2008 May | Bestshortsales.com

What is a Real Estate Short Sale?

Posted May 30th, 2008

A real estate short sale is the sale of a property for less than what is owed on it. The lenders voluntarily accept less than full payment and forgive the unpaid balance.This happens when a property is worth less than what is owed, the owner is insolvent, and can’t make up the difference. In the sale of the property, a lender is paid off with a dollar value short of what it is owed, thus the term short sale. This article briefly explains why this happens and why they are so common.

The root of this issue is in collateralization. The vast majority of properties are purchased with the aid of financing. In order to pay for a property, a homeowner places a small down payment. Since the down payment is not sufficient to purchase the property, a loan is used to pay the remainder of the acquisition value. In other words, the homeowner finances part of the purchase value of the property with a loan from a lender. To guarantee payment, the homeowner pledges the property as collateral. This is called collateralization. This is an agreement between the owner and the lender, such that in case of default, the lender has the right to dispose of the property in order to get paid. In the U.S., properties are collateralized by trust deed, mortgage, and security deed. The term “mortgage” is generic.

Complete and timely payments incrementally reduce the loan payoff value. That is called amortization. The longer payments are made, the more amortized the loan becomes. A fully amortized loan is a loan with zero balance and paid off. On the other hand, because of interest, missed payments increase the loan payoff. That is called accrual.

At sale, unless the loan is fully amortized, the homeowner needs to payoff the remaining debt balance. If the property sale value is high enough, the proceeds of the sale will be sufficient to pay off the loan and for the homeowner to earn a profit or break even. If not, there will be a shortfall. To make up for this shortfall, either the homeowner will have to make up for the amount needed to pay off the loan, or the creditor will have to take less than the amount owed.

A property worth less than what is owed is “over-mortgaged”. The main reasons properties become over-mortgaged include the owner paying too much, refinancing for too much, market decline, damage, deferred maintenance, negative neighborhood changes and disasters.

Often, owners of over-mortgaged properties needing to sell are unable to make up for the loan payment shortfall. It gets worse if they are insolvent. Usually, seeing only losses, they sooner or later get discouraged and become uncommitted to the property. This leads to default. Once this happens, it gets worse. The loan starts to accrue. Unpaid property taxes, utilities, and other costs also accumulate. In addition, usually maintenance is deferred. The property may even be abandoned. This results in further loss of value.

Once the property enters into this cycle, it becomes the lender’s problem. The longer it passes, the worse it gets. Urgently, the lender needs to recover as much of the debt as possible. Lenders in this situation have only two alternatives. One of them is to foreclose. The other is to allow the homeowner to sell the property for less than what is owed. This is a shortsale. Either way, the creditor will take a loss.

Unless the property value is high enough, a lender that decides to foreclose only stands to lose. Only cash-in-hand investors looking for great deals buy at foreclosure sales. If the property is not sold at a significant enough discount, the creditor will have to keep the property. If this happens, the creditor will be liable for maintaining the property, insuring it, paying taxes, and many other costs. Not only that, to sell it, the lender will have to pay commissions!

Foreclosures are costly, lengthy and hostile transactions. Even in an appreciating market, every day the property is worth less. Once in foreclosure, the property enters a legal limbo full of risks for the lender. Hopefully, the homeowner stays until shortly before the foreclosure, does not damage the property and leaves amiably. However, there is a high chance that the homeowner will abandon the property. Vandalism often follows. If neither happens, it is because the homeowner wants to stay longer. These homeowners usually file for bankruptcy. The result is a longer foreclosure and further loss to the lender.

Shortsales are lower cost, shorter and more amiable transactions. They are a much less risky alternative to foreclosure because most of the above mentioned problems are avoided. The insolvent homeowner sells the property for less than what is owed. The lender gets paid off sooner and forgives any debt shortfall. That is a short sale. That is why they happen and why they are so common.

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Ten Mistakes to Avoid When Doing Short Sales

Posted May 30th, 2008

Short sales are thrilling transactions. In a shortsale, an insolvent homeowner about to be foreclosed sells a property for less than what is owed. The remainder of the debt is forgiven. The key to being successful at this is to be a dedicated professional. Dedicated professionals know what to do and what to avoid. These are the top ten mistakes to avoid.

Not knowing the business. To attempt a short sale without knowing what to do is simply reckless. Unless there is plenty of immediate help, most likely the transaction will fail. This is totally disrespectful of the client. Not only that – this brings bad reputation to the short sale business community.
Not understanding the foreclosure process. Each state has its own foreclosure rules. In most states, there are two types of foreclosure, each with its own set of rules. To be effective in short sales, it is critical to dominate this subject.
Not knowing the legal boundaries. In real estate, for the most part, the law is broken unintentionally. However, regardless of good intentions, the law is unforgiving of ignorance.
Working with unmotivated clients. Short sales require full cooperation from clients who understand the benefits of the transaction. Attempting anything with unmotivated clients is a waste of time.
Not being selective about transactions. Not all transactions are viable. Viable transactions have a reasonable chance of success and a potential profit congruent with the needed effort and risk. It is much better to have a few well-selected transactions than many random deals.
Not walking out of a transaction when it is not working. Any negotiation in life needs to have an alternative. In shortsales one alternative must always be to discontinue the transaction. A short seller must always have the alternative of walking away if more convenient. The instant walking away is no longer an option, the negotiation ends, and the asking for favors starts.
Not having the right team. Short sales are not a solo game. Good connections are must. These include title companies, mortgage brokers, building inspectors, attorneys, etc. There are plenty of competent professionals eager to contribute. It is not hard to find compatible teammates.
Not explaining well the process to clients. This has to do with fear of the unknown. Not knowing what has to be done, or what will happen, is scary. Understanding matters makes clients a lot more confident and comfortable.
Not being win-win. For any transaction of any kind to succeed, unless there is no other choice, everybody needs to benefit. People that see benefit make things happen. The benefits need to not only be real. They also need to be perceived as such. For a client perception is reality. A client not fully convinced of the shortsale benefits cooperates less. If matters do not improve, the client may even withdraw from the transaction.
Being too greedy. Too much greed is real estate’s enemy number one. Wanting just a little more than what works often results in loss of great opportunities.

Short sales are professional endeavors. As such, it is just as important to know what to do as well as what to avoid. Avoiding the top ten short sales mistakes will result in a much more prosperous shortsales career.

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Ten Tips About Short Sales

Posted May 30th, 2008

Short sales are thrilling, fulfilling and profitable transactions. In a short sale, the homeowner sells a property for less than what is owed on it. The remainder of the debt is forgiven. This happens because the property is over-mortgaged, the homeowner is insolvent and it’s the lender’s best option.

Negotiating short sales definitely requires expertise. The homeowner and the lender are locked up into an unpleasant situation. The homeowner is unable to pay the mortgage. The lender is not getting paid. The job of the short seller is to positively unravel this awkward situation and be rewarded for it.

The longer it passes, the worse it gets. With time, the debt increases and the property falls in disrepair. As this trend continues, matters only deteriorate further. Sooner or later, the homeowner will lose the property. Very often, the homeowner still owes on the property after the foreclosure. By the time this happens, the creditor will have a great financial loss. The creditor will have a lesser loss the property if sold at the foreclosure sale. If not, the lender will end up owning the property. If this happens, losses will keep growing until the property is sold. It is the expertise of a short seller that provides an amiable solution to this situation.

Short sellers are real estate agents, investors or both. Either way, the set of skills needed for negotiating short sales is basically the same. The difference is in how each make a living. Agents earn commissions. Investors earn by re-sale profit or rental property income.

Here are the top ten tips for succeeding in short sales:

Be knowledgeable. Nothing beats good training. In real estate, the more you learn, the more you earn. In this business, education pays off. Knowing the short sale business allows to quickly assess foreclosure situations and determine whether or not to be involved.

Understand the foreclosure process. The principles of foreclosure are timeless and basically universal. However, foreclosure law varies state to state. Each state has its own foreclosure version. In the least, a short seller must master this.

Know the legal boundaries. There is only so much a short seller can do. Crossing legal boundaries can easily result in judicial problems. This is why the short seller must dominate the local, state and federal regulations of this business. In real estate, the law is most often broken by not being aware, rather than by willful intention. However, the law is not forgiving of ignorance.

Work only with motivated clients. Pre-disposed clients are open to be helped. It is only fair for the client to ask questions and request references. The short seller’s confidence, knowledge and sincerity should be enough to overcome this. However, it is waste of time to have to convince people.

Be helpful, not judgmental. Clients needing a short sale are providing a financial opportunity in exchange for your help. The short seller needs to be grateful to have this chance. Not only that, the moment the short seller passes from being helpful to being judgmental, the business relationship will become strained. Judgmental thoughts negatively affect interactions with clients. Like this, inevitably, attitudes will create problems. Too many problems and the transaction will not close. Incomplete transactions are a waste of time, energy and emotion.

Make sure the client understands the benefits of a short sale. A short sale is always better than a foreclosure. However, this is not always evident to the client. The main benefit of a short sale is reduced credit rating damage. Damaged credit through foreclosure will result in the homeowner having to pay high interest rates for years and years. Not only that, if a short sale is not negotiated, in many instances, the homeowner will remain owing on the home despite no longer owning it. Home equity loans or cash-out second mortgages not fully paid by the foreclosure remain the homeowner’s responsibility. Not owing after the foreclosure is definitely a short sale benefit.

Clearly explain what needs to be done. Short sales take time, effort, have a protocol and require the client’s full collaboration. Clearly and properly explaining to the client the short sale process delineates expectations, responsibilities and outcome possibilities. Not only that, tough choices may have to be made. An educated client tends to be emotionally and mentally prepared. The payoff of a few minutes invested in educating the client is a smoother transaction.

Fully disclose. Tell exactly what, how and why things need to be done. This will keep the client from having any doubts. Doubts lead to discomfort. Discomfort leads to lack of trust. Clients that do not trust soon think that the agent or investor has something to hide. Once this happens, despite the best intentions, matters are questioned. The end result is usually an incomplete transaction. Incomplete transactions are a waste of opportunity.

Ensure earnings. Short sales take time, effort and expertise. This needs to be rewarded. To make sense, a short sale transaction needs to be win-win-win. The homeowner avoids foreclosure and its ongoing negative ramifications. The lender recovers more of the loaned principal sooner. It is only fair that the short seller be rewarded for this. Whether the short seller earns through commission, re-sale or rental income, that profit is the result of others benefiting. If others benefit the short seller should benefit too.

Get testimonials. Testimonials are a great referral basis. Nothing beats evidence of satisfied clients. Testimonials are proof of competence, experience and honesty. Only satisfied clients write testimonials. What is the key to obtaining testimonials? “Ask and you shall receive”. Happy clients will gladly testify in favor of persons that helped them out of a bad situation. Lenders often provide testimonials too. Asking is for free. The best way to obtain a testimonial is to ask for it immediately after the transaction has been finalized. Better yet, right prior to closing, ask the client if so far they are happy how things are going. If they are, ask them to, after closing, write a little note you to show others. This will pre-commit the client. After that, the longer it passes, the lower the quality and the lesser the likelihood a testimonial will be created.

Short sales are very interesting transactions. Plenty of well-trained real estate professionals make a good living with them. Following these ten tips will ensure continued success in this real estate endeavor.

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Ten Tips About Short Sales

Posted May 9th, 2008