The Short Sale by Gigi Krop
Palm Fronds blowing in the balmy breeze. Sail boats gliding on calm seas, Relaxing by the pool with a cool drink. Children playing and building castles in the sand.
The ideal life in sunny south Florida resulted in a huge real estate boom. Then came big tax bills, high insurance and large mortgage payments and reality set in. Tropical Paradise evolved into headache for blue collar workers and middle management that bit into the mango of life but forgot about the pit. Entranced by the beauty of our beaches and tropical weather they forgot that along with home ownership come tax, insurance and mortgage payments.
For a few years homeowners were able to cope with rising costs by refinancing their homes and cashing out on their equity. In North East Miami (for example) values were rising by about $100,000 a year so it was easy to refinance. The residents used the money to make improvements and pay the taxes. Prices started to rise in 2000 and continued like a snow ball down a mountain. Then along came Wilma in October 2005 and the lights went out on south Florida. Rising real estate values began to slow down. A few months after Wilma the market recovered and prices continued to rise. But, Interest rates also began to rise and people with adjustable rate mortgages realized an increase in their payments, taxes and insurance. More houses came on the market for sale and less people were able to afford the higher priced homes. In 2006 we saw the real estate market begin to change. Buyers became scarce. Foreclosures were on the rise. With the onset of 2008, values plummeted. North East Dade County saw a 30% drop in value with inventory of homes for sale going up every month and sales going down. Many banks were forced to foreclose on the loans.
The middle and upper middle class homeowner complained, “I can’t afford my house. But I don’t want to ruin my credit and foreclose? What can I do?”
And so the Short Sale was born. In south Florida approximately 60% of the homes listed on the Dade County MLS are short sales. Short sale is also known as short payoffs and pre-foreclosure sales. When a property is financially over encumbered with monetary liens and a reduced payment is negotiated with the financial institution and the house is sold for less then the mortgage amount it is a short sale. The homeowner still owns the home and the bank accepts less money then the amount of their mortgage. A buyer recognizes the opportunity and the property is sold. To be continued…
The Realtor and Short Sale Consultant
Does it sound easy? It’s not.
Have you ever tried getting information from a bank?
Do you think that getting a bank to take a loss is an easy thing?
From the Realtor’s point of view, the short sale is a challenging and time consuming process.
Saving Grace – with short sales on the rise, a new group of experts has flourished – the Short Sale Consultant. These people handle all the administrative details of the short sale for a fee.
The homeowner puts the home on the market with a Realtor at a price that is less than he/she paid for it and less then the amount of the mortgage. The low price attracts Buyers who then make written offers on the property. The Realtor (or a short sale consultant company) then negotiates with the bank to accept the offer. The owners write a letter detailing their financial difficulties and collect documentation of their income and debts. This information is organized and presented to the bank by the Realtor or Short Sale Consultant. There is no guarantee that the lender will accept the offer. Negotiating a short sale requires patience and attention to detail with no guaranty of results.
The Lender’s Point of View
Banks are not in the business of owning real estate and are becoming more accepting of short sale as an alternative to foreclosure. The Realtor needs to prove to the Lender that: values have substantially dropped in the area,
the owner is unable to sell the property for the amount of the mortgage and
is going to stop paying the mortgage. Hopefully the Bank recognizes that less is more. They see the additional legal and holding costs of foreclosure and accept the reduced payoff.
The Owner’s Point of View
A short sale is not a balmy day at the beach. It is still considered a default. Credit scores drop about 50 points and their borrowing power is strongly affected for about 1-2 years. Compared to a 150 point drop and 7 years of bad credit for a foreclosure it may be a hot & humid day in the park. Either way, a short sale is preferable to a foreclosure. The difference between the amount that was owed the bank and the amount that the bank receives in the short sale may be considered taxable income and reported to the IRS. Ask your accountant about recent legislature regarding short sales.
The Buyer’s Point of View
For Investors and First Time Buyers the short sale is an opportunity to get a good deal and capitalize on another person’s mistake. The bank’s loss is the Buyer’s gain. The Owner may have invested money in improvements to the home, new kitchens, roofs or A/C systems. The Owner sacrifices the time, effort and money spent for these improvements and the Buyer benefits from them. To be continued…
It is a great time to purchase a home in south Florida and especially in North East Dade County. Investors are waking up and jumping in the game. First time Buyers can make use of FHA programs to buy a home they could not afford two years ago. Banks are returning to normal criteria and carefully qualifying the purchaser. The government is passing laws to control future foreclosure and boost the economy. The market is readjusting and in a few years the foreclosure fury will pass, the short sales will be purchased by “buyers in the know” and the market will recycle. In all investing the buzz phrase is “Buy low, Sell high”. Now is the time to buy.
The angler feels a tug on his rod as he hooks a big one. The sweet smell of opportunity tickles your senses. Adults build castles in the sand.