That BofA loan officer has a small case load. It'll, probably, get larger before it gets smaller. I regularily had 125 loans in my portfolio. At any given time, approximately half were active foreclosures, a quarter each were REOs & shorts. Mixed in were the BKs with those falling a bit in each category cause you never know what a judge will insist happen. Some were firsts, some were seconds, & some were so far down the food chain I lost count.

The timeframe given in this article is astonishingly quick. I predict from experience that it will lengthen considerably by Dec. '07. Unless a lender has established a separate Committee...shorts go to the Board for approval. The Board only meets once/month. As a work-out specialist, I had authorization to make decisions up to a certain dollar amount; but, anything over that had to go to the Board. So, if the last piece of paper is received on the 3rd & the Board meets on the 1st...well, you wait another month. The work-out officer really doesn't care...he/she has many others to work on while waiting approval on yours.

Note: The process described in the blog would have played out slightly different had it been a first mortgage rather than a junior lien.

/T

I'll give you my experience as a buyer dealing with a short sale.

Almost three years ago, we placed a bid on a house. We knew the house was listed below market value, was in need of a lot of TLC both inside and out and had not been well maintained by the owners. When we received their counter offer, we found out the owners had a primary mortgage, a second mortgage and in effect, a third mortgage as a business loan against the house. Their counter offer took into consideration all this. In addition to all this, there was a divorce proceeding in the works with those lawyers involved. We also were told the owners had not been making their mortgage payments for over 6 months and were headed for foreclosure.

Needless to say, we were caught a little off guard by all of this, but countered their offer. They accepted. We had been pre-qualified by our bank for a mortgage so this was not a problem.

When we finally went to contract, our lawyer explained the concept of short sale. He said many times a bank will accept a short sale to recover as much of their money as possible. He also said that banks do not like to foreclosure on homes. They would rather have a qualified buyer for the property than to foreclose.

Enjoy the journey.

eal51 in western CT

Well, it's not that they are so community-minded that they can't bear the thought of a home sitting there empty & unloved. They prefer a "qualified buyer" over foreclosure if and only IF it means they receive a larger payback. I have snuffed out thousands of short requests.

/T

Tricia, so the buyer's offer has to be in line (plus/minus a few percentage) with the bank's assessment? Is lack of buyers in the area taken into consideration? Is this all plugged into a software program or is much of it actually up to a human being?

My DB and SIL have been trying to sell their vacated Detroit-area home since last August. I think they should do a short sale. How does a short sale affect one's credit?

Enough questions? LOL.

Hi Gina!

Human beings still make work-out decisions, thank goodness.

Lack of buyers? Well, the lender will take into account average DOM for the area & factor in their cost of funds so, yes, I guess you'd say they consider whether it's a buyer's or seller's market. Short sales happen even during uptick markets...just fewer in number.

How a short sale reflects on a credit score depends on the deal negotiated with the work-out officer. If a non-deficiency agreement is reached the lender should not report a default to the bureaus. If, however, a deficiency judgment is obtained then it could hurt credit. Just because a lender agrees to release their Mortgage does NOT necessarily mean they also release the Promissory Note. So, a mortgagee could end up owing the difference between the "short" & the actual loan balance. The outcome of these transactions is so varied it's impossible to say what is normal. It's a negotiated process. Every situation is unique. That's why good lenders don't automate the process.

Your DB & SIL can't "do" a short sale. It's not their choice. It's solely the lender's decision. What they can do is phone their lender, discuss the situation, & ask for preapproval to offer the property at a listing price that would be insufficient to pay the lien off entirely. Some predetermined price would be negotiated at which they could just accept an offer to purchase.

/T

Thanks for the response. Now, if someone would just give them an offer, any offer!

What surprises me is that since the sellers owned property out of state why didnt BA take a 2nd or 3rd on that property for the amount of the deficiet? Or some portion of it

Unstated in the blog is the tax consequences of a short sale.
The seller will get a 1099 for the amount of the loan 'eaten' by the lender.
This will be reported to the IRS and taxes are due as ordinary income on the amount forgiven.

Of course the sellers in the blog will only find this out around April 15, 2008.

Very interesting. Thank you for posting this. It couldn't have come at a better time, since I recently made an appt to get with an atty regarding the homes I've had sitting for over 2 years.

Yep that's right. Just like so many others.... I'm going down; and quite mystified at what to expect when walking the keys back into the bank at the end of the month.

In over 30 years of construction, this is a first for me and just a bit scary.

I read alot of articles concerning short sales. Is it ture that it's better to try to short the 2nd mortgage then the frist if you looking to gain an reasonable equity position?

thanks

You will have to negotiate carefully.
The second mortgage holder can always step up and mess up any deal you try to arrange with the first.
If I held your second I would come after you tooth and nail.

I have been looking at the public mls for months. This morning with coffee I was flipping through a free Real Estate book I picked up last night and noticed the term "short sale". So I googled and its pretty complicated. So then came here and did a search. All a bit complicated for my brain but I do have basic questions.
1) As a buyer - do you have to worry about buying a short sale? Can you be held accountable for some mortgage or tax differences? IRS or property or whatever. Will the lenders want the difference from you?

2) For curiousity I tried looking up a couple of the listed short sales on mls and they didn't show. Is that just coincidence/blip? Are short sales on the mls but just not specified as such in the comments? I've never seen reference to a short sale on the mls. Or foreclosure - just comments that make you wonder if its probably a foreclosure.

Just saw my first auction listed on the mls. I assume they have a price listed in case someone wants to buy it outright? While typing I got a call back from the realtor -apparently you can place bids before the auction as someone already has, so that will be their opening bid. 10% down cash, 30 days to get financing. Wonder what they do if the financing falls short?

Mary,

If you purchase a property that is now owned by a lender because they worked out a "short sale" with their mortgagee there will be no consequences to you as a buyer. If the lender has a beef...it's with their mortgagee. Many "shorts" are negotiated to be non-recourse & dach...I'd sure recommend you try hard to accomplish that.

I'm not a REA but have a good idea why you're not seeing the words "short" and/or "foreclosure" on the MLS.

1.) The lender always has a fiduciary duty to the mortgagee.
2.) If it's REO, it's no longer a foreclosure so there's no reason it would be advertised as such.
3.) To advertise a "short" would, IMO, violate the fiduciary duty thing & potentially leave the lender exposed to a liable suit...not something a good lender would ever risk.

What you are likely to see advertised is "bank owned" or "lender owned" or "relocation company owned", etc. Nobody potentially gets hurt by those choice of words.

Auctions...

No, they most likely do not have a price listed in case someone wants to purchase it outright. If there were to be a normal sale it would be between the mortgagee & the potential buyer but NOT the lender. The lender is required to present the property to the public via the auction process since that's the standard for "fair market value". Not all states allow phone bids. Most of the states where I've conducted auctions for lenders the potential purchaser had to be on site registered & with a bidding number in hand in order to be qualified to bid. If a successful bidder fails to close within the specified timeframe they can be held liable for breach of contract. It's best to have all of your ducks in a row before bidding at a foreclosure auction.

Frequently, I bid a property in at what we had outstanding including unpaid interest, fees, taxes, insurance, etc. but not always. In down markets, if I had an active bidder & we reached within 10% or so of my target amount I'd let the property go. I also did dozens of absolute auctions where I didn't bid at all so technically the property could have gone for $1.00. Those were in cases where I knew there were problems that could potentially be costly for the bank. An example, is one home (build in the 1930's) that was used as a gas station in the 1950's. I chose to auction absolute rather than risk an EPA fiasco. That property sold for around $30K & I was grateful to get it! Don't remember what our loan amount was but it was certainly more than $30K.

/t

Re the auction when I talked to the realtor listed on the MLS he said that it was like a normal auction, show up on the 28th, make a bid, put down your 10% cash if you won. When I asked where they started the the bidding - that's when he told me someone had already....made an offer? put in a bid? He made it sound like a bid. The price on the MLS is 296,000. The bid or offer was for 250 and he said someone was coming with a bid of 260.

So are you saying the bank will send someone to the auction, or maybe in the this case the bank put in the starting bid of 250?

Yes, basically. I always did my own bidding at my auctions. But, some lenders don't like to do it & will just give their attorney instructions & authorization to bid in lieu of the lender. I never liked to do that because if there were active bidders I wanted to be able to make a decision "on the fly" to either let the property go to a bidder or take it into REO. I held all of my foreclosure auctions physically at the property (rain, snow, or hail!).

Sometimes, a lender will start the bidding at what they intend to take the property into REO at. It varies a lot by state. I don't like that type of auction either. I like it when it's open & free bidding starting wherever the auctioneer decides.

Regarding what you're describing as the MLS price...is it possible that is the old listing between the owner (mortgagee) & REA? In that case, it wouldn't have anything to do with the foreclosure auction. It sounds like your state allows phone bids (every state is different). In that case, on the day of the actual auction the auctioneer will announce that he/she has an opening bid of $250K..."and do I have $260K..do I hear $260K?" And so on... And, yes...the $250K may be the bank.

You should attend a couple foreclosure auctions just to get a feel for how they are orchestrated in your state.

/t