Homeowners facing financial hardships may be able to negotiate with their lenders for a loan modification or refinance that will reduce their monthly mortgage payment. In some cases, this is enough to allow the borrower to remain in the home. In other cases, however, the borrower may still be unable to meet the demands of the loan – because of factors like loss of a job, divorce, illness or death of a spouse – and may have to sell the home through a short sale or lose the home to foreclosure. As difficult as these situations are, a qualified real estate professional can help guide buyers and sellers successfully through the process.
A homeowner in financial distress may put his or her property on the market as a short sale in order to avoid foreclosure. A short sale, or pre-foreclosure sale, occurs when a property is sold for less than the amount due on the mortgage. This type of real estate sale can benefit the lender, who can avoid the lengthy and costly foreclosure process, and the borrower, who can eliminate or reduce mortgage debt and keep a foreclosure off their credit report.
A lender may agree to a short sale if the borrower has a personal financial hardship (such as job loss, divorce or medical emergency) and owes more on the mortgage than the home is worth. If the lender approves the short sale, any proceeds from the sale will go to the lender. Since the sales price falls short of the balance remaining on the mortgage, the difference may either be forgiven by the lender or the lender can seek a deficiency judgment against the borrower for all or part of the balance (a few states prohibit deficiency judgments following a short sale). The short sale process varies from state to state, but the steps generally include:
- Short sale package - A financial package is submitted by the borrower (seller) to the lender. This includes financial statements, a letter describing the seller's hardship and copies of financial records.
- Short sale offer - If the seller accepts the offer from an interested buyer, the listing agent sends the lender the listing agreement, an executed purchase offer, the buyer's preapproval letter and a copy of the earnest money check, and the seller's short sale package.
- Bank processing - The bank reviews the offer and either approves or denies the short sale. This can take several weeks to months.
If it is an option, a short sale often makes more sense than a foreclosure. While a short sale will affect the borrower's credit report, it is not as damaging as a foreclosure. In addition, a short sale will make it easier to borrow money in the future than if the property had gone into foreclosure. The sooner the short sale process is started, the more likely the bank will approve the short sale. Falling further behind on payments will get the borrower closer to foreclosure, so time is of the essence. In fact, it is possible to pursue a short sale before ever falling behind on payments if the borrower's financial situation has changed due to hardship.
Another advantage to a short sale is that, unlike foreclosure, the seller remains in control of the sale – not the bank. That means sellers can know who is buying their home; for some people, that makes the transition a little easier.
As a real estate professional, you can help sellers:
- Determine the value of a property to see if it is eligible for short sale (valued at less than the mortgage balance)
- Develop a short-sale package and get qualified for short sales
- Set a price that will bring offers and be approved by the bank
- List the property as a short sale
- Negotiate with the bank to approve a purchase offer
A short sale can provide an excellent opportunity for a buyer to get into a house at a reduced price. It should be noted, however, that a short sale is a complicated and time-consuming real estate transaction. The lender may take several weeks or months to approve the short sale, and it is not uncommon for a buyer to submit a short sale offer only to cancel because the process is too lengthy. In order to get the property at a discount, the buyer has to be willing and able to wait for short sale approval from the bank.
As a real estate professional, you can help buyers:
- Determine a fair offer
- Negotiate with the bank
Foreclosure is the process that allows a lender to recover the amount owed on a defaulted loan by selling or taking ownership of the property. While foreclosure laws vary from state to state, there are generally six phases:
- Payment Default - This occurs when a borrower has missed at least one mortgage payment. The lender sends a missed payment notice, and after two missed payments may send a Demand Letter. At this point, the lender is likely willing to work with the borrower to make arrangements to catch up on the missed payments.
- Notice of Default (NOD) - A Notice of Default is sent following 90 days of missed payments. The loan is handed over to the lender's foreclosure department and the borrower is informed that the Notice will be recorded. The borrower is typically given 90 days to settle the payments and reinstate the loan.
- Notice of Trustee's Sale - If the loan has not been made up within the allotted time, a Notice of Trustee's Sale will be recorded, and the lender will publish a notice in the local newspaper indicating that the property will be available at public auction.
- Trustee's Sale - The property is placed for public auction and sold to the highest qualifying bidder. After the highest bidder is confirmed and the Trustee's Sale completed, a Trustee's Deed Upon Sale is provided to the winner. The property is then owned by the purchaser, who is entitled to immediate possession.
- Real Estate Owned (REO) - If the property does not sell at the public auction, the lender becomes the owner and will attempt to sell the property on its own, through a broker or with the help of a REO Asset Manager. These properties are called "bank-owned."
- Eviction - The borrower can stay in the home until it has sold or becomes bank-owned. An eviction notice is sent demanding that occupants immediately vacate the premises. The local sheriff will visit the property to remove people and belongings if necessary.
Losing a home to foreclosure can be a heartbreaking and emotional experience. Throughout the foreclosure process, the lender may attempt to make arrangements to help the borrower get caught up on the loan and avoid foreclosure. Unfortunately, if a borrower has trouble making one mortgage payment, it becomes increasingly difficult to make catch-up payments to bring the loan up to date. If a borrower knows that he or she is likely to (or will definitely) fall behind on payments, it is in their best interest to speak with the lender as soon as possible about loan modification or refinance options to lower the monthly payments. In some cases, it will be enough so that the borrower can meet the reduced payments and avoid foreclosure.
If a lender starts the foreclosure process, it is important to note that they are not required to let a homeowner know if they have decided to dismiss the foreclosure. If the borrower is unaware of the foreclosure dismissal, he or she will be left with a zombie title – the right to ownership and possession of a home that remains with a person who believes the home was lost to foreclosure. The homeowner may have moved out while unwittingly still holding the property's title and still being liable for the costs and responsibilities of homeownership. Homeowners can protect themselves by making sure the foreclosure process is complete and that title legally transfers to another entity.
As with short sales, foreclosures can provide the opportunity for buyers to purchase a home at a discount. That said, buying a foreclosure – even at a steep discount – does come with drawbacks. These homes are generally sold "as is" with no guarantee of condition, and a buyer is often not able to inspect the property before making a bid. The result is that any money saved by purchasing a foreclosure could go toward making the home habitable and up to code.
As a real estate professional, you can help buyers:
- Find suitable properties
- Determine if the price is a good value
- Arrange inspections, when available
- Navigate the paperwork
The Short Sales and Foreclosure Resource (SFR®) Certification
Confidently and successfully navigating short sales and foreclosures requires expertise and experience. Many buyers and sellers turn to real estate professionals for assistance, but not all have adequate experience in dealing with these types of transactions. You can increase your marketability as a real estate professional by gaining the knowledge and skills needed to effectively and efficiently handle short sale and foreclosure transactions.
One way to show potential clients that you have the skills is through the Short Sales and Foreclosure Resource (SFR®) certification (offered by the National Association of REALTORS®). Holders of this certification have specialized training in short sales and foreclosures, qualifying sellers for short sales, negotiating with lenders and protecting buyers.
The Bottom Line
Financial hardships can take their toll on homeowners, yet provide good opportunities for buyers. Both buyers and sellers can benefit from your skills as a real estate professional experienced in dealing with short sales and foreclosures. With your expertise you can help clients navigate the process, value properties, list properties and negotiate with lenders.