Should I Just Walk Away From My Mortgage?

...well, only if it were that simple. Here is another option:

A “short sale” is a handy term for a situation in which a homeowner’s debt on his or her property is greater than the amount for which the property can be sold.

Here’s an example: Assume a homeowner has an unpaid loan balance of $110,000, but the property will only sell for $100,000. The unhappy lender accepts that $100,000 as full payment from you or another investor. This is obviously “short” of the full $110,000 amount, thus the name “short sale.”

Let’s be clear – lenders don’t like short sales and often will go through them only as a last resort. After all, they’re not in business to lose money! In many cases, they’ll prefer the option of foreclosure since that choice makes more financial sense.

However, there are instances in which lenders accept short sales and, if you’re “Johnny-on-the-spot,” you can make a very good profit – if you’re willing to brave a complicated process!

Why Is a Short Sale More Complicated Than a Normal Real Estate Transaction?

Simply put, it’s complicated because there are so many factors involved:

- the loan mitigation policies of the lender and third-party investors
- the financial condition of the lender and third-party investors
- financial condition of the borrower
- the property’s as-is value
- the cost to “repair” the property to put it into saleable condition and market it, etc.

On top of these factors, approval for short sale has to come from the investor who actually owns the loan. And then, if the lender is a government-sponsored institution like Fannie Mae or Freddie Mac,approval can eat up a lot of time. After all, you’re dealing with government bureaucracies!

When Will Lenders Accept a Short Sale?

There are a variety of situations in which lenders accept short sales. For example, homeowners experience a devastating illness that eats up all their financial resources. Or they may be military personnel called up to active duty for extended periods of time, and they lack the income to continue mortgage payments.

Other examples include anyone who falls into the “hardship” category—disabling, permanent injuries; financial insolvency; convictions; lack of employment due to economic conditions beyond the homeowner’s control, etc.
In these instances, lenders are willing to consider a short sale.

How Do I Find Out If A Property Qualifies for a Short Sale?

You’ll have to do some digging and gain knowledge about the lenders in your area. In order to acquire that knowledge, complete the following tasks:

Task 1: Talk to the lender and find out their loss mitigation policy. If they seldom or never do short sales, don’t bother with them. Find another lender with a better record in this area.

Task 2: Find out the number of liens recorded against the property title and the total amount of money in those liens.

Task 3: Know the borrower’s present financial condition.

Task 4: Know the type of loan that’s in default and its current status.

Task 5: Know both the property’s as-is market value and its as-repaired value.

Task 6: Be aware of the state of the local economy and the current real estate market conditions. Analyze all this information to determine if a short sale is worth pursuing.

Okay, let’s assume you’ve completed all those tasks and know the short sale is worth pursuing. What’s next?

How to Pursue a Short Sale

First, have the homeowner sign an authorization to release the loan information. Next – and this is very important! - you must have cash on hand. Why? Because all short sales are cash transactions! What’s more, you also need verifiable proof that you possess the money!

Also very important - short sales can’t be made to relatives, family members, or close friends of the homeowner. In real estate, this is called an “arm’s length transaction.” What happens if you do this and the lender discovers that you’ve done an arm’s length deal? The lender can file a lawsuit to have the sale overturned!

As you might expect, the property owners themselves can complicate the process. After all, they can’t receive any of the money from a short payoff sale. That means not much of an incentive for them to do a short sale. 

And one last negative - the debt that’s canceled by the short sale payoff of a mortgage or deed of trust is subject to federal income tax as ordinary earned income. This is not true of a bankruptcy or insolvency.

How to Start the Short Sale Process

Follow these steps (yes, there are many):

- Get in touch with the homeowner who’s in foreclosure.
- Determine the homeowner’s financial condition.
- Analyze the condition of the property.
- If both the financial and property condition are suitable, ask the homeowner for written authorization to communicate with the loan loss mitigation department of the lender.
- Get in touch with the decision-maker in the loan loss mitigation department of the lender and provide them with a copy of the written authorization.
- Contact the decision-maker to discuss the short sale and request that the decision-maker send the appropriate short-sale documents to the homeowner.
- Ask the homeowner gather all documentation to provide support for financial hardship case.
- Get repair cost estimates from a minimum of three licensed home improvement contractors.
 - Do a comparable value study by assessing the value of three similar neighborhood properties sold in the last six months.
- Return the short sale proposal to the lender’s decision-maker. It should include a signed purchase agreement for a percentage less than the amount owed to the lender; e.g., 20%, 30%, 40% less, etc. Include a HUD 1 Settlement Statement in your proposal. You can download the statement in PDF form here.
- The lender’s decision-maker reviews your proposal and orders a BPO to determine the property’s as-is and as-repaired values.
- The decision-maker either accepts your proposal or rejects it.
- If the decision-maker feels a short sale is appropriate, they’ll make a counteroffer.
- You then accept or reject the counteroffer.
- If you accept the counteroffer, you close on the transaction within 30 days.

I hope this brief introduction to short sales gave you enough information to decide whether or not you want to pursue this type of transaction. If you have more questions, please contact me today. 

Home Maintenance Does More Than You Think

For some, the phrase “home maintenance” might sound like a great way to spend a weekend, while to others it might seem like a dreaded, even avoided, task. However you view routine home maintenance, the fact of the matter is that this somewhat simple task, if done consistently, can increase your home’s value over time.

Increased Property Value

Benjamin Franklin once said, “An ounce of prevention is worth of a pound of cure.” This is certainly true when it comes to your home. In fact, proactive maintenance is essential to preserving the value of your home. If you ignore this important task, your home could actually lose 10% of its value over time.

There are a number of benefits you can expect from just making sure you home is kept in decent shape with occasional maintenance. For one, your curb appeal is improved by just simple acts of routine upkeep from time to time. Ultimately, your home reflects your attention to detail, or lack thereof.

Neglecting a home can greatly bring down the value of any property. Things like a house with chipped or fading paint, sagging gutters, or worn carpeting leads to a problem when it is time to sell. Not only does the work accumulate over time, so do the costs. A few simple fixes every year can add up to an increased home value over time.

Cost vs. Value

It’s easy to look at the cost of regular home repairs as a burden that might be able to be avoided. However, it is important to look at the value that you are placing in your home by performing the regular costs of upholding a well-built and maintained home.

A study out of the University of Connecticut and Syracuse University suggests that home maintenance can actually increase a home’s value by about 1% each year. Instead of viewing the routine tasks around a home as “chores,” these tasks should be looked at as a money maker. When you sell your home, you will reap their rewards.

Dr. John P. Harding, Professor of Finance and Real Estate at the University of Connecticut’s School of Business and an author of the study said, “It’s like going to the gym. You have to put in the effort to see the results. People and houses are somewhat similar – the older they are, the more work is needed.”

Some years what needs to be down may be more expensive than others, but it is the overall strategy to keep a “fit” home that should be the ultimate goal.

Proactive Maintenance Strategies

Budgeting for home repairs each year will prevent them from seeming like a burden each year. Knowing there will be a certain amount of money going to home repairs and upkeep makes them a regular part of your annual routine. They won’t be a source of financial devastation they can be for many families.

Other things to keep in mind to take the burden out of home maintenance include:

Play offense, not defense. Being proactive is vital in preventing a small problem becoming a mountain of problems. By having a regular inspections and creating a maintenance schedule, you are in control, for the most part, of home expenses, instead of the other way around.

Focus on a room a year. If you home is generally in good order, you may be at a loss of where to start. By targeting a room each year, you can inspect each and every item in that particular room and know where improvements can be made. This prevents an overwhelmed feeling with you looking at your entire house, scratching you head of where to start.

Keep track. Maintain a notebook or computer file to keep track of all of the maintenance and upgrades you perform is important. Also, either keep a physical file of paper receipts or a file on your computer where can put your scanned receipts. This helps you keep track of what you have done and also helps you prove to a potential buyer exactly what you have done to the home. It also shows you are a conscientious homeowner who has paid attention to the details of your home.

Home maintenance is an important task that should not be overlooked. Not only does it maintain a nice home while you live there, it also helps increase your home’s value when you are ready to sell.

For more on home maintenance visit Bob Vila's home maintenance checklist here!