I mentioned previously that as a society we don’t have the political will to foreclose on every mortgage in default. As a result, we see government interventions including foreclosure moratoriums, troubled asset relief, and new loan modification programs. However, these are at best stop-gap measures — each failing to adequately reduce principal balances to address the core problem of negative equity.
It’s time to stop waiting for a government bailout or for the bank to come to take the house. Homeowners in default don’t have to choose between the lesser evil of foreclosure or a government solution that leaves them a prisoner of debt. There is another way — a short sale.
A short sale is a sale of a home for less than the amount owed on the loan or loans. There are many reasons why a homeowner who receives a notice of default should take charge and aggressively pursue a short sale. First is the impact on the credit report. Dealing with debt via bankruptcy affects a credit report for 10 years vs. a worst-case of seven years with a short sale. When it comes to buying another home, foreclosure prevents the owner from getting a Fannie Mae loan for five years as compared to two years for a short sale. Then there is the opportunity to negotiate a full release from all lenders, allowing the homeowner to settle with no concern for future collection efforts. And proactively negotiating a short sale doesn’t bear the stigma of foreclosure or walking away from a debt.
However, navigating a short sale is not for the faint of heart or the inexperienced. Lenders differ greatly in how they respond to offers. Some lenders, such as Wachovia, are aggressively processing short sales, while others, such as Bank of America, are more cumbersome. In addition, the regulations can be confusing, even to some industry professionals. In August 2009 in California, Senate Bill 306 was approved, which made changes to the California Civil Code related to real property transactions. (See the full text of SB 306.)Some analysts have said they expect that SB 306 will dramatically speed the short sale process. In reality, SB 306 doesn’t address the overall short-sale timeline, just steps in the process after the agreement is executed. Specifically, a lender now must respond in writing to a request for a short-pay demand statement in 21 days. Since lenders already have a similar requirement for requests for a payoff demand for loans not in default, this will not likely improve short sale timelines dramatically.
When it comes to distressed properties, a REALTOR® is in the best position to partner with a homeowner to secure an offer on the home and negotiate a short sale with the lender. Proactive REALTOR®s use tools like ForeclosureRadar.com to locate homeowners best suited for short sales, track the process, and monitor the status of the property during the short sale. Tracking and monitoring are important to ensure that the property isn’t foreclosed on before the sale is successfully completed, a matter of interest not only to the sellers but also to the buyers.
Finding an agent that is a good fit is more challenging when facing foreclosure. A few key questions will help verify that the agent has the knowledge, experience, and infrastructure to handle a short sale scenario, such as:
- How many short sales have you handled in the last year? How many were successfully closed?
- Have you worked with my lender before?
- Do you work with the lender directly or with a short-sale processing company?
- Can I get three references of homeowners for whom you have executed a short sale?
Homeowners should also seek advice from a qualified accountant and real estate attorney.
Foreclosure is not necessarily inevitable. A homeowner who receives a notice of default should contact a REALTOR® to investigate the possibility of a short sale. It can offer the quickest and cleanest path to financial recovery.