The difference between a short sale and a foreclosure is that with a short sale the seller still has control of the property, whereas a foreclosure is bank owned, (and also called a REO, real estate owned).

Here are the definitions:

A short sale is a sale which the sale proceeds fall short of the balance owed on the property’s mortgage. Typically this occurs when a borrower (seller) cannot make the payments on their loan. The lender decides that selling the property at a loss is better than the cost of foreclosing, which can cost the lender upwards of $70,000-$80,000!  Both parties must consent to the short sale process. This agreement does not necessarily release the borrower from the obligation to pay the remaining balance of the loan, known as the deficiency.

Foreclosure is the legal process by which a lender (can be the 1st or 2nd lien holder), repossess a property after the borrower (owner) has failed to comply to the terms of the mortgage. The most common violation of the mortgage is a default in the payments of the promissory note. When the process is complete, the lender can sell the property and keep the proceeds (if any) to pay off its mortgage and any legal costs, and it is typically said that “the lender has foreclosed its mortgage”. If the promissory note was made with a recourse clause (Florida is a recourse state) and then if the (foreclosure) sale does not bring enough to pay the existing balance of principal and fees, the lender can file a claim for a deficiency judgment (against the borrower).

Other lien holders can also foreclose the owner’s right of redemption for other debts, such as for overdue taxes, unpaid contractors’ bills or overdue homeowners’ association dues or assessments.

When you purchase a property, with a mortgage, the promissory note describes the payments, interest rate and additional terms (30 year, 15 year, etc.) and is the promise to repay the money borrowed. A mortgage is security for the debt (note).

RUMOR: Short sales are a great deal.
FACT: Banks are NOT giving anything away.

Everyday I have buyers telling me they want a short sale because they think it’s a “deal”. My question to them is: “Are you willing to wait 90-120 days just to get a response from the lender, with NO guarantee the lender will even accept the offer”? From the day a short sale goes under contract to the day of closing can be 4-6 months! Is it really worth waiting 6 months – to most likely be disappointed in the long run?

Tired of Waiting?

Recently, I had a buyer get frustrated and did not want to extend his contract. I encouraged him to allow at least 120 days for a response from the lender, but he would only do 90. In the end, he grew weary…said he knew it would take time but didn’t believe it would take this long; (even after I said it would be 4-6 months). At one point he believed the seller was taking his time so he could collect the rental income thru our peak rental season. Not so at all…on this transaction, Bank of America was the lender. Right there it tells us it’s going to be at least 120 days for a response.

Banks are overwhelmed. Everyday they receive thousands of new short sale files. If a negotiator spends only 15 minutes per file, that’s 4 per hour or 32 in an 8 hour day. Once they move onto the next file, yours goes to the bottom.

My experience has been that buyers grow weary and don’t want to wait, even though they say otherwise. If it’s really a “deal” you are looking for…compare today’s prices with those of a few years ago, they are no doubt a bargain.

According to The Associated Press, Nevada, Michigan, Florida lead ‘underwater’ list:

It is said that almost half of Nevada homeowners with a mortgage owe more to the bank than their homes are worth. Add in the homeowners in the same situation in California, Arizona, Florida, Georgia and Michigan, and together they account for nearly 60 percent of all homeowners who are “underwater” on their mortgages. Nationwide, it’s about 1 out of 5 homeowners who are underwater.

Some experts predict the problem will get much worse, others feel we are at the bottom. Remember real estate is localized, so some areas just might be at their bottom. In my opinion, I believe the worst is yet to come (in a majority of the states). My area “topped” in June 2005, where as NY topped around Dec. 2007. Buyers who got the adjustable mortgages (or negative amoritization loans) are seeing their payments adjust. And depending on the terms (1 year, 3 year, or 5 year adjustable), will depend on when the homeowner/investor gets into trouble with the higher payments.

According to Nouriel Roubini: Nationally, home prices are already down about 20 percent from their peak in mid-2006. By the time the housing market hits bottom, prices may be down 40 percent from the top, leaving 40 percent of homeowners underwater, according to Nouriel Roubini, economics professor at New York University.

“There is a huge incentive to walk away from your mortgage,” said Roubini, who has attracted attention for his gloomy – and accurate – predictions of the U.S. financial market meltdown. He gave no forecast for when the real estate market would bottom out.

Think of it this way…the investor can’t refinance to get a lower payment because their property won’t appraise…they owe more than it’s worth and they can’t afford to bring the difference to closing. The bank won’t work with them until they are behind, and then if they get behind, it will hit their credit, therefore not allowing them to refinance anyway! If your credit is going to be ruined, because of late payments, why not just walk away?? I’m not saying walking away is the right thing to do, but what other options does the person have? The bailout plan is not going to be able help everyone.

The problem is much worse in suburban neighborhoods where builders flooded the market with new homes and buyers put down small, or no, down payments. Look at Atlanta (I lived there for 12 years so I am very familar with that market). When I moved to Florida in 2004 there were about 3000 homes hitting some stage of Foreclosure every month. That number has skyrocketed to over 7000 per month! Back then there were not enough investors to buy the ones that actually were sold on the courthouse steps.

Looks like there will be some incredible buys for investors and even those who want to purchase a primary residence (or 2nd home in my area). My advice would be to make sure you work with a Realtor who is familiar with short sales and foreclosures.

For more information about real estate along the Emerald Coast visit my website.

Debbie James
850.450.2000

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I’ve had a lot of people ask me what the difference is between these 2, so I thought I would help clarify…

Question #1: Short Sales versus Foreclosure Sales – What is the difference between a Short Sale and a Foreclosure Sale?

Answer: Foreclosure – “The legal process in which a mortgagee (lender) forces the sale of a property to recover all or part of a loan on which the mortgagor (borrower) has defaulted.” (The Dictionary of Real Estate Appraisal)

Short Sales are not Foreclosure Sales but they are sales which have some duress involved. In Short Sales, the owner often owes more on the home than it is worth, and is generally behind on the payments (also referred to as being in an “upside-down” position). The lender, hoping to avoid the expense and time involved in a foreclosure, allows the owner to list the property, with the condition that the lender can approve the sale price. The agreement may relieve the owner from an obligation to pay for the loss, or it may leave the owner open to a deficiency judgment, depending on the agreement. As a result of a Short Sale, the borrower may also face additional tax consequences as the forgiven debt may be considered as income.

In contrast, a true Foreclosure Sale is one that is generally auctioned off at the courthouse steps, and the buyer has to produce a cashier’s check for the full amount to purchase it.

Since Short Sales are advertised in the MLS, just like any other sale, they affect the market much more than Foreclosure Sales, which are available only to those who have cash and the time to research the properties they want to buy. The research is important because buyers can purchase a second trust deed instead of a first trust deed by mistake if they do not know the lien history.

So, should an appraiser use Short Sales as comparables in an appraisal? If they are common, many believe they should be included because they have become the market. Some argue that they may be in substandard condition, and if this is the case, adjustments can be made just as they would be for any other sale. Another consideration is that if Short Sales are relied upon, conditions of sale verification with the lender can be difficult if not impossible. In addition, the Short Sale sales price may reflect the lender’s motivations and business needs (i.e., number of potential loans in default) rather than “market value.”

If the appraiser decides not to include Short Sales, it is highly recommended they be noted in the appraisal with an explanation as to why they were not used. Short Sales may also be a predictor of where the market is going, for once buyers see the latest Short Sale prices, they often do not want to pay more.

For more information about real estate along the Emerald Coast visit my website.

Debbie James
850.450.2000

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We made it thru Tropical Storm, Faye. Got lots of well needed rain and here comes Gustov. Looks like we dodged another bullet, though. It’s going to our neighbors to our west. According to The Weather Channel, Gustov is going to hit somewhere along the Louisanna coast or Texas coast. The center of the cone is just west of New Orleans. The Northeast quadrant of a hurricane is the worst place to be. And unfortunately for New Orleans, they might end up there. Thankfully, they are taking this seriously and doing a great job of evacuating everyone.

I wish I had a dollar for everyone that has asked me that question. (In 5 or so years from now, we will know). it is a fair question, though. Here are my thoughts…I think we are close to the bottom, in my area. Remember that real estate is localized. The area where I live is a resort destination. It’s not a “city” like New York, Atlanta, Houston or Los Angeles. I lived in Atlanta for 12 years and invested in houses. (I am very familiar with their market and I think they have a longer time frame before they hit bottom). Prices are back to 2002/2003 prices. Buyers are coming back and looking. Investors are buying again. There are a lot of cash transactions (sorry to all my lender friends out there). All great indications. Buyers who couldn’t afford to buy a couple of years ago, are now able to afford a condo or home. Even though lending has tightened, interest rates are still low.

Before any market can turn to a seller’s market again, the inventory must go down and prices must stabilize. We are starting to see more and more short sales and foreclosures. Sellers have tried to hold on. They can’t refinance their property as they owe too much and it won’t appraise, the 3-year adjustable mortgages have adjusted and will continue, so sellers just quit making payments.

In my opinion, my area, will be a buyer’s market for at least another year. Since this area is a resort town, many buyers want to own a condo on the beach, a 2nd home or even retire here. We have the most beautiful beaches in the USA! (The photo in the header of my blog is our beach!!! White sand with emerald green water). Baby boomers are selling their homes in the North/mid-west and buying here. Unbeknownst to many, we have 4 seasons…winter is VERY short…just the way I love it!

In upcoming blogs, I will have video of different areas around town. If you’ve never been here before you are truly going to be amazed at our little piece of paradise! We are the #2 drive-to vacation destination, behind Orlando. With gas prices skyrocketing and the new Panama City International Airport opening in (hopefully) 2010, we could just reach #1.

For more information about real estate along the Emerald Coast visit my website.

Debbie James
850.450.2000

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