference between the selling price and the loan amount. So the property went through foreclosure instead. While foreclosure laws in each state are different, apparently in the state this foreclosure occurred (probably California), the lender lost recourse to go after the borrower for the difference. The saying “cutting off your nose to spite your face” seems appropriate here.

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In dealing with a toxic mortgage you can no longer carry, so far I have identified three options:

  • Stop making payments and let the bank foreclose on you.
  • Find a buyer and negotiate a short sale with the bank
  • Keep the property and get a loan modification

I’ve written about short sales previously in this blog.  The foreclosure option is the option of last resort.   Although I have no emotional attachment to the properties it appears the least harmful thing I can do to my credit is to try and negotiate a loan modification as a first step.  If that didn’t work I could look into a short sale or simply give the deed back to the lender.  This is called a “deed in lieu of foreclosure” and not quite the same as a foreclosure.

I belong to a few real estate mailing lists.  One poster to the group, claimed she was able to negotiate a loan modification that cut down on her payments and knocked $46K off the principal balance.  That sounded pretty good to me, so purchased the book she recommended: The Loan Modification Handbook

Written by Michael Albert and Rami Ibrahim, it arrived from Amazon a few days ago.  The Loan Modification Pamphlet would have been a better name for it.   So at first I was rather disappointed at the rather slim size for the price.  However it is a good introduction to the topic.  It provides examples of letters you write to the lender and good advice on how to get to the right decision maker (hint: it’s not the person that answers the customer service line).  A nice touch was a listing of the actual phone numbers for many banks’ loss mitigation departments.  That alone is quite useful, as anyone knows from navigating a large corporate bureaucracy by phone.

So far I haven’t acted on any of the steps in the book, but I will soon.   I read somewhere that a loan modification is 40% cheaper for a bank than a foreclosure.  For one of my houses in particular, the area is gutted with foreclosures and nothing is selling, if the lender has any sense at all they should be willing to work with me.

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As promised here is a bit more on short sales.

I want to do a brief overview on what they are.  This is not by any means a complete writeup.  If you are a homeowner that is in over their head, has no equity and are looking for a way to avoid foreclosure, you might want to consider a short sale.  A short sale will affect your credit negatively .. but it won’t be as bad as having a foreclosure on your record.

A short sale is when the bank agrees to take less than what is owed on the property.   Often it is substainly less.   The bank is motivated to get rid of properties it has to foreclose on.  Instead of having as a performing asset with a nice little income, it is costing them in money in holding costs.  Also having them on the books hurts the banks ability to make new loans.   But even with this reality, banks are not very welcoming to people who want to do a short sale.

There are very specific negotiation techniques that are needed to make the short sale happen and if you are not in the short sale business it’s best to find someone who has done them successfully.

Realtors don’t always understand what a short sale is.  Some think it is just listing the house for less than the market value or less than what is on the loan.   If you are talking to a realtor, make sure they can clearly can tell you what they intend to provide to you.  Most people who do short sales are real estate investors not realtors, and they won’t talk to you if you have signed a listing agreement.

The real estate investor who does short sales will not charge you anything for the service.  In fact if anyone asks you to pay money for a short sale service, run, don’t walk in the other direction.  The investor makes money on the “spread”, the amount that they negogiate the bank down to and what they can sell the house for.  The art of short sales is convincing the bank the property is really worth lot less than the market value and showing the bank they will actually come ahead if they don’t have go through the foreclosure process and have all those holding costs.

Good luck, for anyone who needs to sell, it’s a brutal market out there.

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