A Brief Primer on Distressed Properties
Date: Monday September 8, 2008Posted in: real estate market, mortgage, REO, real estate, short sale, Realtor, foreclosure, interest rates, refinance
Even with all of the buzz in the media regarding short sales and foreclosures, I still have people asking me basic questions regarding the difference between a short sale, pre-foreclosure, foreclosure and REO. So if you are completely educated on this topic, you might want to go onto my next post because this post will be just going over the basics on these topics.
The first step that a financially distressed homeowner should take is to call their bank and ask to speak to the loss mitigation department. They should ask for someone who can help them with a forbearance agreement or a loan modification agreement. Remember, the lender doesn’t want to foreclose but would prefer to work on options that would allow the homeowner to stay in their home.
Should these agreements not be obtainable, the homeowner should explore selling their home as a short sale. A short sale happens when the unfortunate situation arrises where the owner must sell but their mortgage amount is greater than the amount that they can net on the sale of their home in the current market.
Why do banks accept short sales? Simplistically, they do because the mortgage is in arrears, the property may be in poor condition, the homeowner has suffered a hardship (must be proved), the area or neighborhood has depreciated, or the bank simply has too many REOs (bank-owned) properties on their books.
Why do short sales get such a bad rap in the real estate market? Because of the time that it takes for the seller’s bank to agree to the contract price. This can take 30 to 90 days (I’ve seen longer.) Most buyers lose patience and look for another home to purchase.
What do banks require from the short seller? The package must contain, in addition to several other items, the most recent mortgage statement, hardship letter (for job loss - pink slip, for divorce - divorce filing, for excessive debt - consumer credit counseling, for illness - a letter from their doctor, for death - a copy of the death certificate, for a job transfer - the relocation order), completed financial statement, three months bank statement, three months pay stubs or P&L statements, two years past tax returns and current asset statements. If this is incomplete, the process will be delayed that much further.
If the short sale is unsuccessful, foreclosure is the next step. A foreclosure is the legal process of selling property to satisfy a defaulting borrower’s debt. The preforeclosure process has several steps: Notice of Default given to homeowner, Notice of Trustee Sale setting the auction date, the Trustee Sale auction, and the Trustee’s Deed which transfer the property title to the highest bidder or to the beneficiary (the bank).
The timeline for a foreclosure begins with the Notice of Default (NOD) recorded. On Day 14, the NOD is mailed to the borrower (homeowner). At this point in the preforeclosure timeline, some buyers may offer to buy the mortgage from the owner. Some owners are not accomodating and may not allow any inspections of the home. Also the burden is on the buyer to check whether any liens are on the property. On Day 91 the Notice of Trustee’s Sale is recorded and mailed. Day 115 is the deadline to cure default and Day 122 is the Trustee’s Sale.
There is no right to withdraw an offer made at the Trustee’s Sale. The buyer is responsible for any liens on the property. The minimum bid at the Trustee’s Sale covers the loan balance, accrued interest and the fees and costs associated with the foreclosure. These days, most often there are no bids on many of the properties due to the high minimum bids. At that point the bank becomes the owner and the house becomes a Real-Estate Owned property.
Short sales and foreclosures effect a distressed homeowner’s credit rating differently. Although there are not definite amounts that the scores will be lowered and these numbers may be optomistic, a general rule of thumb is that short sales will lead to a loss of 80 to 100 FICO points and that it will take approximately 18 months for the short seller to be able to buy real estate again at a decent interest rate. A foreclosure will lower the credit rating by about 250 to 280 points and it will take approximately 36 months after going through foreclosure to be able to purchase a home with a mortgage that has a reasonable interest rate.
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