Short Sales ‘Affirm Market Has Settled’: Sacramento
A Sacramento area television station has this report on short sales. “Lenders are reporting more home owners are defaulting on their mortgages. But before those defaults turn into foreclosure, some sellers are turning to short sales, if lenders agree.”
“Home owner Gloria Romero bought her three-bedroom home in North Sacramento last year but has to sell it. She has listed the home for $250,000 hoping to cover her mortgage balance. Thursday she received her first offer, $219,000.”
“So, Romero is turning to a short sale instead of letting the bank takeover the house. A short sale is when the lender accepts an offer that is less than the current balance. Not many lenders are accepting these negotiated transactions because it affirms the real estate market has settled from its accelerated growth that drove prices up in the first half of the decade.”
“(Realtor) Scott Williams says his office has gone from no short sales in seven years to nine such transactions in the last few months. ‘Back in the ’90s, I became the short sale guru in Sacramento and did several hundred of them,’ Williams said.”
“The realtor says he’s working with another home owner in Natomas who has to move and has received an offer of $399,000 for her home; about $60,000 less than what she owes on it. Like Romero, the home owner hopes the lender will agree to let the house sell for less than the mortgage balance.”
“Even though a short sale will become part of these homeowners’ financial history, Romero says it’s better than a foreclosure. ‘I don’t want my credit to be really ruined.’”
“There were 37 percent moremortgage defaults statewide in the first three months of this year compared to the same period last year. In Sacramento County, there were 1,140 defaults reported in the first quarter, 2006, and less than half as many, 738, last year at the same time.”
‘it’s better than a foreclosure. ‘I don’t want my credit to be really ruined.’
‘Back in the ’90s, I became the short sale guru in Sacramento and did several hundred of them,’ Williams said’
IMO, this is why low-ball offers are perfectly acceptable. Let the bank take it in the shorts.
I agree with that. If you believe 1999 prices are fair lowball away someone’s gonna take it.
Ditto here….
The bastards are just pirates in brick ships…
Best quote of the day!!
so if you lowball one of these ’short sales’ you’re really making an offer to the bank then, not the seller -meaning the seller could care less what the offer is, is that correct?
To a point yes. Once you get into the area of the seller not making a profit. Your basically talking to the bank. And depending on what they perceive the market to be in that area determines whether or not your lowball is accepted. When dealing with these you are your representative have to be damn good negotiators if your expecting a low-ball to be accepted but it can and has happened.
Someone mentioned earlier that the difference in what was owed (say 500K) and what the offer was (say 450K) for would be treated as income (say50K) is that true? Any info would be appreciated. In case it varies by state I am in CA.
Yep! The seller gets a 1099 for the difference & reported to the IRS - for the forgiven amount.
Enjoy those gifts from the bank!!!
Never mind, someone already answered my question.
Yes, Some people view that as better than taking the credit hit from a BK or foreclosure. Although with prices so out of whack I question that strategy. But then again anyway you look at it your screwed.
AZ_BubblePopper
Thank you for clarifying. Just wanted to make sure the buyer didn’t get taxed….that would not make any sense at all.
I would want the lender to make sure the seller on a short sale doesn’t have any resources left to bring to the table like cash in the Bank . I don’t want the short sale to be a bail out for flippers .
I did a short sale in Ca in 1996. These sellers will get a 1099 for the shorted amount as straight income, then just for fun, the state jumps in for their cut as well. If the original note was not refinanced, a good CPA can get it excused, but if equity was extracted, then the seller DID receive money that was never taxed, and it’s now time to face the music. Nasty letters, leins, and garnishments make the housing ATM fees rather stiff.
?If the original note was not refinanced, a good CPA can get it excused, but if equity was extracted, then the seller DID receive money that was never taxed, and it’s now time to face the music. Nasty letters, leins, and garnishments make the housing ATM fees rather stiff. ”
I’m not sure I follow this logic. A lends B $100. B loses the $100 at the racetrack. A forgives the loan. B is taxed on the forgiveness of debt. How does this differ from where Bank lends B $100. B buys house with proceeds, gains economic benefit from its use, then loses house to bank, who forgives balance of mortgage in excess of value of house? In either case, B gained a taxable economic benefit. The IRS taxes “income, from whatever source derived” (IRC Sec. 63) — it matters not whether the income is in the form of money, or some other form.
win jr.
Your point is well taken, but who ever said the government was logical?
I bought in ‘94 after looking at no less than 50 properties and going through 10 realtors (9 of which were useless). It wasn’t the bottom of the market at that time, but close enough that I knew I was getting a value, and I had a 7.5% fixed loan that I thought was a great deal. Unfortunately, I wasn’t as selective with my choice of spouse, and two years later I woke up to find she found someone she liked better (a subject for a different blog), and all of the accounts suddenly had a balance of zero. I am not as well versed as other contributers here, but I do know first hand how the system works.
I believe the logic (to the IRS) is that a buyer/borrower who found himself upside down, and unable to cover the loss in a short sale (not an investor/speculator who is capable, financial statements are required), the buyer/borrower never actually had cash in hand. However, if a HELOC, or a refinance including a cash out is involved, the borrower now had cash in hand, real money. This play money wasn’t taxable as a loan, since it got payed back with after tax earnings, but with the forgiveness of the debt, the IRS doesn’t consider it play money anymore. It’s now real money the borrower had in hand and spent, and it wasn’t taxed.
Perhaps Getstucco or someone else can explain it better, but this is the way the system works. I will get back in the game again…when I can see the bottom of the trough, but this time I will know to look at more than just what the market is doing.
Even lowball offers are risky on the bidder, so it’s not like you are stealing. Someone pointed out this the other day.
It bears paying attention to when we start snapping up “deals”.
“A short sale is when the lender accepts an offer that is less than the current balance. Not many lenders are accepting these negotiated transactions because it affirms the real estate market has settled from its accelerated growth that drove prices up in the first half of the decade.”
You can run but you cannot hide. The market will eventually affirm the drop in prices no matter how hard these folks work to hide the fact.
This is a repost from me yesterday.
SHORT SALE at Dreamland where everyone want to live.
This is in Camarillo , about 30 miles north of LA, along 101 freeway in Ventura county. Coastal city, Nice weather, low crime…
Troubled owner/flipper: Source Ziprealty.com
Here is one owner/lender selling at a loss. Appears to be a classic SHORT SALE. (Being sold for less than owed)
It says on the listing :
“Drastically reduced! ( offer must be approved by lender)”
5/24/05 Purchased for 683,500.
six month later up for sale at profit :
12/13/05 listed for 770K
1/19/06 reduced to 760K
3/23/06 reduced to 720k
4/19/06 reduced to 699K
5/17/06 reduced to 649k!
No sale yet…YOY sale came down a big 41% last time sales volume data was released. Doubtful it will even sell at this price…
Zillow.com still has Estimate of 739K , ($665,849 - $806,417 ). What will happen to comp when this sells:-(
http://tinyurl.com/q7q3g
And Oh yes, you will notice it also says ” Please Bring All Offers”
Someone wants out for sure.
Camarillo is still west of los Angeles just like yesterday as well.
Camarillo is no more “coastal” than Inglewood for that matter as both are equally as far from the beach.
West it is! You are right, but Can I keep the “coastal” please
LMAO, No you cannot it’s like saying Los Feliz is coastal. Shame on you for suggesting it. LOL j/k
It’s a deal. My Camarillo backyard:
http://users.adelphia.net/~techscan/Backyard2.jpg
Inglewood it ain’t.
Robert: great ocean view! But I didn’t know the ocean was green and leafy!
Clouseau
well what about the dreaded mulholland “claw” ?
give me inglewood anyday
robert
you seem to be familiar with the area.
what about those homes opp tecnhicolor, after santarosa exit while heading north towards camarillo.
So many condos/homes being built in what was once a buewtiful farm land.
any ideas…. will they sell, r they sold???
Camarillo has one of the best climates in the US if not the world. National Geographic placed it 19th at one time as one of the best climates in the world to live. It also lies on the Oxnard plain that has one of the best farm lands in the US. It is ten miles from the ocean and you do have ocean view if you live on the heights. The tremendous growth in Camarillo is because of Amgen in Thousand Oaks and the advent of the new university. As for the new homes on the south side of the freeway, yes they are selling but with IO or ARM loans. Once these construction guys finish they will realize they have no more work. You already see pickups and Dooley’s with Arizona and Nevada plates all over the area looking for work. Watch for the fire sale of Jet ski’s and ski boats around November. Then the pick-up trucks and the wife’s Tahoe will also be on the market. I am in construction in the Ventura/Santa Barbara area and one can see the slow down and the new out of state worker applications. Yes, finish carpenters were golden one year ago, now they are a dime a dozen. Poor guys never saved a penny and blew it all on big F250 and Suburbans for the misses. Now they have to wait at least ten years for the next cycle.
west of los angeles is santa barbara island cammarillo is west nw
i fish therefore i am
I guess we are addicted to this blog …
I posted this yesterday in another thread, but it is more relevant here. I am beginning to observe short sales in Pasadena and Altadena, something unthinkable a few months ago. The asking prices are still ridiculous, but it is a good indicator of distress. Hopefully it won’t stop here.
These two sellers are asking slightly above of what they pay in 04:
3715 N HOLLINGSWORTH RD, Altadena, CA 91001
“Fabulous opportunity to live in la vina: great view site, popular stehman plan, five bedrooms or four plus media/family room upstairs and large family room downstairs adjacent to kitchen with wood floors, stone counters; four and a half baths; dining room; formal entry with curving staircase; attached double garage. Probate sale subject to court confirmation: 10% deposit required.”
1714 ASBURY DR, Pasadena, CA 91104
“Fixer…In forclosure…Subject to short sale approval by lender…Your opportunity to be the next proud owner of this nice spanish style home with a sparkling swimming pool. Huege double lot 17,288 square feet! Possible lot split? Please verify with city. To be sold in as is condition.”
Short sales…another “soft landing” phenomenon, right? The downturn has only just begun, fasten your seatbelts…
Judicious1-
Short sales are an indication that the “soft landing” nonsense was toast before it even got started
I told you Sacramento was “different”. Problem is, the difference is that it always had a nasty reputation for RE. When I was still in SoCal I personally knew people who had a rough time selling homes in the late 80s (FIL) and mid to late ’90s (co-worker). Both waited years to sell and both lost money even after trying to wait the cycle out.
I guess we’re just witnessing this decade’s batch of RE bad luck stories. What a short memory people have!
I forgot to mention both the homes I’m referring to were in Sacramento. The obvious difference was we’re talking about people not getting their asking price of approx. $150K but having to settle for $120K. Some sellers in the very near future will realize actual losses in the $100,000 and above range. It’s surreal to even image that kind of loss.
I think there’s something steamy in those shorts, it’s soft and it’s coming in for a landing.
I LOLed!
Someone please enlighten me about “short sales.”
Wouldn’t that still mean essentially the same on someone’s credit report as a foreclosure? After all, the bank still isn’t getting all the money that is due.
Let’s say that, during a short-lived housing boom, Joe buys a real estate investment property in Arizona for $150,000. He puts down $30,000 and takes a $120,000 mortgage loan from Sunburn Bank and Trust (SBT) and, immediately after closing, a second mortgage loan for $10,000 from his credit union to make improvements to the property. He rents the property out for a year or two, nicely covering his mortgage payments then, just as he is about to sell and take his profit, the local economy hits the wall. First Joe has trouble renting the property for enough to cover his mortgage payments and then loses his own job, runs through his savings, and begins to fall behind both on his home mortgage and the first and second mortgages on the investment property.
The banks are calling him weekly but Joe claims he can do nothing. His unemployment insurance is gone, both houses are for sale with no takers, and his last tenant left owing two months rent after virtually trashing the place.
SBT hires an appraiser to inspect the investment property and he reports that it appears to be in bad shape and probably not worth anywhere near the $120,000 that Joe owes the bank. The bank’s loss mitigation specialist estimates that a non-judicial foreclosure will cost about $4,000 and there are property taxes due in the amount of $800. The appraiser estimated repairs in the amount of $5,000. With the second mortgage still outstanding, the bank is looking at a substantial loss.
The bank has several options.
Foreclosure is the most obvious recourse. While it seems unlikely that the bank can sell the house at auction for enough to cover the mortgage amount and legal fees, foreclosure would at least wipe out the second mortgage.
If there is a shortfall following foreclosure the bank could seek a judgment against Joe for the balance owed. It looks, however, that he might be the proverbial turnip out of which one cannot extract blood.
A workout or restructure of the loan also looks futile. Joe is clearly underwater so it is unlikely that he would be able to pay any restructured amount that the bank might propose.
The bank could accept a Deed-in-Lieu-of-Foreclosure in which Joe would sign over all rights to the house. The bank, in return, might promise to forgive Joe the balance of the debt owed. This, however, still leaves the bank faced with the outstanding tax bill, some legal fees, and the second mortgage.
Or they could search (or encourage Joe to search) for a private party who would buy the property possibly even before foreclosure begins.
Joe has had the property on the market for some time so apparently the amount needed to pay off the first and second mortgagees and the back taxes (and possibly a real estate commission) is more than the market will bear.
It looks like everyone in this deal, except for the city which will collect its taxes no matter what, is going to get burned.
And that is where a real estate short sale comes in.
We have painted an unusually complicated scenario in order to demonstrate some alternatives that might take place.
Let’s say that Joe’s friend Carl has had his eye on the investment property and is willing to pay $115,000, even in the current depressed market. He approaches Joe with this offer.
Joe has already given up on the idea of recouping his original $30,000 investment and just wants to get out with his credit history somewhat intact and without the possibility of a summary judgment against him for any shortfalls on the payoff to first and second mortgagees.
The $115,000 offer that Joe presents to Sunburn B&T looks like the answer to both their dreams. Granted, the bank is owed around $120,000 on the original loan along with several months’ unpaid interest and some appraisal and collections expenses, but it is still facing $4,000 in legal fees and, if the property does not sell at auction, a second mortgage (which may have to be paid off immediately after the new deed is filed) $800 in property taxes, and untold future expenses managing and marketing the property and making needed repairs to keep the property from deteriorating any further.
The bank might be delighted to take the $115,000 offer but there are still the issues of the second mortgage and the tax bill. Carl will have to pay the taxes before closing on the house so the big problem is the second mortgage. Carl however, can negotiate that just as he has the first mortgagee. SB&T will probably encourage Carl to approach the credit union with a nominal offer to release its second mortgage and might even offer to reduce its payoff a thousand or two to assist in the negotiation. The CU is not in a position to argue as a foreclosure by SB&T will wipe out their lien position although a deed transfer in lieu of foreclosure would put them in the catbird seat. Any pre-emptive strike by the CU to foreclose would force them to pay off Sunburn’s senior $120,000 mortgage to recoup its $10,000 second - not a smart move to explain to your shareholders.
Both lenders will have to jump through some regulatory hoops to prove that the deal is the best they can do - a formal appraisal of the property, financial statements and possibly an asset search to prove that Joe is in financial extremis - but basically such a real estate short sale can ultimately work to everyone’s satisfaction.
So it is possible that Carl will buy the property for $115,000 to $120,000, Joe will walk away a free man with only the remainder of his financial collapse to worry about, and Sunburn Bank and Trust will clear somewhere in the vicinity of $113,000 to $115,000, a loss of only $5,000 - 7,000 to explain to their stockholders and federal regulators.
Excellent explanation Crispy
Very nice explanation. Always learning on this blog.
Crispy & Cole,
Thank you for the details!
“He puts down $30,000 and takes a $120,000 mortgage loan from Sunburn Bank and Trust (SBT) and, immediately after closing, a second mortgage loan for $10,000 from his credit union to make improvements to the property.”
What does it mean to “put money down”?
Thank you…very clear. My only question is whether the hordes of short sellers/flippers will have a credit “Scarlet Letter” imprinted on them? There has to be SOME penalty for what they have done not just to themselves, but to everyone else.
Handing flippers a “get out of jail free card” will just encourage their “nothing to lose” mentality.
Unaccountability seems to be rampant these days. It makes those of us who keep our financially prudent noses to the grindstone wondering whether we are just grinding our noses flat.
The bank takes the loss, which is usually very unpopular with shareholders. And the above example didn’t mention any real estate commissions, which would normally have to be paid I think.
So, Joe has a trashed credit history. The banks have an increasing portfolio of “non-performing” loans, and straight out losses. A large number of these mortgages are processed and packaged through FNM and FRE to get the implied government guarentee, and then sold back to the banks, mutual funds, foreign investors, etc.
Ultimately, I think it’s going to be the average taxpayer to bail this mess out, via huge cash payments to FNM and FRE to make sure the bonds don’t default. It will be a scale that dwarfs the S&L bailout in the 80’s. If the bonds default, the banks are toast. GNMA bonds look real risky these days!
Perhaps the government can print more dollars to pay
the bonds? That’ll keep everyone happy.
Thank you for a very clear explanation. Great post.
I believe it’s not as bad, because with a “take-it-in-the-shorts” sale, the bank does not have to go through the headache ($$$$) of (A) taking possession of the property (which I think can take mos-yrs) and (B) selling it. Pluse foreclosed properties would sell for less $$$ I believe (auctioning, etc.).
Someone correct me if wrong here.
No, they are the ones “taking it in the shorts”.
Wow… didn’t expect that it would accelerate this quickly. At Christmas nobody was talking about foreclosures and short sales and yet here we have the media telling us about it.
This is going to be nasty !
This is just the beginning, IMO. The tide is ever so slowly going out. With prices stagnant and $2T+ ARMs yet to reset… Gives me the creepy crawlies just thinking about how big this thing could end up being. History in the making, no doubt.
We discused all this happening on this blog a year ago. I blown away at how accurate some people have been.
being relatively new to this blog (few months), I take it there’s no archives here, or past articles saved anywhere?
There is an archive at the bottom of the linklist on the main page. You can also search this blog for specific topics. Ben has done a great job documenting this bubble.
Just click on the calendar on the sidebar to the right to view previous posts.
Llrenter,
Be aware this address is the 3rd home of this blog, I think because Ben had volume troubles with Google’s hosting of the 1st and 2nd. If you want to go a long way back you need to look at http://www.thehousingbubble2.blogspot.com and http://www.thehousingbubble.blogspot.com
excellent, thank you.
You’re right, about a year ago…when the “maestro” was mentioning “signs of froth”.
What a mess he left behind. Helicopter Ben is now holding the bag, and when things get ugly the average indebted consumer will be saying “we need the maestro back…”.
sit tight grasshopper u aint seen the half of it
It really is amazing that it is happening in the spring as well. I would have pegged the fall for the major downdraft. This fall is going to be worse than this and thank god I am not a flipper!
God, imagine NEXT summer.
RealtyTrac, an industry organization that maintains a nationwide database of foreclosures, says mortgage defaults between January and March of this year numbered 323,102 compared with 188,122 during the same period last year — an increase of 72 percent.
http://tinyurl.com/guss8
Oops! Meant to make a comment. If foreclosures are already up before the ARM resets and while the economy is relatively sound what will happen if that is no longer the case. As one guy said from an article I posted earlier: “…foreclosures are a lagging indicator…” Wow, think what this first wave of defaults must be dragging behing them. oogoly boogoly!!!
No increase YOY by August in the OC. So all those people bragging last summer about their gains will be bookended by all those people this year asking “where are my gains?” and “you mean my loan payment is increasing?” I have a relative who actually asked for an advance on his “inheritance” so pay down his mortgage (he is SO stressed with the reset on his payment). His dad isn’t even sick yet - although probably now embarrassed to death by his son.
“Hey Dad?”
“Yes, son?”
“When are you going to die?”
“What?”
“Just wondering… when are you planning on dying?”
“Not for awhile son.”
“Really?”
Awkward silence.
“Really.”
“Oh.”
Another awkward silence.
“Can I borrow twenty grand?”
These short sales are actually good news, because they allow the price to fall and transactions to take place. I guess that mortgage lenders are willing to write off a portion of the loan rather than dealing with foreclosure and selling the house.
I wonder what is the max that lenders are willing to forgive? It will depend on how “expensive” it is to foreclose and sell the home. Any ideas?
Depending on the lender mileage will vary. I expect the most flexibility in the 80/20 stuff.
I believe they prefer short sales because they eliminate the liability of being the owner and it is much quicker…
Banks don’t want to own property. They want to sell it before foreclosure if at all possible…foreclosure is costly to them. If they deem the amt. reasonable…then we get the short sale. The seller still has to pay taxes on the differencea…as though he/she covered the loan. For us bears…short sales are a mighty good thing to see so soon in the game!
So banks are in the business of losing $60,000 because the market turned down? Short sales aren’t that easy to get thru. The agent who said he got 200 thru during the last down turn out of the 1000’s of foreclosures in Sacremento. It ain’t that easy, just more denial talk,
Your right they aren’t that easy. Actually they are quite complicated and why you have a lot of turn downs. Not because the bank is resistant or hesitant to do so but you actually have to prove your case. Which a lot don’t do. I mean if you still have your job and are current on your hummer and cell phone bill but claim you can’t make your house note how do you expect approval. A lot of folks realtors included don’t get that aspect. They believe cable and cellphones are neccessary day to day expenses typically the lender does not.
Exactly. If a Chapter 7 Trustee or U.S. Trustee will kick out your bk schedules for it, a lender sure as hell isn’t going to let you off the hook. You should see some of the shit people put on bankruptcy schedules while stiffing huge amounts of debt. It would be funny if it weren’t so aggravating. Happily, the UST doesn’t let them get away with it.
Yes. I would expect the lenders in Florida will go to the front of the short sale class, given how expensive homeowners insurance has become.
What may make it tough to get a short sale through is multiple lenders when 2nds, 3rds and HELOCs are in the mix. Then there’s an order and the lender in the first spot might not be inclined to go for the short sale since he’s the first in line at auction.
No actually when a property is encumbered like that it makes it easier. 2nd’s, 3rd’s and Heloc’s drop their shorts right away for pennies on the dollar. When a first see’s that it makes them think about getting what they can while the getting is good.
Think about it if the 2nd and 3rd have already dropped their pants that means the market is FUBAR typically. Why would you take something back increasing your liability and cost when you could just dump it now 20k under what you’re in it for.
Here’s why. I’m the primary lienholder and hold 75% of the outstanding debt. The short sale is for 20% off. Unless the secondary lienholders are willing to lose almost everything I say no deal. Let it go to auction and I get all of my $$$$ back. I can see letting a few grand go but that’s it.
I agree with that we’re saying the same thing. In my scenario 2nd’s, 3rd’s and Heloc’s take pennie’s on the dollar. Actually if a property has a 2nd or a 3rd the loss to the first is nominal unless the market is 50% total encumberance.
I agree with that we’re saying the same thing. In my scenario 2nd’s, 3rd’s and Heloc’s take pennys on the dollar. Actually if a property has a 2nd or a 3rd the loss to the first is nominal unless the market is 50% total encumberance.
The first lender probably prefers the short sale since he will most likely get fully compensated or lose very little (% wise anyhow). It’s #2 and so on who know they will get stiffed for most or all of the loan and will fight the short sale. That’s why it’s a whole lot easier to get a short sale with only one lender. The first lender stands to lose a lot less of the overall amount.
Any of the lenders can force a foreclosure, but the primary note holder gets money first, so they’re most likely to press the issue. Second mortgages used to carry a lot higher interest penalty because the money is far less secure.
They also reveal missing information about the true market value which is well hidden in those growing inventory mountains (we know it is lower than what sellers are asking, but not by how much) and they will help restore equilibrium to the market, as sellers will face short sales results as comps.
“Home owner Gloria Romero bought her three-bedroom home in North Sacramento last year but has to sell it. She has listed the home for $250,000 hoping to cover her mortgage balance. Thursday she received her first offer, $219,000.”
Crap, a sibling bought a 4BR place in North Sac last summer for $475K, they are truly toast…
only if they use zero down, with IO and ARMs.
Regardless, their house is worth less than what they had paid for.
Ben, this should be a weekend topic: “Lenders are reporting more home owners are defaulting on their mortgages. But before those defaults turn into foreclosure, some sellers are turning to short sales, if lenders agree.”
That is, on a short sale do you get a 1099 for added income? If true you can’t get rid of the tax liability by filing BK. Yet, if you choose to stay put and let the property go into foreclosure, can’t you get 3-4 months free rent before eviction? If you are at a low income level BK should wipe out all debt and you have more disposable from the start; the other poor slob could be stuck with a $100K gift to pay off…if that’s the case bring on foreclosure.
The bank looses in foreclosure (lengthly process) because the neighborhood will have boarded up houses, weeds for yards, trash piled up and other home owners will be unable to sell at decent prices.
You can get rid of the tax liability if you truly have no assets.
Not exactly true. You also must demonstrate virtually nil net income stream over the coming 5 year period.
Pulte warns, 25% cut in earnings forecast for the year. This should be fun.
The PPT will have to keep its presses busy to keep a lid on these dogs.
http://news.moneycentral.msn.com/provider/providerarticle.asp?feed=FT&Date=20060602&ID=5766904
This from Realitytimes:
A short sale occurs when a lender agrees to write off the portion of a mortgage that’s higher than the value of a home. A buyer must be willing to purchase the property.
The strategy can offer a softer financial landing than bankruptcies or foreclosures, provided you survive the turbulence on the way down.
A difficult consumer real estate transaction to approve, short sales involve as much, if not more paperwork than an original mortgage application.
Instead of proving your credit worthiness and financial stability, you must prove you are broke. You must be without cash flow, including savings, investments, trusts, liquid retirement funds or other finances to tap.
Ironically, while you are proving insolvency you also may reveal the dark under side of your original application. Insolvency today could be rooted in financial trouble that began before you purchased your home — trouble you didn’t reveal to your lender who could now consider your tight lip fraud from the past.
Property encumbered by a second mortgage will likely kill a short sale deal, because the second lender often won’t remove its lien and risk losing its investment. A private mortgage insurance holder will also want to protect its interests.
Before you can even approach the lender you must have a firm market-value offer from a qualified buyer and a broker who can negotiate the deal.
And when you can least afford it, you may have to hire an attorney to negotiate what the lender will report to the credit agency.
If you qualify for the short sale, it isn’t over until the tax collector sings.
Any remaining difference between your home’s value and the balance on your mortgage is considered a forgiveness of debt and, in virtually all cases, that’s income that is taxable.
Chalk up another expense for a good tax professional to hold your hand.
The bottom line one short sales? Be aware. Be very aware of the devil in the details.
Good stuff!!
Good post …..People should realize that you really have to be broke in every way to qualify for a short sale . I know someone who got approval on a short sale once . They had put 100K in the house ,had lowered the price by 100K ,and still no bites in a prior turndown ,(this was a expensive house in those days ). I quess the lender felt this borrower/seller had taken enough of a beating and had done everything they could to get the house sold .The problem with the house was that it was sitting next to cheaper houses and it was a 3000sq foot house in a 1200 square ft. area . The seller bought it right when the market turned ,but it was a elephant because of the location .
I knew another person at that same time that had to bring alot of money to the table to get the house sold because it was a second house they had when the market turned .
“The problem with the house was that it was sitting next to cheaper houses and it was a 3000sq foot house in a 1200 square ft. area .”
Never buy the castle on the block! Sheesh RE-101!!
So retirement funds (IRAs, 401k) can’t be protected in a short sale? Goodness, people really are going to end up wiped out. And I assume liquidated retirement funds are still subject to the tax on gains and the 10% withdrawal penalty.
And you have to have a willing buyer with a firm offer, too. Just wait until the ratio of offers to sellers dwindles further.
Bankruptcy is more appealing, IMO.
There are worse things than getting your credit ruined.
Bad credit is likely to keep these FBs out of trouble for a few years, anyway.
On one hand the short sales are a good idea to stabilize the market (which is bad from my point of view as a potential buyer). On the other hand, I disagree with Thornburg that this will be a slow drop. Oh, at first I think it will. But every economist starts going into how people *need* a home; that’s fine. What I disagree with is the shear number of 2nd homes. Those people must sell.
I just wish there was a way to determine the owner occupancy rate of any zip code…
salinasron has a good point that in a few years it might be better for the “short sellers” to go BK. By wipping out the debt in BK they avoid the 1099 and thus avoid the “unavoidable” taxes as I understand it.
I think we’ll still have a strong summer and then… oh, the fall. Beware the ides of October.
Neil
Comment to my own post: I found Thornburg’s statistics from the UCSD economics conference facinating. How in the heck could there not be a faster downturn when the top employement growth in CA has been:
#1: Construction workers (for houses)
#2: Mortgage and other real estate transaction workers
#3: Durable retail (Home Depot and others who sell to new home owners)
But hey, let’s see if I’m wrong.
Neil
Neil,
I do not think you are wrong on this one, to reply to your earlier post on 2nd homes by zip code. Your best bet is to go to the open houses to see how many of them are vacant. Remember though that if it looks like a model home, and it appears no one lives there….they rented the furniture. Check the closets.
A quick reply to Waiting in SD:
Your advice is good advice. Last weekend my girlfriend and I toured a bunch of open houses… Every single home was vacant. I’ve posted before how amused we were at the prevalence of mini-twin beds (rented model furniture). One place looked like the home of the munchkins, so I peaked in the closets (as you suggest) and found… nothing!
These were homes in areas I would either love to live in or might “settle” to live in. The reality is if these homes were at
check the kitchen drawer for cutlery, check the tiny bedroom with a dresser and large plant but no bed
Neil,
A short sale means that the selling price has fallen (if a short isn’t allowed, then the seller needs to bring money to the table, which makes the sale less likely). Potential buyers should love short sales, because it allows the seller to sell for a lower price.
Neil,
If can spring $300 for MS- Mappoint that comes bundled with a bunch of demographic data (including % owner occupier) by zip code and even at the census tract level. You can do your own maps.
Devo
Please tell me more about MS-mappoint. For $300, the “peace of mind” for such information would certainly be worth it. By “MS-mappoint” is that “microsoft-mappoint” as in software or something else?
Neil-
Why must second home owners sell? Maybe they have great appreciation and income. I would never consider a second home because I’d rather ensure my family’s future than either speculate on real estate or have a trophy property to brag about costing 10x the rate for the best hotel for the same amount of time used, and without all of the attendant hassle.
But I am not them. Why do they have to sell in what’s been an (up-to-now) appreciating market? Do we have any idea if buyers of second homes put less down or used riskier financing?
“In Sacramento County, there were 1,140 defaults reported in the first quarter, 2006, and less than half as many, 738, last year at the same time.”
I’m sorry, but is 738 “less than half” of 1140?
Perhaps they’ve been reading the NAR handbook of mathematics.
Maybe they meant: defaults are up by more than 50% compared to last year???
Liareah gives me diarrhea: “If the economy stays healthy and creates jobs, you may see these foreclosure rates actually go down in some of these cities,” says David Lereah, chief economist at the National Association of Realtors.
Meantime, foreclosure auctions are filling up, with houses too pricey for many to keep.
There is no stormy cloud where he can’t find the silver lining. He makes me queasy.
The hilarious thing is going to see how the housing idiot bulls like Lereah sidestep the “employment growth sinking” news that we got today. All along, they’ve been saying higher rates and speculative froth won’t hurt the housing market because the economy is strong and job growth is great. Well, in May we created half the jobs Wall Street was looking for and there was widespread weakness once you read the details. So how do you explain that away?
If the economy craters, I half expect Lereah and the rest of those idiots to say “But that’s actually good — we love 15% unemployment because it means interest rates are 3%!” No I don’t really think those numbers are realistic, but you get my drift.
I got it. I got it!
Short Sale= Soft Landing
Foreclosure=Hard Landing!
A mortgage servicer can approve a short sale depending on the circumstances. Usually the borrower has missed some payments and does not look like he will be able to keep the house. The lender looks at the amount short compared to the costs and trouble of foreclosure, market value, marketing time, etc. If it is a portfolio lender (owns the loan vs loan in a mortgage security) they also look at having this move from a performing to non-performing asset (REO.) IF it makes sense they will approve the sale. The borrower gets a 1099 for forgiveness of debt.
Depending on how the lender reports this, it could affect a persons credit report.
For some reason, this is what’s standing out: Home owner Gloria Romero bought her three-bedroom home in North Sacramento last year BUT has to sell it.
As if buying a house one year and then selling it the next were the norm, or the healthy thing to do. Why do the media insist on buying into this crap? If you buy a house and then six months later HAVE to sell it, you’ve either had some life-altering emergency thing happen or your finances are way, way screwed up.
Good point bubblewatcher . It’s not normal to sell a house within a year of purchase . Is Gloria really a flipper ? Did she run into medical problems , did she lose her job , did her employer transfer her ,or was she going for a quick flip ?
The party hasn’t even started yet, and people are already in trouble. What will it be like when we hit into recession early next year. Financial disaster in the works. It’s like watching a slowly moving tornado coming your way.
Learning man it has, for me over these last 3 years, been like watching a slow motion train collision. The direction of the two trains and their eventual fate has been obvious and now the faces of the passengers can be seen in the stories on this blog.
Don’t know if this story made it to the blog, yet. The News-Press in Fort Myers has this story about foreclosures in SW FLA with the investment buzzards flying about ready to “help” folks out of a jam. When you see these stories, you know the real estate market has completely hit the wall.
http://www.news-press.com/apps/pbcs.dll/article?AID=/20060601/RE/606010308/1076
Oh, and I love this quote about the new breed of real estate investor:
“So far, he said, he has used home-equity lines of credit to purchase four homes in foreclosure. He has sold two of them, he said, clearing about $160,000 in profits. Though he expects some transactions to be less lucrative, Termine predicts he can easily earn a six-figure annual income. One sign of his confidence: he bought himself an $82,000 red Porsche Carrera late last year.”
If you’re living at The Ritz, but can only afford Holiday Inn, someone is eventually going to start knocking on your door.