*********************************************************************************** Are you a Nevada resident at risk of foreclosure? Here is additional foreclosure help provided by the State. *********************************************************************************** Disclaimer: We are neither attorneys nor accountants. The information provided here is general in nature and may or may not apply in any individual case. Please discuss with your personal advisors (attorneys, tax accountants, financial planners, etc.) before taking action. We would be happy to discuss your situation with you, answer any questions, and provide personalized suggestions in the areas of our expertise and licensing. Simply call our office (775-232-8515), send a text message, or email ShortSales@HumphreyHomeConnections.com to arrange an appointment. *********************************************************************************** Table of Contents What is a short sale? What is the difference between a short sale and an REO (bank-owned property)? Why would a homeowner want to sell his home as a short sale? Do I qualify for a short sale? Why would a lender agree to a short sale? What are the alternatives to a short sale? What will be required of me if I decide to list my home as a short sale? How long will it take? Why will it take that long? What are my potential liabilities if I sell my home as a short sale? What is the foreclosure timeline in Nevada? *********************************************************************************** What is a short sale? The term "short sale" refers to the situation where ownership of real property is transferred, the funds received by the seller are insufficient to pay off all of the liens on the property, and the seller is unable or unwilling to make up the difference. A lien is a claim against a property that is formally recorded with the county, created in order to force the payment of a debt owed by the homeowner. The property is the collateral for the debt, so the home cannot be sold to someone else without the lienholder(s) being paid back. Liens, except for real estate taxes, are prioritized in the order in which they were recorded. For example "first" and "second" mortgages refer to their recorded sequence and also to the order in which they are paid in case of a foreclosure. Please note that the term short sale is a bit misleading; there is nothing short timewise about these transactions! Short payoff is perhaps a bit more accurate, as the payoff to the lender is short of the amount owed, but short sale is the term most commonly used. In order for clear title (ownership) to transfer to a new owner, all lienholders must either be paid in full or agree to release their liens on the property for less than what is owed. For our purposes here, we will overlook liens such as property tax liens, sewer liens, mechanic's liens and so forth and focus on liens held by lenders (i.e. mortgages, deeds of trust, home equity lines of credit, etc.), although all of those other liens must be satisfied before the home can be sold to a new owner. You have probably heard that a large percentage of homeowners nationwide are currently "upside down" or "underwater" on their homes. All that means is that the home is worth less in the current market than the homeowner owes on it. Although annoying and a bit depressing, being upside down is not necessarily of concern if the homeowner has no need or desire to sell or refinance. Problems arise when the homeowner needs to refinance because his payments have become unaffordable but can't because his home has fallen in value, or when he has no choice but to sell, for example due to a job transfer. In these circumstances, selling short is one possible option. top
*********************************************************************************** What is the difference between a short sale and an REO (bank-owned property)? A short sale occurs while the property is still owned by the homeowner. The homeowner may or may not be behind on his mortgage payments. The property may or may not be in the process of foreclosure. What is consistently true about a short sale is that the proceeds of the sale will not be enough to pay off all of the liens on the property, hence the involvement of the lender who must agree to release their lien for less than owed. The lender does not own the property, is not the seller of the property, and does not negotiate the terms of the sale. An offer to purchase is made by a buyer to the selling homeowner, and the contract is negotiated between them, subject to third party (lender) approval. Approval of the lender is a contingency, just like inspections, ability to obtain a loan, etc., which must be met for the sale to come to fruition. A short sale package that includes the fully executed (signed by all parties) purchase agreement is sent to the bank for their approval. It may seem as if the lender is involved in the negotiations, because they may respond by requesting a higher purchase price, but what they are actually negotiating is their lien release and the net payoff to them required to procure it. Short sales can be frustrating, annoying, lengthy affairs that often do not result in a successful outcome. Depending on the experience of the listing agent and the careful screening of the selling homeowner, as few as 30% or fewer of these deals actually close escrow. Before you make an offer on a short sale property, your REALTOR® should have a frank conversation with the listing agent to determine the likelihood of success. An REO, for "real estate owned", property is one that is held in the name of the bank or loan servicing company. They have acquired the property as a result of foreclosure or a deed in lieu of foreclosure, and now have it on the market for sale. Because the property is in their name, the lender (or a designated asset management company) is the seller of the property and does all the negotiating of the purchase contract. The advantage to the buyer of purchasing an REO property is that there is no need for third party approval with the lengthy delays that are typical of a short sale. REO properties also tend to be very competitively priced relative to the market. There are downsides, however. The property has often been neglected; at best, there is significant deferred maintenance, and at worst, there can be potentially expensive issues with major systems such as plumbing, HVAC, roofing, etc. Because the bank has, of course, not lived in the house, they will insist that the buyer waive the Seller's Real Property Disclosure form, ordinarily mandated by law in the State of Nevada, so you will be on your own to discover any problems. Although your inspectors will likely discover problems that might warrant canceling the sale, inspections are not free and there may be expenses to turn on the power and water so that inspections can take place. On the other hand, some banks will arrange for local contractors to clean up, repair, and even upgrade their REOs, and these properties can be nice bargains. Another disadvantage to purchasing an REO is that many REO sellers will insist on using their own title and escrow companies, which may not even be in Nevada. They may or may not arrange with a local title company to assist with closing. If you are an inexperienced, perhaps first-time, buyer, there may be no one to help you understand the sea of documents required to purchase a home, a service ordinarily provided by a knowledgeable local escrow officer. Other problems arise when out of state companies don't bother to understand the way we customarily or legally do things here. Occasionally, the whole process becomes ridiculous. We had one recent escrow on an REO property in Sparks, in which the bank representative in the midwest emailed to cheerfully inform us that she had arranged for us to sign closing documents the following Tuesday....in Las Vegas. When we pointed out that Las Vegas was some 800 miles away, she indignantly asked why she hadn't been informed of that. Gee, we thought, we don't think they moved it... top *********************************************************************************** Why would a homeowner want to sell his home in a short sale? First, of course, the homeowner needs to make a determination that a short sale will be necessary; that is, that sale proceeds will likely be insufficient to pay off his loans. In this assessment, it is important to take into account all the costs involved in the sale including closing costs, repair costs, brokerage commissions, etc., and not just the difference between the current mortgage balance and the likely sale price of the home. Assuming that a short sale is the probable outcome if the home is listed, there are many possible reasons for a homeowner to move forward. These reasons fall into two general subcategories: the homeowner has no choice but to sell the home now or the homeowner can no longer afford the home. In the first category, we find folks who have or are going to have some sort of life change. This could include the need to move for work-related reasons (note that members of the armed services receive well-deserved special consideration here), divorce, death, health-related issues, and so on. The key feature is that the homeowner has to sell the home for reasons beyond his control, and can't wait for the market to improve in order to get a better price. In the second category are those who for one reason or another can't afford their mortgage payments. In the current recession, many of these people have lost their jobs, or had their work hours cut back (and their paychecks along with them). Another large group in this category is people who bought their homes near the height of the market using loans that were not appropriate for them, at least in retrospect. Examples include adjustable rate loans (ARMs) with artificially low "teaser rates" initially. It is hard to imagine that a reasonable person could have envisioned the homeowner able to afford the loan payment after even one rate adjustment. Another group is the option-ARMs, so called "pick-a-pay" loans that allowed owners to choose every month to pay a fully-amortized payment, an interest-only payment, or a payment of some lesser amount that didn't even cover the interest owed. Many of the homeowners with these loans could barely afford the smallest payment every month, the result being that their loan balance became increasingly larger through the "miracle" of negative amortization. There has been extensive and vitriolic debate as to whose fault it is that people ended up with these crummy loans and in homes they can't afford. Fingers have been pointed at both greedy lenders and irresponsible home buyers; no doubt there is blame to be found on both sides. Further discussion can be found in the history section of this page. However, it is a bit of a moot point. Here we are. The more appropriate question is how can we resolve the current mess in the most satisfactory way possible for both homeowners and lenders? One possibility is for the lender to agree to some sort of loan modification, providing payments the homeowner can afford and keeping him in his home. In other cases, a short sale can be the best option from a group of unpleasant choices. top
*********************************************************************************** Do I qualify for a short sale? You can't do a short sale just because you want to. The fact that your loan adjusted to a higher rate that you find objectionable (but can afford to pay), or that you are unhappy that your home's value is so upside down, or that you would prefer to short-sell your current house and then buy a nicer one for the same price or less are not likely to be reasons the bank finds acceptable to allow a short sale. The bank, or actually the investor that owns your loan, is under no obligation to agree to a short sale. Some investors do not agree to short sales under any conditions. The ones that may agree are only likely to do so if four conditions are met: 1) they are convinced that you will be unlikely to pay your loan going forward because your monthly income is less than your monthly "outgo"; 2) they are convinced that you are financially incapable of paying your loan as a result of some hardship, in other words, not because you fudged your original loan application; 3) you are insolvent, in other words your personal balance sheet shows more liabilities than assets (if you have a large stash of money squirreled away somewhere they will expect you to access it); and 4) they will come out better financially with a short sale than they will with a foreclosure. It is your job with your REALTOR's® help to convince the lender that these four conditions are true for you. top *********************************************************************************** Why would a lender agree to a short sale? In general, lenders agree to short sales if it is in their best interest to do so. Lenders know that there are significant costs associated with a foreclosure: legal costs, holding costs, brokerage costs when they eventually sell, possibly repair and upkeep costs, etc. In a falling market, the longer they wait, the lower the ultimate sale price will be. Add to that the inescapable fact that most buyers of bank-owned property expect a discount to compensate for condition and increased risk, and the net to the lender is likely to be significantly less than in a short sale. The longer the property stands empty, the further it falls into disrepair and the greater the likelihood of vandalism. The owners themselves often take out their anger and frustrations on the house after a foreclosure, or remove every fixture of conceivable value. The lenders are well aware of all of these factors, but they have a fiduciary responsibility to obtain the maximum possible recovery on behalf of the investor. They have a very clear idea of their losses under each scenario, and will make the decision to approve or disapprove a short sale based on this analysis. They are also obligated to perform in accordance with the investor's guidelines, as spelled out in the pooling and servicing agreement (see history for more info on this topic). There is a great deal that goes on behind the scenes that the lender will not tell you. It also depends on whether the lender is in first or second position on the loan. As an example, a second position lender may appear to be receiving nothing in the case of foreclosure, and should seemingly be happy to get the couple of thousand dollars offered by the first in exchange for release of their lien. What you may not know is that they have purchased insurance on that mortgage that pays them a much larger sum if foreclosure occurs. In that case, unless either the buyer or the seller is willing to match that payoff to them, it is unlikely that they will agree to release their lien. Whenever it appears that the lender is behaving in an irrational manner, there is usually more to the story than meets the eye. Homeowners and their representatives often conclude that lenders are stupid because the folks that answer the phone seem clueless and/or disinterested and/or rude. While this is often (though far from always) the case, the actual decision makers are very smart people and they do everything in their power to minimize losses. top *********************************************************************************** What are the alternatives to a short sale? 1. Do nothing. Not recommended. Sticking your head in the sand does nothing to avoid the inevitable, most likely resulting in loss of the home to foreclosure and a trustee's sale. Some homeowners are paralyzed by fear or embarrassment when they are unable to keep up with their mortgage payments. It is important to realize that you are not alone. Many, many people find themselves in the same situation, often through no fault of their own. It is best to be proactive and explore your options with knowledgeable and sympathetic professionals. 2. Refinance at a lower interest rate. If you are among those fortunate enough to have equity in your home even at current market levels, this might be a possibility for you. You will receive the best rates if you are current on your payments and your credit is good, so don't wait until you have missed payments to explore. 2. Forbearance. If the situation that resulted in falling behind on house payments was a temporary one, it is possible that your lender will allow you to resume making payments. Either immediately, or perhaps after several months of successful payments, they may be willing to help you correct your arrearages by having you make a larger payment until you bring your account current. If you haven't missed any payments yet but are anticipating a temporary problem, you might be able to negotiate in advance to skip or reduce payments for a finite period, making them up later. 3. Loan modification. If it is impossible for you to continue to make your loan payments, and that situation is unlikely to correct in the forseeable future, it is important to make contact with your lender or loan servicer right away. They may have a loan modification program in place for which you qualify. Loan modifications might include decreasing your interest rate, changing your loan from an adjustable to a fixed rate, increasing the term of your loan, taking all of your missed payments and late fees and adding them to the end of your loan term, or some combination of these. Although many homeowners would like to see their principle balance reduced, this is something lenders strenuously resist. The Hope for Homeowners program of 2008 was a spectacular failure for this reason. 4. Deed in Lieu of Foreclosure. Basically, the lender agrees to take your home back instead of foreclosing. Note the key word "agrees". You can't just mail in the keys, or drop them off at your branch office. Lenders would often rather foreclose, because foreclosure results in subordinate liens being wiped out. Taking a deed in lieu leaves all the liens in place for the lender to deal with. It is especially unlikely that a deed in lieu would be accepted on a property with a second mortgage or HELOC. A deed in lieu of foreclosure produces approximately the same damage to your credit as a foreclosure. 5. Bankruptcy. This is a topic best addressed by your attorney. In some cases, filing for bankruptcy will delay a trustee's sale, though usually not indefinitely. It becomes difficult to impossible to negotiate a short sale in the middle of bankruptcy proceedings, so it would be best to decide which path to take before listing your home for sale. top *********************************************************************************** What will be required of me if I decide to list my home as a short sale? The most important thing that will be required is the full cooperation of everyone whose name is on the loan. Short sales are hard enough without one or more homeowners dragging their feet, refusing to provide necessary documents, or just being unavailable and/or difficult to deal with. Divorces can be particularly problematic in this regard. Everyone involved needs to be convinced that a short sale is the best alternative. It is strongly recommended that all homeowners seek legal advice and discuss their personal situation and ramifications with a CPA so that everyone is on board with this course of action and has had all concerns addressed. There is a ton of paperwork that will be required from you in order for your REALTOR® to submit a purchase offer to the lender for approval. Most REALTORs® will request that you prepare all of it at the time your home is listed for sale, and perhaps even before your first meeting. He or she will most probably be spending an extraordinary amount of time on your home sale, far in excess of that required for a normal, nondistressed sale, and will want to be sure that there is a reasonable expectation of success, so that neither their time nor yours is wasted. The specifics of the paperwork vary slightly from lender to lender, but in general you should plan on two year's worth of tax returns including W-2s, two month's bank statements, one month's pay stubs for all borrowers, a personal financial statement, recent statements for all of the loans on the property, and a hardship letter. Keep a file of pay stubs and bank statements as you receive them, because the lender will likely want the most recent ones when the time comes to submit an accepted offer. The hardship letter should address the reason(s) that you have fallen behind in your payments. Acceptable reasons include illness, divorce, job loss, job transfer, death (presumably not yours), etc. The letter should not be long; one or two paragraphs are plenty, and it doesn't hurt to express regret. Your REALTOR® will prepare some documents to accompany the ones you put together, such as a listing history (how many showings, how often the price was reduced), a market analysis of the area, and any other information that they believe will strengthen your case with the lender. Once your home is on the market, prospective buyers will be coming to view it. Just as with any home for sale, it is important that the property is kept tidy and presentable, at a minimum. Cleaning, decluttering, and providing a bit of curb appeal is just as important if not more important in a short sale than it is in a non-short sale. Buyers know that short sales are lengthy and problematic. Your home must be compelling in terms of condition or price and preferably both in order to attract their interest. top *********************************************************************************** What is the foreclosure timeline in Nevada? The timeline begins when the owner stops making his loan payment. In this example, we'll assume the payment is due on the first of each month. Most commonly, the payment will be late around the middle of the month, let's say the 15th, although the exact terms will be specified in the loan documents. After the 15th, late fees will be charged, and the loan becomes delinquent. Paying a full payment plus late fees at this point will get the owner back on track, and nothing bad will happen. Credit agencies generally take note of payments that are 30 days late or more. After three consecutive monthly payments have been missed (again, this is common but check your docs), the Beneficiary, the actual holder/owner of the Note, instructs the Trustee* to record a Notice of Default (NOD). The NOD is recorded with the county recorder and is available to anyone who cares to look. As a result, the homeowner is deluged with solicitations of various sorts from salespersons, investors, con artists, scammers, and so forth, all of whom want to "help". It can be very difficult to know whom to trust, and with good reason. Many if not most of these solicitations come from people whose primary interest is making money for themselves. If the homeowner happens to coincidentally be helped along the way, great, but if not, they seem to feel that one out of two isn't bad. Once the NOD is recorded, the house is "in foreclosure" and the clock is ticking. A certified letter is sent to the homeowner, who then has 35 days to reinstate. New legislation enacted in the 2009 legislature requires an attempt by the lender to work with the homeowner at this point. After that, assuming that the loan documents include an acceleration clause (most do), the loan becomes due and payable IN FULL. The homeowner has 90 days from the NOD recording to the first Notice of Trustee's Sale in the newspaper. Notices must be published weekly in a newspaper of general circulation (here in Northern Nevada, generally the Reno Gazette-Journal) for three consecutive weeks. On the fourth week, the Trustee's sale is held on the courthouse steps and the home is sold to the highest bidder. The lienholder generally starts the bidding at the amount owed, including late fees, legal fees, etc., although they are not required to do so. Given the recent drop in home values, the amount owed is usually significantly more than the home is worth, so ownership most often transfers back to the Note holder. *Most homes in Nevada are sold using a Deed of Trust rather than a Mortgage. When a home is sold, the new homeowner signs both a Promissory Note, promising to repay the loan, and a Trust Deed, a transfer of Title to a Trustee that allows the Trustee to sell the house to repay the loan in case of default. When the Note is paid in full, Title is reconveyed by the Trustee to the homeowner. top *********************************************************************************** How long will it take? Why will it take that long? That is a very difficult question to answer. It depends on many factors, most of them out of your control. The biggest factor is who your lender is. But, best case scenario, plan on at least three to four months. If it happens faster, you can be pleasantly surprised. We have heard of short sales taking upwards of a year! Few buyers have the patience to stick around that long, especially considering that prices have been dropping and there is loads of inventory on the market. Why does it take that long? The stated reason is that there are endless stacks of short sales waiting for a negotiator to be assigned, and then additional endless stacks waiting for the negotiator to take action. There is certainly some truth to that. What kind of a business model would include hiring additional people so that you can lose money faster? Other reasons include the need to receive approval from multiple lenders and/or mortgage insurance companies, inexperienced agents attempting to manage the short sale, and endless footdragging on the part of some lenders/loan servicers. It has been suggested (though we have no insider insight here) that mortgage servicing companies have no incentive to expedite short sales, when they are paid monthly fees to "manage" the accounts. Others argue that fees are only paid when actual payments are collected. It is difficult for an outsider to know where the truth lies. One thing that is clear is that short sales are becoming increasingly harder to close. Second mortgage holders, who used to be content with some small contribution from the first, are now increasingly demanding cash and/or promissory notes, or refusing to relinquish their right to seek a deficiency judgment. Firsts are making similar demands in states that are "recourse", that is, where state law allows foreclosing lenders to still seek a deficiency judgment after foreclosure. More and more concessions are being demanded from sellers, buyers, and their agents. Lip service to "helping homeowners" is just that; as the economy improves, and banks and loan servicers see more value in foreclosing, the probability of accomplishing a short sale decreases accordingly. top *********************************************************************************** What are my potential liabilities if I sell my home as a short sale? 1. Credit score hit. This is primarily because of the missed loan payments leading up to the short sale, and not so much the short sale itself. How the short sale is reported to the credit bureaus is a negotiable item. It would be nice if you could get them to report as "paid as agreed", but more likely it will be some variant of "debt settled for less than owed". That is still superior to either a bankruptcy, a foreclosure, or a deed in lieu in the long run, but will likely (combined with missed payments) drop your credit score a couple of hundred points in the short run. 2. Tax liability. In the past, any "forgiven" debt was treated as income for tax purposes. Legislation passed at the end of the Bush administration, the Mortgage Forgiveness Debt Relief Act of 2007, allowed this so-called income not to be subject to Federal income tax provided certain conditions were met: the loan was purchase money or a no-cash-out refi or a refi to upgrade or improve the home, the property was owner-occupied, and/or the homeowner was insolvent, etc. It is wise to check with your tax accountant to be sure you meet the criteria to avoid this tax. The bank will send you a tax form, known as a 1099, regardless of the circumstances. They are required to do so by law; it is not up to the bank whether you owe tax or not. You may be able to waive any tax liability by filing a form 982 with your taxes. Again, seek the advice of a tax professional, preferably before you embark on a short sale! 3. Deficiency judgment. This is a court-ordered judgment requiring you to pay the balance of the debt owing. In Nevada, it is likely that a second lienholder will be able to seek such a judgment, and it can remain on your credit record for an extended period of time. The first lienholder may or may not be able to seek such a judgment, depending on whether your loan is a recourse or nonrecourse loan. In a nonrecourse loan, the lender can foreclose and take your house back, but that is all. A recourse loan, common especially in refinances, allows both a foreclosure and a deficiency judgment. Even in the case of a nonrecourse loan, the first lienholder may require the borrower to sign a document waiving their right to avoid a deficiency. This is a very complicated area best addressed by a real estate attorney. 4. Promissory note. In order to release their lien, the second lienholder or the mortgage insurance company may require the homeowner to sign a promissory note for some portion of the balance of the loan, up to and including the full balance. 5. Cash at closing. In some cases, one of the parties may insist that additional cash be brought to the closing table for their lien to be released. If the buyers are unwilling or unable to provide this additional money to the lender's bottom line, it may fall to the seller to provide it to allow the sale to close escrow. top *********************************************************************************** |