“Short Sale” and “Foreclosure” are two hot topics in South Florida Real Estate. I wanted to discuss my view on what these terms mean, and how they impact both home buyers and home sellers in this market.
A Foreclosure is when the bank, lender, homeowner’s association or other vested party uses the courts to take legal ownership of a property. Most commonly, this occurs when a homeowner stops making mortgage or association payments.
Sometimes a homeowner will “give back”or “walk away” from the property. This is an, “I give up” move on the part of the homeowner. In this instance the homeowner is basically accepting a foreclosure on the banks terms with no involvement in the process.
The critical piece of information here is that when there is a foreclosure, there is a judgement. A judgment is an action by the court which assigns a specific dollar amount owed to the foreclosing party. The judgement can often represent 100% of the outstanding loan or association fee balance.
A Short Sale is a negotiated event. This occurs when the bank agrees to allow clear title to transfer despite there being a stated deficiency at the time of closing. In other words, the bank accepts less than the full amount owed on the mortgage and the homeowner reduces their deficiency all at the same time.
The two biggest benefits of a short sale are:
1. the lender gets something out of a nonperforming loan and can move on to the next
2. the borrower leverages the bank’s desire to move on to negotiate a reduced
deficiency or judgement
A homeowner has a mortgage of $300,000 on a property purchased for $320,000 in 2006. Today, (summer 2012) the market value of this property is $220,000. The homeowner is selling this property.
An offer is made and accepted for $210,000, The bank now must determine whether it is willing to accept $210,000 for its balance of close to $300,000. Assuming the bank goes along with this plan there is now a deficiency of roughly $90,000 owed by the homeowner.
Banks understand the concept of hardship and often (with required documentation) will take less than the $90,000 owed by the borrower. This debt is often reduced by more than 50% and in some cases entirely forgiven.
Back to Foreclosures, there is NO debt reduction or deficiency write down in the event of a Foreclosure. The foreclosed upon parties will be obligated to pay the entire $90,000 or so dollars sited in the example.
A Short Sale is a homeowner’s last chance to negotiate prior to being foreclosed upon. Don’t give up and accept a judgment that you don’t need to own! It is worthwhile to explore Short Sale options for homes with debt balance significantly higher than their current market value.
Home buyers can benefit from a Short Sale transaction in that we now understand that the bank is willing to accept less than what they are owed and a seller is motivated to get a property sold in order to receive the benefit of debt reduction. Armed with these facts a buyer can offer less than full market value with the expectation that the motivation of the seller and the bank may very well lead to an opportunity for the buyer. Be advised, Short Sales can take months and months to complete. The frustratingly slow pace of the process needs to be weighed against benefit of reduced price.
Feel free to call or e-mail me to further discuss this important topic.