The most prevalent question and one that continues to permeate the industry is:

“Why should a seller go through the short sale process rather than letting their house be foreclosed upon?”

While we cannot speak to every client circumstance, we can say one thing with complete conviction. In almost all instances in which a potential seller is contemplating whether they should short sell their house or let it go through the foreclosure process, a short sale is the better option. The following are examples to consider:

Example A- Short Sale
Mr. Smith owns a home in which he has a mortgage balance of $220,000 and a current market value of $150,000. Mr. Smith has elected to short sell his property. His Realtor successfully obtains a buyer who puts forth an offer price of $120,000 (80% current market value according to Realty Trac Foreclosure Report 5/26/2011). After reviewing the buyers offer and the financial hardship information from Mr. Smith, Mr Smith’s bank agrees to accept the short payoff of $120,000 which would leave a deficiency balance of $100,000.

The transaction closes and is final. Mr. Smith then pulls his credit report 30 days after the transaction takes place. On the report he notices that the mortgage trade line states “Mortgage debt was settled for less than full” and the balance on the mortgage is $0. Mr. Smith is now on the road to financial recovery.

Example B- Foreclosure
For the ease of illustration we will use the same value and mortgage debt amounts as in Example A. However, Mr. Smith has elected to forgo the short sale process and let the bank foreclose on the property. The bank holding his mortgage facilitates the proper legal procedures to foreclose on the property, all of which are costly. Mr. Smith is notified and his property foreclosed upon of which is taken back by the bank to sell as an REO.

Six months later, the bank finally sells Mr. Smith’s home only they sell it for $90,000 (60% of current market value according to Realty Trac Foreclosure report dated 5/26/2011). Remember, as a short sale, the home would have sold for $120,000 keeping the deficiency to $100,000. In addition to the deficiency now being $130,000, the bank has elected to add on legal costs of $15,000 and asset preservation costs of another $5000 for a total deficiency liability of $150,000. Mr. Smith pulls his credit report 30 days after being notified that the bank has sold his property and of his liability.

On the report he notices that the mortgage trade line states “Foreclosure” and the balance is $150,000. Because of Mr Smith’s choice to choose foreclosure vs. short sale his road to financial recovery has taken a major detour. He not only has a foreclosure on his credit report but now has a much larger deficiency balance in which the bank, in most cases, will report on his credit report as a balance owed.

The Best Option is Clear
While the financial and credit advantages are clear when choosing a short sale over a foreclosure, other advantages are sometimes overlooked. The most important of all of them is maintaining the seller’s dignity and peace of mind. We have heard too many stories of families having to leave their homes because of a Sheriff’s order or some other type of legal action. The short sale process alleviates this negative social impact. The process puts the control back in the seller’s hands so that they can get back on the road to financial recovery and start providing for their families. In the battle of the two evils, a short sale always wins!!!

Article Courtesy of:
Christopher Reale, Director of Short Sale Operations at Lepizzera and Laprocina Title and Escrow Services. He is an expert on the short sale process.

IF YOU ARE READING THIS IN ANOTHER STATE (NOT NEW YORK) – PLEASE NOTE THAT STATES HAVE DIFFERENT LAWS REGULATING HOMEOWNERSHIP. PLEASE CONSULT AN ATTORNEY IN YOUR STATE. IF YOU HAVE ANY QUESTIONS OR WOULD LIKE ME TO REFER YOU TO SOMEONE IN YOUR STATE, PLEASE FEEL FREE TO CONTACT ME.

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This video talks about what to look for if you need an attorney to help you negotiate a short sale.

IF YOU ARE READING THIS IN ANOTHER STATE (NOT NEW YORK) – PLEASE NOTE THAT STATES HAVE DIFFERENT LAWS REGULATING HOMEOWNERSHIP. PLEASE CONSULT AN ATTORNEY IN YOUR STATE. IF YOU HAVE ANY QUESTIONS OR WOULD LIKE ME TO REFER YOU TO SOMEONE IN YOUR STATE, PLEASE FEEL FREE TO CONTACT ME.

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Once this settlement is reached, the banks will again move forward on many homes which are currently stalled at some stage in the foreclosure process.

How many homes are we talking about?

There are millions of homes in this category. Calculated Risk quantified the situation:

“There are a large number of seriously delinquent mortgage loans in limbo waiting for this settlement. According to LPS, at the end of August there were about 1.87 million loans seriously delinquent and another 2.15 million loans in the foreclosure process. This is only down slightly from a year ago when 4.4 million loans were seriously delinquent or in-foreclosure. Once the settlement is reached, the pace of foreclosures will pick up sharply.”

The pace will “pick up sharply”.

Bottom Line

As more foreclosures come to the market at discounted prices, there will be greater downward pressure on all housing values. Waiting for the spring selling season to put your house on the market may not make sense this year. The increase in demand may be overshadowed by an increased supply of distressed properties.

Article Courtesy of KCM
IF YOU ARE READING THIS IN ANOTHER STATE (NOT NEW YORK) – PLEASE NOTE THAT STATES HAVE DIFFERENT LAWS REGULATING HOMEOWNERSHIP. PLEASE CONSULT AN ATTORNEY IN YOUR STATE. IF YOU HAVE ANY QUESTIONS OR WOULD LIKE ME TO REFER YOU TO SOMEONE IN YOUR STATE, PLEASE FEEL FREE TO CONTACT ME.

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1. Preventing future delinquencies (people falling behind on their payments)
2. Clearing the backlog of foreclosures already owned by the banks (REOs).

As proof of this, we just need to look at the speech by Edward J. DeMarco, the Acting Director of the Federal Housing Finance Agency (FHFA), to the American Mortgage Conference.

The text of the speech was released earlier this week . Mr. DeMarco explains:

“At the end of the Bush Administration and in the early days of the Obama Administration, attention focused on loan modifications as a way of stabilizing troubled borrowers’ monthly payments and aiding them in avoiding foreclosure. These efforts resulted in the Home Affordable Modification Program, or HAMP. For much of 2009, the key priority was developing and then implementing HAMP; in late 2009 and into 2010, the challenge became making HAMP more operationally effective and converting borrowers from trial modifications to permanent modifications.”

DeMarco then talks about what initiatives the agency is now concentrating on:

“Current priorities are focused on issues at the two ends of the foreclosure process – at one end, we are enhancing efforts to keep current borrowers from going delinquent in the first place and at the other end, we are now focusing on the challenges of disposing of the real estate owned that is left after a foreclosure.”

Preventing New Delinquencies

Trying to prevent more American families from falling delinquent on their mortgage payments is a great first step to a recovery in the housing sector. DeMarco claims:

“FHFA is carefully reviewing the mechanics of the Home Affordable Refinance Program (HARP) program to identify possible enhancements that would reduce barriers for borrowers already otherwise eligible to refinance using HARP. If there are frictions associated with the origination of HARP loans that can be eased while still achieving the program’s intent of assisting borrowers …we will seek to do so.”

Clearing Existing Foreclosures

We must also clear the inventories of foreclosures currently held by the banks. This is seen by FHFA as a crucial component to any plan to help the real estate market recover.

“The second area I would like to briefly discuss is the disposition of Real Estate Owned or REO. In August, FHFA, Treasury, and HUD issued a Request for Information (RFI) on ways to dispose of REO properties. While the Enterprises have considered various approaches to disposing of REO over time, the RFI represents an opportunity to consider new approaches, including possible approaches that include both the Enterprises and the Federal Housing Administration (FHA). By taking this collaborative approach, the three agencies seek ways to improve returns to taxpayers and bring greater stability to local housing markets. We have received nearly 4,000 submissions in response to the RFI. We are encouraged by the strong response and interest in this effort. Obviously it will take a little time to review so many responses but we are already hard at work doing so.

To be clear, this effort is not intended to develop a single, national program for REO disposition. Rather, we are most interested in proposals tailored to the needs and economic conditions of local communities.”

Bottom Line

To help the market, the two major initiatives FHFA is pursuing are preventing new delinquencies and selling off the backlog of foreclosures that currently exists. Modifications, at best, now appear to be on the back burner.

IF YOU ARE READING THIS IN ANOTHER STATE (NOT NEW YORK) – PLEASE NOTE THAT STATES HAVE DIFFERENT LAWS REGULATING HOMEOWNERSHIP. PLEASE CONSULT AN ATTORNEY IN YOUR STATE. IF YOU HAVE ANY QUESTIONS OR WOULD LIKE ME TO REFER YOU TO SOMEONE IN YOUR STATE, PLEASE FEEL FREE TO CONTACT ME.

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(Pssst…there’s a recession going on…people are afraid of losing jobs…and they believe they won’t “get back” the money they spend by renovating upon sale).

The 203K loan can be used for small repairs (with a minimum of $5000 of work) such as a new roof or replacing the boiler. It can go all the way up to practically rebuilding the home and anything in between. Maybe you love a home, the neighborhood, etc., but you hate the kitchen cabinets. The 203K may be for you. As long as the existing foundation stays intact, we can talk about any type of repair, upgrade, modernization or expansion.

With one closing, we will give borrowers money to satisfy their contract with the seller AND establish a Rehab Escrow Account to fund the agreed renovations. The Rehab Escrow Account is managed like a Construction Loan. Money is released after work is completed, the property is inspected by the lender and the title is updated.

Like all FHA loans, the property must be owner occupied and loan approval requires full documentation of income, assets and credit worthiness. At the same time, underwriting guidelines have some flexibility built in. (In theory, we can lend up to 110% of the After-Improved Value of the home for example.)

Loans are processed in the same fashion as any other loan (in terms of income, asset and credit) with the exception of the appraisal. Appraisers work in conjunction with the home improvement contractor and a HUD Approved Pre-Planner to determine: “As-Is” Value, “After-Improved” Value, costs of construction and the draw schedule of the renovation portion of the loan. This work typically adds about a week to the approval process, largely because it should be done BEFORE contracts are signed.

SOME UNIQUE FEATURES OF THE 203K

Mixed-Use Properties may be eligible! As long as the commercial space is no more than the allowable square footage based on the number of floors in the building and none of the renovation monies are used for a commercial renovation, the 203K gives tremendous interest rates for Mixed-Use Properties.
The loan can be used to change property usage (when appropriate municipality approval)…..converting a 1 Family Home to a 2 Family or a 4 Family to a 3 Family or any variation that stays within the 1-4 Family boundaries works.
On major renovations we will finance up to six months payments into the loan. In these cases,the house will not be habitable until after the work is completed.
There is a Streamline 203K for projects that require less than $35,000 of repairs. Typically, we like to see only one or two items of work that can be done quickly (with one inspection).
It is recommended that you work with an experienced loan officer when exploring the 203K Program, as there are many details that need to be considered (from selecting a qualified contractor to the inner workings of the draw schedule and preparing for different contingencies). While the program is more intricate, with the right education ahead of time, it is extremely manageable.

By Dean Hartman
Benchmark Mortgage

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IF YOU ARE READING THIS IN ANOTHER STATE (NOT NEW YORK) – PLEASE NOTE THAT STATES HAVE DIFFERENT LAWS REGULATING HOMEOWNERSHIP. PLEASE CONSULT AN ATTORNEY IN YOUR STATE. IF YOU HAVE ANY QUESTIONS OR WOULD LIKE ME TO REFER YOU TO SOMEONE IN YOUR STATE, PLEASE FEEL FREE TO CONTACT ME.

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I’ve got news for you, in this market, you’re not saving anything.

We are in the middle of a housing crisis, not a “bad market”. And from the numbers I’m looking at, Long Island is in the middle of its uphill battle. I’m not saying prices are going to decline another 30% or that housing values will continue to decline for the next 5 years (yes it’s been nearly 5 years that home prices have steadily declined – since 2007). Time flies when you’re…well time just flies I guess.

In any event, I decided to run the numbers on some random towns and what I looked at was the current available inventory in 10 towns. I then looked at how many short sales and REO (real estate owned – bank owned properties) listings were available and came up with a percentage for each town. The numbers are incredible.

10 Towns

Baldwin 22.6% [190 homes for sale, 42 short sales, 1 Active REO]
Bay Shore 44.8% [386 | 165 | 8]
Bellport 38% [50 | 19 | 0]
Centereach 30.5% [154 | 42 |5]
Corona 23.1% [221 | 48 | 3]
E. Patchogue 29.9% [144 | 42 | 1]
East Hampton 18.4% [87 | 15 | 1]
Hempstead 72.1% [208 | 137 | 13 ]
Lindenhurst 24.6% [260 | 59 | 5]
Shirley 38% [310 | 115 | 3]

When I did this random sample of towns on Long Island, it wasn’t just the numbers that caught my eye, but the differences between how many short sales there are on the market and how little foreclosures are currently listed in comparison. This is a problem and it’s spelled out very good in the graph below.

When you look at a town like Hempstead (in bold), I wasn’t just shocked that nearly 3 in 4 homes is in distress, but that there are only 13 bank-owned homes. The graph above demonstrates how far behind the banks and courts really are to clearing out these homes or fixing the crisis. There’s that word again!

If you take into account that in July of last year, the Times pointed out that the process was taking nearly a year and a half to actually foreclose on a homeowner shows that this problem is systemic.

Fast-forward to the end of 2010 and you see that Nassau and Suffolk county rank in the top three areas of the country with the most months of shadow inventory and what you have an area that has a lot of work to do.

Now I also looked at the national REO numbers in comparison to the sales prices of homes throughout the period from 2008 through 2011 and it’s a mirror image.

As foreclosures go up in volume, the prices drop just as much in the opposite direction.

The Bottom Line

If you’re a homeowner and you’re trying to sell on your own to “save a commission”, please stop and call me right now. This is a housing crisis we’re in, not a “bad market”. It takes special and careful planning and review of information like this, to determine where your price point should be and what marketing strategies to use. If you’re behind on your payments, do not delay, contact me now to go over your options.

If you’re buying, now or 2 years from now – the differences will be tremendous. The cost of mortgages is going up, but prices won’t move all that much from here on out. Shadow inventory or steady short sales and slow-to-the-market foreclosures aren’t going to move the housing prices much further down so you won’t be “saving” either.

Call me to discuss this. I have more slides and information than you can possibly need to make an educated decision about investing in real estate (631)831-9048. I look forward to your call.

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IF YOU ARE READING THIS IN ANOTHER STATE (NOT NEW YORK) – PLEASE NOTE THAT STATES HAVE DIFFERENT LAWS REGULATING HOMEOWNERSHIP. PLEASE CONSULT AN ATTORNEY IN YOUR STATE. IF YOU HAVE ANY QUESTIONS OR WOULD LIKE ME TO REFER YOU TO SOMEONE IN YOUR STATE, PLEASE FEEL FREE TO CONTACT ME.

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Have no fear because this short article is going to give you a link to let you know what a short sale is and what pending bank approval means.

Remembering that a short sale involves the seller having to negotiate with their bank to allow the sale of the home for less than what is owed on the mortgage, the term pending bank approval simply means that an offer has been made and the owner (and everyone else associated with the sale) is waiting for their bank to approve the sales price.

On our local MLS of Long Island, homes that are “pending bank approval” or PBA show on MLSLI as available which does confuse matters a bit with prospective buyers. Conversely, when a “regular” sale (a non-short sale) is put in contract, it is removed from the MLS and does not show as available (or on the market).

Now what goes in to helping a bank (of a seller) approve a short sale includes a fair market analysis of the home values in the immediate area. The bank itself will do what’s called a “Cost Carry Analysis” or CCA. The CCA is simply a mathematical form which forecasts holding costs and other factors such as how much it will cost to foreclose as opposed to allowing the homeowner to sell the home for less than what is owed.

Of course there is so much more that is involved in a short sale, but this should give you some outline as to some of the basics. As always, if you have any questions, please do not hesitate to call me.
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IF YOU ARE READING THIS IN ANOTHER STATE (NOT NEW YORK) – PLEASE NOTE THAT STATES HAVE DIFFERENT LAWS REGULATING HOMEOWNERSHIP. PLEASE CONSULT AN ATTORNEY IN YOUR STATE. IF YOU HAVE ANY QUESTIONS OR WOULD LIKE ME TO REFER YOU TO SOMEONE IN YOUR STATE, PLEASE FEEL FREE TO CONTACT ME.

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The short sale process in a nutshell:
Seller, for whatever reasons (usually a financial hardship or strategic default strategy), puts their home up for sale with the intention of negotiating with their lender(s) to sell the home for less than what they owe on the mortgage.

Buyer makes an offer.

Seller and buyer agents negotiate an acceptable price and terms.

Buyer gets an engineer inspection to determine if they want to move forward with the purchase. In most cases, short sales are sold “as-is”. This means that, unlike “normal” sales,where if the inspection finds a few problems with the home, a homeowner will decide to maybe fix a thing or two or renegotiate the price/terms; a short sale usually has a seller who has no money and is getting no money from the sale to fix anything. Thus, the “as-is” is somewhat final. There are circumstances where a seller will agree to do somethings in order to make the sale happen.

After the engineer inspection, usually the two parties will sign a contract. Please see a real estate attorney about further information on real estate contracts.

This is where the buyer earns his/her patience equity. It usually takes time for a short sale to be negotiated with the sellers lender(s).

During this period, a Broker Price Opinion (BPO) will be ordered. It will either be an interior or exterior BPO. The BPO is simply an evaluation by a local real estate agent who completes these reports for various firms which are hired by lenders to complete. An appraisal also may be (and most likely will) ordered by the seller’s lender(s).

These reports are used to determine what the value of the home is. Then the lender(s) can determine if the offer price is adequate.

From here, the seller may receive word of an approval of the short sale and be issued a “pay off” with terms and time frames for closing. Sometimes, the lender will counter the price and terms in the original contract. Then it is up to the buyer to decide whether or not to accept the counter from the lender, counter it back (i.e. come up in price a little) or cancel the deal entirely.

Please note that multiple lenders on a seller’s home may complicate the negotiations. This may include the “first bank” agreeing to give a portion of the sale proceeds to the “second/Third/Fourth bank”. This usually does complicate the process.

From here, assuming all is cleared and accepted. The buyer will then order their appraisal (I usually recommend that buyers wait to get their appraisal from their lender due to the degree of uncertainty with short sales). The buyer will then renew their application, updating it accordingly and get their mortgage commitment and clear to close on or before the “pay off” dates issued by the seller’s lender(s).

The buyer will do a walk-through of the home like they normally would on any sale, making sure the home meets whatever criteria is set in the contract (i.e. “broom-swept clean, etc.”.

Sellers normally do not attend the closing. I would say that in my experience, about 1 in 4 sellers attend their short sale closings. Usually a power of attorney is executed prior to closing. I guess since this process is very challenging, most sellers don’t want to attend this closing.

Through this process, a seller must always keep in mind that a waiver of deficiency may or may not be put into writing from their respective lender(s). Watch this video for more on this issue.

For buyers, there are many variables that can pop up throughout this process so you must be willing to have the patience to see it through or simply back out when the time is right for you.

Short sales, in this market, present a fantastic buying opportunity mainly because most sell at about 80% of fair market value due to the fact that they are “distressed” sales. So if you have stomach for it, I highly recommend that you consider taking a shot at a good deal.

For homeowners, I would say that in 95% of the circumstances, a short sale should be given serious consideration over the alternative of foreclosure. When faced with the options, a foreclosure is devastating to future home-buying opportunities [watch video].

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A common term used by people who buy “handyman specials” is sweat equity. This type of equity is what you’re buying when you buy the worst house on the best block. You’re planning to turn the home into something better after you sweat out the rehabilitation process.

Patience equity is what the buyer of a short sale is aiming for.

Honestly, you could call it sweat equity as well because after you’ve made the offer and it’s been accepted, you’re going to “sweat it out” over waiting for the sellers bank to okay the deal.

Either way, as a buyer of a short sale, it’s imperative that you understand the process of purchasing a home that is “subject to bank approval”. When you do this, you must be prepared to be patient. The longer you can sit back and wait for the sellers bank to give any indication or acknowledgement of an offer, the better off you’ll be in eventually earning your patience equity.

While there are some indications that banks have improved their ability to expedite their short sale transactions over the past few years, I can tell you from experience that you still must be willing to wait out the bank. It’s imperative also to call me and let me analyze your prospective short sale deal. I will let you know how good of a chance it has at closing. And by all means, call me before you find a home and let’s make an appointment to go see short sales together!

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However, in this article, I’m going to includes several other points of interest that will include information on mortgage rates, foreclosures and “the real estate bubble”.

To bring all the information together, I’m including a video where I review some of this information with you. Specifically, I’d like to start with the “real estate bubble”. You’ve definitely heard the saying, “What goes up, must come down.” This video is going to focus on the bubble vs. the norm and it’s powerful information.

The Real Estate Bubble

So after watching this video, you might be wondering what exactly is going to drag prices down.

Supply Vs. Demand

This chart continues to bother me because it doesn’t seem to change very much.

There are slight differences, but overall, things are still basically the same when it comes to supply and demand. So the main drag on Long Island home prices is inventory. There is simply too much supply and not enough demand.

So someone could determine that this is going to change in 2012 or during this Spring. I do believe the demand is definitely going to increase over the Spring months due to low prices and mortgage rates.

Mortgage Rates

This brings me to mortgage rates. Where will they be five months from now? What’s interesting to look at is the effect the stimulus package had on the mortgage rates.

There’s no doubt that mortgage rates were impacted positively by stimulus packages and home buyer credits. Now if you’ve paid attention to quantitative easing by the Fed, you’ll know that the purchasing of Treasuries by the Fed will end in June, 2011. This is a main component of low mortgage rates.

If there are no viable buyers for Treasury notes after the Federal Reserve stops purchasing these notes, this could very possibly send mortgage rates higher, literally overnight.

Now as mortgage rates go up, this will impact how much buyers can afford to borrow.

For home sellers, this information is vital to keeping your “eye on the ball”. If your intention is to sell your home for the most money you can in 2011, there is no doubt in my opinion, that listing your home now is better than waiting.

Foreclosures

Are foreclosures going to be a problem for the Long Island real estate market in 2011? The answer is yes. How will foreclosures impact prices? The same way they have over the last two years. Increases in short sales and bank foreclosures to the market continue to drag down prices because they sell for a lot less than your average “normal sale”. When a foreclosure or short sale closes, that sale number becomes part of what appraisers look at when they determine the value of a home.

If there’s one thing the graph above demonstrates, it’s that we have a long way towards getting through the foreclosure mess. Notice the inventory building up to 2008 as it rises, we are now on the way down and if it took 4 years to get to the top, I’d say it’s going to take nearly the same amount of time to work out of it. That’s puts us at 2014 to be basically through the foreclosure mess.

The Bottom Line

The pricing forecast for the Long Island Real Estate market is much like the rest of the country. Our greatest challenge is getting homes sold vs. homes that are for sale. Supply is still very high and demand, while improving, is still very low. One could look at the supply vs. demand challenge and adjust it for the season (we had a rough winter that may have hindered sales), but with mortgage rates still at historic lows and prices down nearly 40%, I don’t care what snow storms hit our area in February, home buyers should have been out in full force – buying!

The fact that sales were much lower than current supply, only makes me wonder what buyers are thinking. I know I’ve spoken with numerous buyers and many have told me they’re waiting to save more money or for prices to drop or for the moon, stars and sun to be in perfect alignment. Whatever the reasons may be, buyers are still cautious and that means, if you’re in the market to sell, you’d better be talking with a professional and deciphering this important information.

If you’re having difficulty paying the mortgage or are so “upside down” on your home value (the home is worth much less than what you owe) and you’re concerned about continuing to pay a mortgage (and dump your money into a declining investment), then contact me. Do not “wait it out”. Maybe waiting is right for you, but the only way to determine that is to talk with an expert. Hopefully, I can provide you with info that helps you make your best decision possible. I can be reached at (631)881-5959.

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