Snag a great deal on a short sale

Short sales - where a lender agrees to take less than it's owed on a mortgage - are rising sharply. Here's how you can profit.

By Joe Light, Money Magazine staff reporter


(Money Magazine) -- When Brian Gavitt, a physician, and his wife Gayleen, a stay-at-home mom, started to eye homes in Sacramento last winter, they knew they were looking in the hardest-hit areas of the housing bust. So the couple, who were relocating from Lansing, figured they could land a fantastic bargain in no time at all.

The part about the bargain turned out to be true. The Gavitts bought a five-bedroom house in the upscale Natomas Park neighborhood ("Even now, you don't see FOR SALE signs up anywhere," says Gayleen.) And it was a steal at $300,000, a full $200,000 less than they would have paid just two years ago.

The amount of time it took to land the deal was another story. It was more than six months from when the Gavitts first saw their dream home to the moment they held the keys in their hands. The reason: The home they bought was a short sale.

Not along ago, few people had even heard of a short sale, which occurs when the bank agrees to discount the loan balance for a seller who owes more on his mortgage than the home is currently worth.

If you're in the market for a home today, you're almost guaranteed to be looking at some short sales. Nationwide, 14% of homeowners are currently underwater on their mortgages, calculates real estate website Zillow.com. And in many areas, it's far more: In the Gavitts' zip code, for example, over half of homeowners would owe more than their home is worth if they sold today, calculates Dee Schwindt, the Gavitts' realtor.

The good news is that short sellers are likely to still be living in the home and some may even be current on their payments. That means these aren't the run-down, distressed properties that you often find among foreclosures; in fact, there's a good chance that some of the most deluxe homes for sale in your market are underwater.

Before you get too excited about buying a short sale, know that they generally aren't, well, short. For the sale to go through, the seller's lender must approve the price and agree to take the shortfall as a loss. That extra step can cause the process to drag on three times as long as a normal home sale.

But as the Gavitts discovered, the hassles can be well worth it. Some buyers and realtors don't want to deal with short sales, leaving many choice homes with very few bidders. So if you're willing to brave the intricacies of the process, you'll be far more likely to land the home you always wanted. The key to snagging a good deal is knowing how to avoid the land mines.

Know what you're getting into. In a short sale, you are dealing with several parties: the sellers, their agent and the sellers' lender. That's why a short sale can take anywhere between two and six months to execute, compared with about 30 days for a typical sale. Though many banks are willing to take a loss on a mortgage in a short sale if it means avoiding an even bigger loss in a foreclosure, with so many owners trying to unload properties, the lender's negotiators are flooded with short-sale offers. So if you're moving or selling another property, keep in mind that you'll likely need to budget for a few months' worth of rental payments so you have somewhere to live in the interim.

Find the right pro. Lenders often make realtors who work on short sales take a hit on their commission, so some brokers may be loath to show you the listings. But don't even think about going solo. These deals take a lot of work and persistence, says Loni Parmelly, author of Success in Short Sales. Before you sign up with an agent, ask him how many short sales he's closed. If he hasn't done at least two, find someone more experienced.

Weed out candidates. In most cities, home listings will indicate in the description whether the property is a short sale. Ideally, you want to knock off ones that come with extra complexities. If possible, pass on any home that has more than one lien against it; having to negotiate loans with two lenders can greatly increase the amount of time it takes to complete the deal. Also avoid homes where the seller has other offers. That's because if another offer is pending, the seller's agent isn't likely to even submit yours for approval until the first one is rejected, meaning you'll have to wait for another negotiation to play out before you even get a chance.

Set the right price. The first step is to have your agent submit your offer to the seller. Don't just rely on the current list price to come up with your initial bid, says Bill Richardson, a district sales manager for the Keyes Co. Realtors in Boca Raton, Fla. The seller's agent may have far underpriced it in hopes of attracting buyers, but the bank likely won't accept a lowball offer. Ask your agent to determine the home's fair market value by searching comparable sales in the area, with an emphasis on other short sales and foreclosures (or get a rough estimate yourself at zillow.com). If the fair market value is lower than the list price, set your offer 10% lower than that.

At this point, you'll also want to get pre-approval for a mortgage; many banks won't even consider your offer if you don't have one, says Schwindt.

Protect yourself. Next, the seller's agent will submit your offer to the seller's lender. At this point, you'll be asked to sign a sales contract. See if the lender will agree to pick up all closing costs as part of the contract, says author Parmelly. Also ask your realtor to specify that you won't do an appraisal or inspection of the property until the offer is approved. That way you won't have to shell out hundreds of dollars until you know you realistically have a good chance of getting the home.

Finally, though most lenders will require you to make some kind of deposit along with the contract, don't put down more than $3,000 before your bid is accepted. That will give you room to put offers on other homes or even to pull out of the sale if it drags on for too long.

Be a pain in the neck. After your offer is submitted to the lender, you're likely to hear nothing for weeks, if not months. This is no time to relax. Call your agent at least once a week, and make sure the seller's agent is contacting the bank's negotiator nearly every day.

"These negotiators may have 400 files on their desk. They'll want to get rid of the squeaky wheels," says Parmelly, who worked as a loan negotiator for lenders for 16 years. To help the seller's realtor in her negotiations with the lender, it's a good idea to have your agent show her which comparable homes you used to arrive at your number.

If the clock keeps ticking and you're reaching the end of your rope, try playing hardball. After months, the lender the Gavitts negotiated with was still dragging its feet and their pre-approved loan rate was about to expire. "We said, 'We need an answer by Friday or we walk,' " Gayleen says. The bank responded by week's end.

Keep your eye on the market. When the bank finally sends its counter-offer, use it as a guideline rather than an ultimatum. Most of the time, the lender's number is based on its own research, that of a local realtor it hires and the outstanding loan balance. Usually its goal is to sell for at least 90% of the home's value, says Amy Bohutinsky, a spokes-person for Zillow.com.

The lender's offer may not be what you'd hoped for, but don't despair: You have a chance to counter. If the market has been flat since your initial bid, try for 5% to 10% less than the bank's number. If the market has been sinking rapidly, however, you may be able to prove that the home's value has shrunk further and offer even less. Once you have the lender's ear, the new offer should take less time to process.

Despite all the legwork and wait, the Gavitts are thrilled with their new home. "I'm glad people are turned off by short sales," says Brian. "It just means more choices for the rest of us."

Realtors® Help Buyers, Sellers, With Short Sales Solutions

ORLANDO, November 09, 2008

When families lose their homes to foreclosure, communities, the housing market and the economy all suffer. Short sales are one way that some troubled homeowners can avoid foreclosure, and Realtors® at the Short Sales Solutions session today at the 2008 REALTORS® Conference & Expo gained valuable insights into how to facilitate these complex sales.

“Homeowners who are struggling to make their mortgage payments must have more options available to them to avoid foreclosure,” said National Association of Realtors® President Richard Gaylord, a broker with RE/MAX Real Estate Specialists in Long Beach, Calif. “Short sales can benefit not only the homeowner in question, but also buyers, lenders and the surrounding community. With their established lender relationships and insights into complicated real estate transactions, Realtors® can add real value for both sellers and buyers interested in short sales.”

A short sale is a transaction in which the seller’s mortgage lender agrees to accept a payoff of less than the balance due on the loan. The lender often receives a higher amount of the remaining loan balance than it would from the sale of the property after a foreclosure. This helps support home values in the surrounding community. Short sales also help homeowners maintain some level of credit.

According to Freddie Mac, of homeowners who have loans that enter into the foreclosure process, 50 percent did not have any contact with the lender before foreclosure began. One of the most valuable services Realtors® can provide to clients who may be facing a foreclosure is guiding them through the lender’s short sale process and facilitating communication, according to session panelists Michael and Stacey Spikes of America’s Home Rescue.

“The process for short selling an FHA loan is different than the process for shorting a Veterans Administration or conventional loan,” said Stacey Spikes. “Knowing the type of loan the seller has, and understanding the proper steps for short selling that loan and the order of those steps, is critical.”

Homeowners who are having difficulty making their mortgage payments and who may be considering a short sale must generally meet three qualifying criteria: they must be behind on their payments, be able to prove a legitimate hardship, and have little or no equity in their home.

While a typical real estate transaction involves two real estate professionals, a seller, a buyer, and the buyer’s lender, a short sale can include all of these parties in addition to the seller’s loan servicer, housing counselor, junior lienholders, mortgage investors and mortgage insurers. In addition to the number of parties involved, Realtors® say there are many reasons for the difficulty in completing a short sale. These include burdensome paperwork, appraisals that do not consider the sellers’ duress or number of foreclosures in the community, over-burdened loss mitigation departments, and the complications created by second mortgages.

NAR has created a working group to examine the problems and difficulties surrounding short sales and to educate its members on how to best work with their clients through this process. NAR is also reaching out to its partners in the housing and mortgage industry to encourage adoption of principles and practices to streamline the short sale process.

“Short sales give many families in financial difficulties the possibility of salvaging their credit and avoiding the embarrassment of a foreclosure,” said Gaylord. “Realtors® across the country stand ready to help, and NAR will work hard to ensure that short sales are a viable alternative to foreclosures whenever possible.”

Be a Better Borrower

The stories of foreclosure and loss in today's mortgage crisis are painful. If you are in the market, here are five things you should do.
1. Begin with a good understanding of your finances. Examine your budget and income and determine how much you can pay as a down payment and afford each month (mortgage plus bills). Remember to factor in a cushion for unexpected costs such as unemployment.

2. Understand the lending process. Take time to learn about credit, mortgage terms, interest rates and points. Keep in mind that when you assume a mortgage you may be buying your dream home, but are also taking on a significant debt.

3. Get pre-approved. Once you have a handle on your finances and the lending process, get pre-approved for a mortgage. This gives you defined parameters for your home search and makes you a more appealing prospect to sellers.

4. Search out a reputable lender. Ask for recommendations from your real estate professional and from friends and family. Research the lenders you are considering before making a selection. Of course you should shop around for the best rates, but remember there are other important factors at play.

5. Listen to your heart and look ahead. If something seems too good to be true, it probably is. Also, take the time to analyze the fine print and make sure the mortgage terms are still manageable five, ten, and twenty years from now.

Finding the Right Home Loan

Thanks for checking out today's blog. Below is info which I have pulled from a real estate website discussing factors to consider when choosing a mortgage. Feel free to take a look and discuss any questions or concerns that you may have. Also don't forget to check out me website. HAVE A GREAT DAY!!

Weigh your options to find the right home loan for you.

Finding the right home loan is all about saving money. You took your time finding the right house – shouldn’t you also carefully evaluate the financing for that home?

When finding the right home loan, there are several factors to consider. What is your financial situation? How much of a down payment do you have? What are current interest rates? How long do you plan to stay in the new home? Consider these factors, plus others, to help you find the right home loan for you.

How long will this be your address?
Let’s start with how long you plan to stay in the home. While no one can know the future with certainty, you can probably make a good guess as to how long you’ll stay. If you know your job will require a transfer in a few years or if you’re self-aware enough to know that you’re part nomad, then this will affect what home loan you choose. If, however, your job doesn’t move you around and you are the type who likes to put down roots, then a different type of home loan may be better for you.

• If you may move soon
If you think you may move again within 4 to 5 years, you have may want to consider several different options for the right home loan. If rates are low, you may want to consider a short-term fixed rate mortgage (such as a 10 or 15-year fixed loan) to build up equity for your short time in the home. Another option to consider is an adjustable rate mortgage (ARM) or a hybrid loan. An ARM gives you a lower interest rate than typically offered with a fixed rate mortgage. The catch is that the ARM’s interest rate changes. A hybrid loan gives you the benefit of an ARM’s lower interest rate, but the security of a fixed loan because there is a fixed period before the rate resets. If you plan to move relatively soon, it may turn out that you sell the house before your rate adjusts.

• If you’re in it for the long haul
If you won’t be moving again anytime in the near future, then a fixed rate mortgage may be the right loan for you, especially if interest rates are low. A 15-year or 30-year fixed rate mortgage can be the perfect fit if you plan to stay in the home for a long period of time and you prefer the security of knowing what your interest rate (and monthly payments) will be. You can lock in a good interest rate that is guaranteed to you for the 15 or 30-year term of the mortgage.

What about down payment options?
Finding the right home loan also means evaluating options for your down payment. The 20 percent down payment is not necessarily the standard these days.

• No-down-payment mortgage
Yes, you read that right. It is possible to get a mortgage without putting any money down. That means that you finance 100 percent of the purchase price of the home. Sounds pretty scary, right? But, sometimes it can be a viable option. If you live in a market with rapidly escalating prices, it may not be that possible for you to save 10 to 20 percent of the purchase price before being priced out of the market. With a no-down-payment mortgage, you’ll get a higher interest rate and you’ll have to pay PMI (private mortgage insurance). Also, it’ll take you longer to build up equity since you didn’t put any money down. Keep in mind that not having equity in your home can be dangerous if home prices fall.

• Piggy-back loan
Another way to finance a home if you don’t have enough for a 20 percent down payment is a piggy-back loan. Basically, A piggy-back loan is a combination of two loans that close at the same time to allow you to purchase a home. The most common types of piggy-back loans are an 80/20 mortgage, an 80/15/5, or an 80/10/10. An 80/20 means that you finance 80 percent of the home’s purchase price through a first mortgage, but the other 20 percent comes from a second mortgage. An 80/10/10 means that you finance 80 percent of the purchase price via a first mortgage, 10 percent from a second mortgage, and that you make a down payment of 10%. With a piggyback loan you avoid PMI, but your second loan often will have a higher interest rate. Still, this can be a good option if you don’t have enough for a 20 percent down payment.

• FHA loan
For the first-time homebuyer, the government runs a program to help you realize the dream of homeownership. An FHA loan lets you get in with as little as 3 percent down.

This really just scratches the surface for your options in finding the right home loan. Know your financial situation and investigate all of the mortgage options so that you can get the right home loan for you.

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