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What is a short sale?

February 19th, 2008 · 6 Comments

A “Short Sale” is a sale of real property in which the outstanding obligations (loan balances) are greater than the amount that the property can be sold for.  This is typically the case when home prices are falling, and the seller has financial distress from either a reduction in income or an increase in monthly loan payments such a re-casting of the existing rate. Successfully completing a short sale may have a far less negative impact on the seller’s credit and tax circumstances than a foreclosure would.  A foreclosure will severely damage the borrower’s credit score for the next 7-10 years, and rates on any future loans they apply for during that time will have interest payments based on about 3 times what prevailing interest rates are.

A short sale is typically done during the foreclosure process, after a Notice of Default” has been filed. A short sale will stop the Trustee Sale which concludes the foreclosure process.

At this point, you may be thinking to yourself, “Why in the world would a bank agree to a short sale?” The answer is fairly simple:

Banks are in the business of lending money and not owning real estate. If a home is in foreclosure because the borrower is in default, that’s called a non-performing loan. Federal Reserve guidelines state that the bank must put aside two to eight times the amount of the non-performing loan to cover the bad debt. If this money is sitting in reserve, it obviously can’t be loaned out to new customers to make the bank more money. As a matter of fact, there are strict federal guidelines as to how many bad loans a bank can even have on their books at any given time. If a certain percentage of their outstanding loans are considered bad debt, they can be fined, sanctioned and even federally regulated.  So you see, they are quite eager to get rid of a property before they have to take it all the way to a Trustee Sale and possibly take it back as an REO (which by the way stands for Real Estate Owned.)  Not to mention the fact that the foreclosure process is long and expensive for the lender involved.

A short sale is accomplished by sending the lender a “Short Sale Package” which includes many documents supporting the fact that the borrower can no longer pay their mortgage and must sell the property at a loss to the lender, and the only other alternative is foreclosure.  Things included in the short sale package include: financial statements, pay stubs, medical bills, divorce decree, etc.  Also included will be a detailed letter from the homeowner, called the “Hardship Letter,” explaining why they can’t make their mortgage payments anymore.  The most important part of the package will be… an offer!  True, the lender will most likely not even look at a short sale package if it does not have an actual written offer from an interested buyer.

A short sale is an often complicated process, and can be lengthy, sometimes taking upwards of 3-4 months to get the whole thing done, especially if the real estate agent doesn’t know what they’re doing. Therefore, much of the success or failure in accomplishing a short sale depends on the real estate agent involved.  I specialize in foreclosures and short sales and have many unique methods for getting short sales approved quickly.  I also work with a large number of homebuyers and investors who are ready to make offers on properties immediately.

I know that being in the middle of the foreclosure process can be very stressful and frightening, and that understanding the process and what your options are can shed some light on the situation and help you feel better about it.  My goal is to truly help people get out of this terrible predicament and move on with their lives.

If you have any questions about your particular situation, or about foreclosures and short sales in general, please don’t hesitate to .

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Lien priority

November 14th, 2007 · 2 Comments

As part of my ongoing involvement with foreclosures and how to buy them, I get asked lots of questions. One that comes up frequently is, “When buying a foreclosure at auction, do I have to pay off all the liens?”

The answer is, “It depends on the lien priority.” What is lien priority, you ask? Well, properties always have a Title document that shows who or what entities have an interest against that property. Each interest is recorded in chronological order:

  • First and foremost, County property taxes are always in first position on Title (we all know that there are only two things for sure in this world - death and taxes).
  • Second is usually a lien for supplemental taxes, based on any new assessed value.
  • Third is usually for neighborhood CC&R’s (Covenants, Conditions and Restrictions) which govern how you can and cannot use your property in that particular development, neighborhood or homeowner’s association.
  • Fourth position is sometimes for easements (which is a right for someone else to use a portion of the said property), for example for the gas or electric company to come onto your property and read the meter, or for a land-locked neighboring property to have a driveway run along the edge of your property in order to gain access to theirs.
  • Fifth will normally be for the first mortgage holder, if there is one.
  • Sixth would be for a second mortgage, if there is one.
  • Seventh would be for any additional mortgages
  • Eighth would be for any other interests against the property, such as a Mechanic’s Lien (i.e. that contractor who installed your new bathroom, but whom you failed to pay)

If the first mortgage holder is the one doing the foreclosing, and have brought the property to auction on the County Courthouse steps, then all the subsequent liens (called junior liens) are wiped out! If the lien holder down the line, the contractor who never got paid for the bathroom, for example, is the one doing the foreclosing, and you buy the property at auction, then you need to pay off all the liens that are above him (called senior liens). In that case, you would be responsible for paying off the first, second, and maybe third liens as well as HOA dues and county taxes. So be very careful when buying a foreclosure property at auction - do your research! You can always go down to the County Recorder’s Office in the county where the property is located (usually in the county offices or at the city hall) to research all the recorded liens against a specific property - this is public information.

Every week, I send out the list of Notices of Default and Notices of Trustee Sale for foreclosure properties in Alameda, Santa Clara, San Mateo & San Francisco Counties. If you would like to be included on that list, you can sign up here.

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