Even if you can’t save your home,
you can save your credit
Experts give the ins and outs of short sales
By Christa Buchanan
C & G Staff Writer
Facing foreclosure is a difficult and emotional ordeal. Not only does the homeowner have to face the fact that the biggest investment of their life is seemingly being taken away, but they also have to face the messy aftereffect foreclosure leaves on their credit.
The good news is that there is an alternative to foreclosure — the short sale.
“We need to let people know there is a resource out there for them that will somewhat save their credit, and that option is a short sale in lieu of foreclosure,” said Gary Patrosso, a Realtor with Keller Williams in St. Clair Shores.
“They’re still going to take a hit by doing the short sale, but the recovery period is much shorter. … However, this (a short sale) has to be an anomaly on your record,” said Scott LaFond, a senior consultant with the Short Sale Team LLC in Troy.
“A foreclosure will drop (a credit score) from 300-400 points, easy. A short sale, from 80-100 points, from articles I have read. … With a foreclosure, you won’t be able to rebuild your credit right away, but with a short sale, you can,” said Will Weaver, a short sale expert and Realtor with Century 21 Town & Country in Royal Oak, adding that with the passage of the Mortgage Forgiveness Relief Act of 2007, sellers no longer have to pay taxes on the monetary difference between the home’s value and what it sells for in a short sale. Visit www.irs.gov for more information.
Homeowners also have to be wary of who they are dealing with, as there are a number of scams out there right now.
“They should always consult with some kind of credit repair company, a reputable one,” said Weaver, advising homeowners to “beware of these so-called loss mitigation services; they are scams, period.”
Ralph Newkirk, manager of Real Estate One-Corporate Foreclosure Division in Southfield, agrees.
“Anytime anybody seems to get into financial trouble, you always have these guys that come out of the woodwork that are sending them things saying, ‘sign your house over to me and I’ll take care of it’ and stuff, because I go into these vacant homes and I see all those letters that people have sent trying to get things. … That’s why we have agents that know about short sales — it makes a big difference when people realize there is another option. It was that the only options were to redeem the property or lose it,” said Newkirk.
What is the proper process when facing foreclosure?
“The process would be to, No. 1, call the lender and see if the lender is willing to do a loan modification, and if they’re not willing to do a loan modification, see if they are willing to do a deed in lieu or a forbearance agreement,” said Weaver, adding that “a deed in lieu is signing the house back in lieu of a foreclosure, which is supposed to be less damaging to your credit.”
If no agreement can be reached at this point, said Weaver, it’s time to consider a short sale.
“A short sale happens when someone is either in trouble, they’re not making their house payment and they’re headed for foreclosure, although maybe they haven’t accepted that yet,” said Patrosso, noting that banks prefer short sales to foreclosures, as foreclosures are costly.
“It costs the bank an average of $50-$60 per day for every day they have a foreclosure sitting vacant on the market, because they’ve got to pay commission to the agent, pay utilities, taxes, lawn care and upkeep, and then things like people breaking into vacant homes and stealing things, and they have to pay for the board-up and maintenance,” said Newkirk.
A well-maintained property is another motivation for banks due to the fact that foreclosed properties are often in disrepair, or even destroyed, said LaFond: By destroying the property, “they are only hurting themselves, because the home’s deficiency becomes greater.”
“By the time that it gets to the foreclosure process and once it’s over the houses aren’t in that great of shape. … A lot of time in foreclosure, people take it out on the house — they rip up carpeting, take lighting fixtures, the furnace, and things like this. The old saying is that they’ll take everything but the kitchen sink, but I had a house in Commerce where I didn’t even know where the kitchen was,” said Newkirk.
So, what exactly is a short sale and who qualifies?
“A short sale, the definition in layman’s terms, is that the payoff amount is less than what’s owed on the property to satisfy the loan. … People that would qualify would, No. 1, be someone with a hardship,” said Weaver.
Hardships can vary from either being behind, or potentially behind, in payments and not being able to pay anymore to having interest rates adjust to the point where payments can no longer be made, to personal hardships, such a loss of job, illness and divorce.
To qualify for a short sale, said LaFond, “they have to demonstrate that they are suffering a hardship to give the bank a reason to accept less in payment than what’s owed on the loan.”
The homeowner will have to submit a hardship letter, among other documents to prove their case.
“The essay question is, ‘How did you get in this trouble?’… Don’t just put on there that you don’t have any money. Tell them how you got there: Tell them about job loss, job reduction or price, divorce, illness, death, something. Go into fine detail and tell them exactly what happened. … Don’t be embarrassed,” said Newkirk. “This market is just the way it is, and you’re not alone — don’t feel bad.”
Weaver gave the following advice for those looking into a short sale: “No. 1, my advice would be to talk to a Realtor. No. 2, they are going to want to gather the following: They need to write a hardship letter; they need to get their most recent two months of their pay stubs, the last two months of their checking and saving account statements, the last four years of their tax returns so that they can prove they have no assets, and a financial disclosure form, which show what their monthly bills are, what their income is, and how much they are in the red each month.”
Short sale sellers also have to consider all of their assets, said Newkirk, so it’s a good idea to talk to a CPA.
“With that short sale packet, you have to list all your assets and all your liabilities. That includes 401Ks, any properties they have, anything, besides any liabilities, which include second and third mortgages,” said Newkirk. “If they have assets, like a 401K, the banks are going to ask them to try and pull some money out of there and try to keep the house up.”
How does a short sale work?
“The bottom line is they meet with a Realtor and get their house on the market. When an offer comes in, no matter what the offer is, it’s subject to lender approval, so we send it to the lender, and here’s what the lender will do: They’ll analyze the offer and they say you’ve got a deal, or reject — if they reject, then the buyer has to bring a better offer, or counter — it’s no different than any other offer: It’s accept, reject or counter,” said Weaver.
However, said Patrosso, “with a short sale, once you get an offer, and this is something people need to realize, it could be 30-45 days before the banks even get back with you.”
LaFond agreed: “It’s an extraordinarily fluid time out there right now, and if the buyer doesn’t have an understanding that that’s the case, the buyer’s gonna walk. You’ve got to manage expectations. They may want to move in right away. They need to know in advance that it could take 30 or more days for approval.”
Overall, said Weaver, homeowners should explore all the options that are available and make sure that they are dealing with reputable professionals.
“The point of a short sale is about helping as many people as you can — that’s the key. … There are people out there that are preying on desperate people — it’s so scary out there — that’s why it’s so important they deal with a reputable professional,” said Weaver, citing scams in which people are tricked into signing over their deeds, or are charged exorbitant fees for credit “help” or “hidden” fees for short sale transactions — to name a few.
To find out if a short sale is right for you, contact Century 21 Town & Country at (248) 280-4777, Keller Williams at (586) 541-4058 or Real Estate One at (248) 208-3773. More information about The Short Sale Team can be found at www.myshortsaleteam.com.
You can reach Staff Writer Christa Buchanan at cbuchanan@candgnews.com or at (586) 498-1061.
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