The Goad Team's Blog

Foreclosures (aka: Bank Owned, REO’s) vs Short Sales

Most articles you'll find about Foreclosures and Short Sales are focused on sellers who may be losing their home to foreclosure. However, if you're a buyer looking for information on what you should purchase, we've made it easy to understand the differences between Short Sales and Foreclosures!


Aren't Foreclosures and Short Sales the Same?

At first glance, a Foreclosure and a Short Sale (or pre-foreclosure) would seem almost the same. Both of them are being sold for much less than they were last purchased, the bank gets all the money from the sale and has final say as to how much they'll accept, and both are very abundant in this market.

There are some major differences between Foreclosures and Short Sales. We have given you some of the important differences buyers should know before making any offers.


The Short Sale

A short sale is still owned by a private entity and may still be occupied, either by the owner or a tenant. The current owner is no longer able or no longer willing to make the payments, and they are probably unable to sell their home because the value of the home is now much lower than what they currently owe on their mortgage(s). In this situation, one option the owner has is to try to negotiate a "Short Sale" with their bank.

In a Short Sale, the bank allows the seller to sell their home either at or below the current market value and "forgive" the difference. For example, Sally Seller purchased her home 2 years ago for $350,000, and she currently owes $300,000. But because of the rapid decline of the market in the last year, her home is only worth $200,000, so she is unable to sell it. The bank may allow her to sell her home for $200,000 and forgive the difference of $100,000 so that she may avoid foreclosure. She can still be involved in the selling process by hiring The Goad Team of Century 21 Infinity to market the property, procure offers, etc. However, because the bank is granting her the opportunity to sell her home through the Short Sale process, the sale of her home is still subject to the bank's approval. The bank will look at factors such as the seller's financial situation and the home's current market value, and they will determine whether or not they will accept any offers that have been made on the property. So, in essence, you can make an offer on a home that is “subject to short sale approval” and wait for the bank to answer.

"SHORT" sale Time Frame

These days, a "Short Sale" can be anything but short. The time that it takes for this process varies from bank to bank, loan to loan, investor to investor, however be prepared for an average wait time of 30 to 60 Days. Because so many homes are going into foreclosure, banks
have to hire negotiators, who are inundated with files (many are handling over 100 files at a time). It can be extremely difficult for a listing agent to get in contact with their negotiator. Since the negotiator is such a crucial part of the Short Sale process, it is imperative for the listing agent to be contacting the negotiator on a regular basis so that all necessary parts of the Short
Sale can be completed.


Here's how a Short Sale works:

Sally Seller hires The Goad Team of Century 21Infinity and puts her home on the market. After she receives an offer, the offer is submitted to the bank, along with documentation that Sally’s bank wants to review in order for Sally to demonstrate that Sally indeed has a Hardship and can no longer afford to make the monthly mortgage payments, NOT that Sally simply no longer wants to make the payments. The bank(s) will obtain an appraisal or BPO to find out the properties approximate value. The Negotiator will then prepare an analysis of how much will be lost by agreeing to conduct a Short Sale vs Foreclosing on the Property. Once the bank or the investor decide if it is in their best interest they will either issue a “Short Sale Approval Letter” or Negotiate the Terms by which they will agree to a Short Sale. However it may not end there, if the loan is “backed” by a governmental organization (such as Fannie Mae or Freddie Mac) OR the loan has Mortgage Insurance then the Short Sale must be approved by the governmental organization or Mortgage Insurance Company as well.

The Short Sale process is very complicated, and takes time for approval before you can start making plans to move in! In today’s market many times a buyer is able to get a “better deal” on a Short Sale vs a Foreclosure, however keep in mind as with most other things in life, the better deal comes at a cost such as: longer wait times for approval of offers, not knowing for sure whether the bank will approve of the price or terms until after waiting for some time, etc.

Something else to keep in mind when looking at Short Sale properties, is that the listing price for a property is set by the listing agent, and in most cases has not yet been approved by the bank. So until the bank issues the Short Sale Approval Letter, it is not known by anyone just what price the bank will agree to sell the property for. If the listing agent has done their job the listing price SHOULD be at, or close to what the bank(s) can “realistically” expect to get for the property.

The Foreclosure (aka Bank Owned or REO’s)

A Foreclosure (or REO) property is completely owned by the bank. It has gone through the entire foreclosure process and is now fully controlled by the bank. The property generally will be vacant, there are no negotiators to deal with. Instead, you deal directly with the listing agent that the bank
chose as its representative. The bank has already done the ground work and has come to a bottom line price that they find acceptable. There is usually less waiting time for an answer, and once your offer is accepted, you are able to begin the escrow process. REO’s do not need to go through all of the steps for approval that Short Sales do, so it is usually a much easier process to work with. You make an offer, and if accepted you are on your way to moving in.

However in today’s market there is HIGH DEMAND for Foreclosures, as a result, the listing agent many times receives several offers and may put out a "Multiple Counter Offer" to all the parties who made offers. The Multiple Counter Offer will state that there are several offers on the property and will ask everyone to submit their “Highest and Best Offer”. So, after all is said and done, the offers many times end up being much higher than what they were originally asking for the property.

Thank you for reading our blog about Foreclosures and Short Sales. We hope you find this information valuable, and of course if your are interest in buying or selling a property, please give a member of The Goad Team of Century 21 Infinity a call at (702) 586-2772.

With out a doubt...YES.  Prime example, we recently had a client who's home we were selling, we will call them the "Smith's Family".  The Smith Family did not have a home inspection completed when they purchased, as after all it was Brand New, nothing could be wrong with a Brand New Home right? WRONG

There was indeed something wrong with the home, and it was a severly damaged roof joist.  The Smith Family was unaware of the problem, until we procured a buyer for the house, and the buyer of the home had a home inspection conducted.  The home inspector found and noted this broken roof joist, and stated that this was obviouly a builder defect and had been this way since it was new.  Of course the buyer would not purchase the home unless it was fixed.  Because the roof was sagging, from the broken joist, this turned out to be a costly repair to fix the problem ($3,950.00).  Had the Smith Family paid about $400.00 for a home inspection, that would have caught the problem, this would have been the builders issue to fix at that time, rather than the sellers problem to fix later on.  The builders warranty had run out long before we were selling the house, so of course the builder refused to do anything about it.

Bottom line...Always have a Home Inspection conducted on any home you intend to purchase.  Do not purchase a home "blindly" as you never know what you may be getting into.

The term "Short Sale" is often times thrown around by Real Estate Professionals with the belief that the general public knows exactly what they are referring to.  So for that reason I wanted to help describe "in a nutshell" what a Short Sale is.

So what exactly is a "Short Sale"?  A short sale is when a persons mortgage company agrees to forgive a certain portion of the debt that the person owes on their mortgage.  For example lets say that your current mortgage balance is $300,000 on your house, you need to sell that house but in today's market that house will sell for $250,000.  This means that you need to come up with $50,000 OUT OF YOUR POCKET to sell your house. (this does not include Real Estate Agent fee's and closing costs (escrow & title fees, transfer taxes, appraisals, demand and reconveyance fees, etc.) and in today's market in order to sell a house the seller is often having to pay the buyers costs as well.  All of these cost will generally run anywhere from 8-11% of the sales price.  For the purposes of our example lets use 8% in total closing costs, commission, etc. at a sales price of $250,000 which is $20,000.  So in order to sell your house you would need to come OUT OF POCKET $70,000.

In a situation such as this if you do no have the $70,000 to sell your house then you (or your real estate professional) can get in contact with your mortgage company to request authorization to perform a "Short Sale" where your mortgage company (or companies if you have more than one mortgage) agree to take less than what is owed on the mortgage in order to sell the house.

Why would a mortgage company agree to this?  Simply put to save money!!!  Most people looking to conduct a short sale can no longer afford their mortgage payments.  If the mortgage company has to foreclose on your property this will generally cost them between $50,000-$70,000 in fees to take your house from you.  But it does not stop there, remember you owed them $300,000, now they spent $50,000 taking back the house (for the purposes of our example we will use the low side of the foreclosure fees)  and now they need to sell it.  Lets say your house is still worth $250,000 by the time the bank takes it back, they still have to pay Real Estate Agent commissions and closing costs in order to sell it after the foreclosure.  However as an REO Property (REO - Real Estate Owned meaning "owned by the bank" now) generally buyer's expect a better deal on these types of properties so for the purposes of our example lets say the mortgage company was able to sell the house for $240,000.  Lets look at their losses...

•   $240,000 Sales Price
• - $ 50,000 Foreclosure Fees
• - $ 20,000 Real Estate Commissions and Closing Costs
•   $170,000 Amount Mortgage Company recouped from original $300,000

If a "Short Sale" had been conducted it would have looked more like this...

•   $250,000 Sale Price
• - $ 20,000 Real Estate Commissions and Closing Costs
•   $230,000 Amount Mortgage Company recouped from original $300,000

Please bear in mind this is a very simplified scenario, there could be and generally are more fees the mortgage company will incur taking back, and later selling the property. 

So this is how it benefits the mortgage company.  Now...how does a Short Sale benefits the person selling the house?  A foreclosure is generally looked at as being one of, if not the worst items a person can have on their credit report.  In fact when I see people trying to buy homes that have filed bankruptcy, many times they can buy a house months after the bankruptcy has been discharged (depending on what type of bankruptcy the person filed for).  However a foreclosure is a much different story...It may be several years before they can buy another house.

I have been conducting Short Sales for years and not once have I had a seller come back to me and say that the bank is trying to get them to pay back what they lost on the house.  Bear in mind the mortgage company agreed to forgive a certain portion of your debt, so it would be rather hard for a mortgage company to go before a court and ask for judgement on a debt that they agreed to forgive.   However I know of numerous times where the bank is attempting to collect the deficiency money from the seller after they have foreclosed and later sold the property.  Almost always it is better for both the seller and mortgage company (or companies) to conduct a short sale rather than foreclose.  When a short sale has been performed, in the past the mortgage company(s) would issue the seller a 1099 form, as the seller was responsible for paying taxes on the amount that the mortgage company agreed to forgive.  The IRS viewed this amount as "taxable income" and therefore would tax the seller on the forgiven amount.  BUT recently President Bush signed the H.R. 3648, The Mortgage Forgiveness Debt Relief Act of 2007 which now removed the tax on the amount the mortgage company forgave, which is a huge benefit to those who need to sell via a short sale.*

In a nut shell the Short Sale process can be compared to applying for a mortgage in reverse.  When you applied for a mortgage to purchase your house the bank generally wanted you to provide documentation that you WERE ABLE to make the payments on the house.  On a Short Sale the mortgage company will now want documentation that you can NO LONGER afford to make the payments on the house.

Another thing for a person facing a situation such as this to consider is to talk an attorney and go over other options that may help your particular situation, such as filing for bankruptcy protection, as the attorney may be able to provide other option for you to consider.  I would be happy to recommend an attorney if you would like. 

If you or someone you know is behind on their mortgage payments or realizing they may soon not be able to afford to make their mortgage payment, give The Goad Team of Century 21 Infinity a call at (702) 460-3782.  The sooner you start taking care of the situation the better, as the further the mortgage payments get behind the more damage will occur to your credit, and if you get far enough behind on your payments the bank may foreclose before the Short Sale can take place, thereby eliminating this option.

John Goad, Jr. with The Goad Team of Century 21 Infinity

* The Goad Team always recomends you consult with your accountant when it comes to possible tax ramifications, as no member of The Goad Team is a Certified Public Accountant.

For this months Las Vegas Market Update there is good news and more good news.  We have been tracking the number of Listings and number of sales since May of 2007 to keep a better eye on the market and any changes that have been taking place and here are those figures...

Month 2007	# of Sales	# of Resale Homes on the Market
May	2,080	27,541
June	1,961	28,185
July	1,735	28,864
August	1,701	29,290
September	1,273	29,942
October	1,234	30,314
November	1,479	27,851

So what do we mean by good news and more good news?  Well if your a seller in the Las Vegas market...The good news is that the number of listings on the resale market if finally DECLINING.  As you can see above the number of homes on the market has steadily been increasing from May-October.  Also note that during that period the number of sales has been declining.  HOWEVER for the month of November the number of Sales increased, while the number of homes on the market has declined.  This is great news for sellers in that while it is still a "Buyer's Market" there are some slight signs of improvement.

So what about the news for Buyers?  Again while there has been a slight improvement in the market for sellers, we still are in a "Buyer's Market" with plenty of great deals out there.  Many buyers ask us "Should we wait to buy at this time?"  This is a very complex question because it depends on a lot of variables.  We believe prices will continue to decline for a bit longer. HOWEVER with that being said Mortgage Lenders are continuing to tighten their guidelines, in other words making it tougher and tougher to qualify for a loan.  I have seen buyers get turned down for a mortgage loan over the last month that would have qualified 3-6 month ago.  So if you wait for prices to decline a little more, by the time they decline you may not be able to qualify for a loan at that time, whereas today you may be able to.  The key thing in this market it to get a great deal on a home and get it today.  For example...lets say you buy a home today at 15% below market value and you qualify for a mortgage today.  You would still be better off than waiting 6 month (and for purposes of this example lets assume prices will decline another 10%) and then you find out at that time you can no longer qualify for a mortgage loan, due to fact that the lenders have tightened their guidelines again. 

Now obviously if you have excellent Credit, Great Income, Verifiable Assets and Income, etc. the lenders tightening their guidelines is not as big of an issue and you may indeed want to wait a little longer before buying.  But if you are like most people in Las Vegas that have Less than perfect Credit, a moderate income, and maybe work for tips that you cannot verify, etc. there may be a good chance of not only missing out on a get a great deal, but you may no longer be able to buy.

Call a member of The Goad Team today and we can go over your individual situation and help you decide if Now is a good time to buy for you, or if you should wait a little longer.  We are always here to help.

In my last blog post I discussed the idea that with the current Buyer's Market Conditions that exist in Las Vegas, we should have a tremendous amount of Real Estate Investors pouring into Las Vegas.  Well we are in the beginning stages of an influx of investors heading into the Las Vegas market.  We have been placing offers on behalf of some of our Real Estate investors on REO and Foreclosure homes on the market, and in some cases our clients are not getting the properties due to MULTIPLE OFFERS MADE ON THE SAME PROPERTY.  This is a phenomenon that I have not seen happen since the Las Vegas Real Estate Boom in 2004/2005.  Granted the properties we were making offers on where price lower than market value (sometimes as much as 20-30% below market value) however again keep in mind that multiple offer situations have been unheard of for the last couple of years.

Why are investors focusing on Las Vegas during the current Real Estate crisis conditions?  Here are just some of the reasons...

• Las Vegas currently has the 5th fastest rising rental rates in the nation.
• Most investors know that historically Las Vegas bounces back from economic hardships faster than any other part of the country.  For example: Much of the United States took 2 years or more to recover from the economic disaster created by 9/11.  Las Vegas recovered in approximately 1 year.
• It is estimated that between 180,000 and 320,000 new jobs will be created in Las Vegas by 2010...more jobs equals more housing needs.

If your interested in cashing in on the current market conditions, and would like to start investing in your future...be sure and visit out Foreclosure Web Site www.LVInvestorForeclosures.com or www.LVDeals.com