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In today’s market we’re seeing the term Short Sale, more and more. Exactly what is a short sale, and how do you do know if this is the right option for you? Hopefully the following information can shed a little light on the subject.
In real estate, a short sale refers to the sale of a property in which the sale price is lower than what is owed on the home. If the lender is convinced that the owner, for various reasons, is unable to continue making the payments the lender will often agree to take less than the full amount owed to allow the sale to happen. The incentive for the bank to approve a short sale is to have the property sell before the loan becomes a problem account on their books.
Banks are willing to allow individuals to assume the loan if they meet the required criteria. This is a system that works because the banks do not want to hold property for one but they also do not want to pay a fee (at times up to $25,000) in order to send the property through the foreclosure process.
Before a lender approves a short sale they will make two key decisions.
First, can the owner afford to continue making the payments on the property? If they can there is no reason for the bank to eat the loss. Banks will not look favorably upon a borrower that they determine lied to get the loan.
Second, will approving the short sale leave the bank in relatively the same position as they are likely to be in by going though the foreclosure process and then selling the property? If the bank can do significantly better by foreclosing they are likely to do so.
The seller must not receive any sale proceeds for themselves.
If there is a junior lienholder, the discounts can be substantial, sometimes as high as 90% or more. Question two is the primary determinant here. If the senior lender forecloses the junior may get nothing so they may take a deep discount to get something out of the property.
Short sale sellers need to be careful because there is no free lunch. The seller may end up with taxable income in the amount of the debt that is forgiven. The seller may also end up with adverse entries in their credit history. Any property owner considering a short sale needs to seek the advice of competent legal and tax advisers before entering into the transaction.
I would advise anyone facing foreclosure to discuss their situation with an experienced Realtor who is trained in Short Sales. Lenders will pay a reasonable selling commission so Realtors have an incentive to get involved in Short Sale situations. The basic requirements for a Short Sale are a Listing Agreement with a Realtor and a Sales Contract from a Buyer which are submitted to the Lender along with a Hardship Letter from the Seller explaining why they cannot continue to pay the mortgage and supporting documents such as tax returns, bank statements, information and photos of the home and the Comps, or comparative home prices supporting the offer. The way mortgages are sold, the mortgage holder can be anywhere and certainly not aware of local real estate conditions. If the package is complete, the Lender will order a BPO, or Broker’s Price Opinion, from an independent Realtor. Ths BPO is the key to the whole process. If it is too high, the Lender will not accept a low offer. Your Realtor can meet with the Agent doing the BPO and offer information supporting the offer, such as the average time on market of comparable homes, recent selling prices and point out any defects in the home. Most Lenders will accept an offer lower than the BPO, but usually not much more than 10% lower, though that will vary depending on the company. The sales contract should specifically state that the offer is contingent on the Lender accepting the purchase price in full and forgiving the Seller the deficiency on the mortgage. Yes, there can be tax consequences. The Seller does receive a 1099 on the forgiven part of the mortgage, but there are provisions in the tax code for the offset of the phantom income due to insolvency. Most Short Sellers will satisfy the insolvency requirements or the Lender would not be allowing the Short Sale in the first place. Be aware too that if the home goes to foreclosure, a 1099 is received for the FULL amount of the mortgage, plus late fees, legal fees etc. Obviously every individual situation is different so a CPA or tax attorney should be consulted.
The process does all take time and Lenders are swamped, expect at least 2-3 months before a sale can be finalized, even if the Lender accepts the first offer. If they do not, the price can be negotiated.
The Short Sale is a detailed but fairly straightforward process that can work to benefit Buyer, Seller and even the Lender. The Buyer gets a good price on a home, the Seller gets to avoid the disruption and credit hit of a foreclosure and the Lender avoids the delay and expense of foreclosing on a property they don’t want to own and that would negatively impact their ability to make more loans.
RISMEDIA, Feb. 23, 2008-(MCT)-With today’s turmoil in the housing market, hitting up mom and dad for a down payment may be a young buyer’s best route to homeownership. It’s hard for the younger generation to become first-time home buyers today as they try to juggle numerous financial responsibilities, experts say.”Stakes are higher,” says Carrie Schwab Pomerantz, chief strategist of consumer education with Charles Schwab & Co. “Today, young people are solely responsible for their retirement. A lot of young people are coming out of college with high levels of debt.”
Here are three ways parents can help their children buy homes:
1. Cash is Clean and Easy: Experts say simply giving adult children cash for a down payment is one of the smoothest ways to help them buy a home. For parents with the means, gifting can avoid intergenerational squabbles and misunderstandings.
“Helping with cash is pretty clean, pretty easy,” says Jack Guttentag, an emeritus finance professor at the Wharton School of the University of Pennsylvania.
Guttentag helped his adult son buy a house in Venice Beach, Calif., about 15 years ago. Prices were high, so Guttentag ponied up for the down payment, while his son had enough income to carry the mortgage.
“It turned out well,” Guttentag says.
To avoid triggering a taxable event, Guttentag spaced out his gift over two years. An individual can give $12,000 a year to a recipient without having to pay a tax on the gift. Therefore, a couple could give an adult child and the child’s spouse a total of $48,000 in one year.
Yet gifting can become complicated when lender institutions have rules that limit the size of a gift. From a lender’s point of view, a debt obligation-even a gift from parent to child-could weaken the security of the mortgage, Guttentag says.
“When lenders assess someone’s qualification for carrying a mortgage, they take into account their other debt payments,” he says.
Some lenders can be concerned that reported gifts aren’t really gifts at all, and may require borrowers and parents to sign an affidavit that no repayment is expected, Guttentag says. To avoid too much scrutiny by a lender, Guttentag suggests giving your adult child a down payment well in advance of applying for a mortgage.
2. Cosign a Loan or Invest in a House: Some parents may have limited resources as home equity has come under pressure. Others may need their investments for retirement.
Yet they can still help their adult children by cosigning a loan. Cosigning can help make a lender feel more comfortable with extending a mortgage to an adult child, says Adele Brady Bolson, a certified public accountant in Washington state.
However, if payments aren’t made, the mortgage company will go back to the parents, she says. And the parents’ credit can be affected.
Investing in a home can also work for parents that want to be paid back.
Families must be careful planners and good record keepers over time to avoid confusion and intergenerational quarrels. All parties should understand how their respective shares in the equity of the house would be divided and change over time. As children make the mortgage payments, their share of the equity in the house will increase.
“The investment has the potential for conflict because of changes that occur over time,” Guttentag says. “If both parties agree on what the rules are and keep accurate records, there isn’t going to be any conflict.”
And parents may face hard choices if they invest in a child’s home through a loan or by co-signing a mortgage.
“I’ve seen all sorts of really unfortunate things happen,” Bolson says. “Don’t make promises that you cannot keep. Whatever promises you’ve made should be put down in writing.”
3. The Gift of Knowledge: Schwab Pomerantz says the “gift of knowledge” is a good option for parents without the means to contribute cash or invest in a child’s home.
“Very few families have frequent conversations about money and investing,” she says. “So you’re already starting at a deficit in terms of families who talk about finances.”
The lack of conversation is not a socioeconomic issue-families across the wealth spectrum are missing out on these important talks, Schwab Pomerantz says. She suggests “helping kids weed through the various mortgage alternatives to avoid these scandalous offerings that are inappropriate for them.”
Adult children should understand the importance of borrowing within the limit of what they can actually afford, rather than becoming overly indebted to a home.
“It’s never worth it to be house poor. … It limits you from doing so many other things,” Schwab Pomerantz says.
Current turmoil in the mortgage market magnifies the importance of ensuring that all parties understand the terms of a mortgage before buying a home, says Bolson.
“If I’m going to be giving money to my child I need to make sure that my husband is OK with it,” she says. “All parties need to agree.”
Bolson also recommends that a first home for adult children should cost no more that the average for the community, especially when parents are helping financially.
“You want to be cautious about whether this is just the beginning of kids wanting parents to buy what they themselves can’t afford,” she says. She added that in most circumstances parents “should only help with the first home. When (adult children) are ready for the dream home they can trade up to it.”
© 2008, MarketWatch.com Inc.
Distributed by McClatchy-Tribune Information Services.
Here are the average market times, days on market (DOM) to sell a Portland area home:
DOM = Area
103 = Oregon City, Canby
93 = Milwaukie, Clackamas, Happy Valley
93 = Hillsboro, Forest Grove
89 = West Portland
81 = Tigard, Tualatin, Sherwood, Wilsonville
81 = Northeast Portland
80 = Gresham, Troutdale
78 = Northwest Washington County
77 = Lake Oswego, West Linn
76 = North Portland
69 = Southeast Portland
67 = Beaverton, Aloha
