Talk to your lender before it’s too late
Today we’re looking at the difference between a foreclosure and
a short sale. It is more common today than it has been since the
early 1990s, and many people are confused.
Talk to your lender before it’s too late
Today we’re looking at the difference between a foreclosure and a short sale. It is more common today than it has been since the early 1990s, and many people are confused.
Ron Ricard from IPX came to talk to Realtors about both of these topics at a seminar recently hosted by Fidelity Title. He is a delightful man and he makes us laugh while he teaches us. How could we not love that?
Let me insert a factoid here before we begin our discussion: There was never a phone call made to the lender by the owner in a shocking 75% of the homes lost in foreclosure. If you learn nothing else from reading this column, if you or a friend or loved one is in trouble, call the lender and see what you can figure out with them. They do not want your house!
If you cannot make your payments because of a temporary problem (You’re laid up with a broken leg and can’t work, your company has closed its doors for a month for updating, you’ll be back at work in 30 days, etc.) you might arrange a forebearance agreement to reduce your monthly payment for up to 18 months. Or if there has been a death or divorce or long-term illness or job loss a modification might be made in your loan. But none of this will happen if a phone call is not made.
Ron used this analogy. You have a teen-ager with a curfew of midnight. It’s 12:05 a.m. and no child in sight. How do you feel? Annoyed. When it’s 12:20 you could be angry, scared, anxious. But what if that child had called at 11:50 p.m. and said, “Hey, we’re getting a burger, and I’m going to be a little late, but I’ll be home at 12:30”? Your comfort level would increase dramatically. The same holds true for a bank. Let them know what’s going on and they’ll be more likely to negotiate with you. It bears repeating: They do not want your house.
Okay, back on topic here. You in the back, listen up. A foreclosure is a legal process begun by a lender when the homeowner fails to make payments on a mortgage in a timely fashion. A notice of default will be sent to the homeowner. This can be nipped in the bud by paying back the money owed (including late fees and legal costs) within 90 days.
Assuming this cannot be done, the auction process begins. Notice is prepared and recorded by the trustee of the lender, citing the legal description of the property along with the date, time and place of the auction. This notice is published for three weeks. Then the auction is held.
If no one buys the property at the auction (also known as a trustee sale) the lender owns the house. (I told you they didn’t want this to happen). The property is now an REO, which means real estate owned, and will be offered for sale by the bank.
Now for a short sale. This merely means that the house has more outstanding loans on it than its current worth. The difference between what is owed and what it can be sold for is called the short. Obviously as we face a downward market in an area where many people recently bought their homes with no money down this is not uncommon. If as a seller you can afford to bring a check to escrow covering the difference, great.
If not, the bank has to agree to taking less money and you will be taxed by the government on the “debt relief” (amount the bank agreed to write off). The bank also might require you to sign an unsecured note for the amount of the short. Then you’ll have to make payments on a house you no longer own. Whoa, doggies! That doesn’t sound like much fun, does it?
So you can have a short sale without a foreclosure as long as you continue to make payments. Or you can have a foreclosure without a short sale (or necessity of having a short sale) if you have equity in your home but cannot make your current mortgage payments.
Somehow we’ve all gotten it into our minds that if we can get a house that is in foreclosure or is an REO, we’ll be making a sweet deal in today’s market. I’m here to tell you that is an urban legend.
When you buy a home from a bank (REO), there is no negotiation. You buy it as-is, at their price, in present condition, and you better like it because it’s the bank’s way or the highway.
When you purchase a home in foreclosure that is also a short sale, the offer has to go to the bank for consideration. They take about three weeks to say yay or nay.
That’s a lot of information you just took in. If you need more specific assistance, call your local Realtor. Just as with the bank, nothing will happen until you pick up that phone!
And be kind to your Realtor.
