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Why A Denver Short Sale?
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Why A Denver Short Sale?

One of the most common questions were are asked on a regular basis by Denver area homeowners who are in an underwater situation is ‘Our home has dropped in value a fair amount, Why would a bank want to do a Denver short sale in the first place?’

It is a good question - why would an financial institution want to deliberately take a loss on a transaction? The answer is spelled out in the name of the department that handles short sale transactions for the lenders - LOSS MITIGATION Department. The Bank or lender is trying to mitigate their loss. RealtyTrac - a leading foreclosure data company - tracks pre-foreclosure, foreclosure and REO (Real Estate Owned or Bank Owned) housing sales and shows that for the first Quarter of 2011 the average pre-foreclosure sale price was 9.49% less compared to a equity property but 26.66% discount for houses sold in foreclosure and a 35.08% for REO properties. Banks know they are going to lose more money by foreclosing on a property than they will by agreeing to a short sale.

Foreclosing on a home not only results in a lower sale price. When a Bank takes back a house they have to start to pay taxes on the property, maintenance, HOA fees etc. They also have to pay lawyer fees. In reality, the last thing the bank wants to do, in theory, is to own your home. They are in the business of loaning money, not owning homes. Why then, are there stories of banks foreclosing on homes after refusing a short sale price, only to sell it at a lower price as an REO? Sorry, I can’t answer that question. Sometimes decisions are impossible to figure out, and this is one of those times!

A short sale is a foreclosure alternative. There are others to be sure - a deed in lieu of foreclosure, renting, loan modification, mortgage forebearance, and bankruptcy to name a few. For some homeowners any of these may be viable options but there are some things to consider in each.

Loan modifications, for instance, have failed to provide the relief many government agencies were hoping. Studies have shown that the re-default rate on loan modifications is over 50%. Deed in lieu of foreclosure can be effective but are almost impossible if you have more than one lien or mortgages on the house. Most lenders would rather you sell the property via a short sale than turn it into them, especially with the amount of bank owned real estate they may already have.

Which brings us to short sales. So what is a short sale?

From Wikipedia - A short sale is a sale of real estate in which the sale proceeds fall short of the balance owed on the property’s loan.

Let’s say you bought a house in Denver in 2006 for $365,000.00 and you put 20% down on the house. Your mortgage at the start of the loan was $292,000.00. In 2009 your mortgage rate went from 1.9% to 5% so your payment went from $1057 to $1557. To make matters worse, the value of your house has dropped to $245,000.00. Now what? One of the options is to sell your house short - sell it from less than the balance of the loan.

Now - you can’t just DO that. First, you have to call a Realtor. Most banks won’t consider a short sale unless the home is listed on the MLS. They want to be sure you are actively trying to sell the house for a market value amount. Secondly, you have to qualify. You must show the bank there is a reason why you can’t afford the mortgage payment any longer. This is called the hardship letter. You need to explain that the hardship won’t disappear in 2 months, that it is a long term hardship - job loss, divorce, illness etc. You have to be able to prove that the value of the house has depreciated below the mortgage balance. This is why the house should be listed with a Realtor. Some people think that they will list the home themselves to save the Realtor fees. What you may not realize is that in a short sale, the Bank pays those fees. If you can sell the house for enough to cover your mortgage only by not paying Realtor fees, by all means try an FSBO approach. But if you are under water without factoring in commissions, then find a Realtor that is experienced with short sales.

Once the house is up for sale, nothing really happens until a buyer makes an offer to purchase the property. Once an offer is received, the Realtor will collect the necessary paperwork (including tax returns, bank statements, hardship letter, listing agreement information, MLS listing etc) and submit it to the bank. It is VERY important that this submission is complete. An incomplete submission may doom a transaction before it is even started. These days, Bank Loss Mitigators have 10’s if not 100’s of files on their desks. If a file isn’t complete, it gets pushed to the bottom of the pile.

The bank, once they have the offer and have assigned an mitigator to the file, will request a BPO (Broker’s Price Opinion). This is completed by either a local Broker or sometimes an approved property appraiser. Their job is to view the property and make an educated price appraisal of the property. The Bank will use this BPO number to compare against the offer to purchase. If the numbers are an exact match, the bank usually signs off on the sale. If the numbers don’t match, then the negotiations begin. The bank will argue as to why their BPO value represents the true market value of the property while your listing agent will try to get the buyer to either increase their offer or to explain why the BPO isn’t 100% accurate. Perhaps the BPO didn’t include the fact that there is a crack in the foundation that needs to be repaired by the buyer so the BPO is over-valued. Also, the bank may agree on the sale price but wants the difference between the sale price and loan amount in the form of a promissory note. You, as the homeowner may agree to a $10,000 promissory note but not a $40,000. All of this is part of the negotiation.

Once the negotiations are completed, you can set a closing date with the buyer and close your sale, like a traditional transaction. A few things to consider at closing. As mentioned, the realtor fees are paid by the bank. Also, the bank will not allow the seller to receive any funds from the transaction. This includes any commission - you can’t be the Realtor on your own short sale. The bank, on top of the Promissory note, will also provide you an IRS form 1099 for the amount of the forgiven debt. This debt is taxable (the IRS considers it a gain) but you may qualify for a tax exemption which is in place for mortgage debt relief until the end of 2012. Please discuss whether you are eligible for this exemption with a tax professional.

When facing a Denver area Foreclosure, it certainly helps to know your alternatives and a short sale is perhaps the best option you have.


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