Recently, a new reader commented that when I used the term "short sale", he didn't understand what it meant and thought it was just real estate "jargon". There is a lot of talk about foreclosures, short sales and bank owned properties so here is a brief overview of each to help you understand the difference between them.
Foreclosures: A foreclosure property is one where the owner is behind on their payment and the bank has issued a lis pendens or pending lawsuit and scheduled a day for a sale. During the time between the issue of the lis pendens and the sale, the homeowner can sell their home to pay off the loan or take other measures to avoid foreclosure. At the sale, the home is sold in a bidding environment at the County Courthouse and the purchaser must pay for the home with 5% down in cash with the balance payable within 30 days. Buyers have very little time available to research title, have a home inspection or to arrange for financing so you need to take great care to know exactly what you are purchasing. While foreclosure auction sales are interesting to attend, very few properties actually sell on the Courthouse steps.
Please note that South Carolina is a judicial foreclosure state and that the foreclosure process varies from state to state.
Short Sale: If a homeowner wants to avoid foreclosure by selling their home but can't sell it for what is owed, they may attempt what is known as a short sale. A short sale is where the bank agrees to accept less than what is owed when the home is sold. In a short sale, the homeowner can accept your offer but that offer is contingent upon 3rd party lender approval so it doesn't mean that it's a done deal. The lender or lenders must also accept the offer. In most cases it can take several months for this approval to take place so don't start packing your belongings if you plan on buying a short sale unless you have 3 to 6 months minimum for the process to take place. In purchasing a short sale, you do have time to have a home inspection and arrange for financing.
Bank Owned: When a home is not sold at the Courthouse sale, it goes back to the bank or mortgage lender and becomes Real Estate Owned or REO also known as Lender Owned or Bank Owned property. Most of these homes are sold "as is" and are listed with a real estate agent in the Charleston MLS for sale. These homes have had the outstanding liens and additional mortgages removed so they can be a much cleaner transaction than buying a foreclosure at the Courthouse. The acceptance time typically takes days, not months like with short sales. In many cases, bank owned properties can be in very distressed condition but I've also seen many that are in reasonably good condition. As with short sales, you do have time to have a home inspection and arrange for financing but in many cases, the seller will require you to be pre approved for financing with their representative (or provide proof of funds if paying in cash) before considering your offer although you may still use your preferred lender to complete the transaction.
You can view most bank owned properties listed in the Charleston MLS here.
Today, we are once again touching on the subject of being "under water" or "upside down" in your home. The responses we received, via calls, emails, facebook messages, from our post yesterday has shown us that people are eager for information for numerous reasons regarding this topic. This situation is real and it is happening all over the country at an alarming rate.
We are helping more and more people every day navigate the crazy financial circumstances that pop up every day in lives. As always , feel free to contact us regrading anything you may be uncertain about in your financial lives. There are more options available right now to consumers than there ever have been.
Big Legal Disclaimer: I’m not an attorney and you need to Consult an attorney, accountant, or anybody else you deem necessary to help you make the right decisions.
Having negative equity is like walking on a treadmill with an injured knee. You don't get anywhere, and it's painful. If you're lucky enough to be financially solvent, that puts you in the enviable position of being able to make the house payments, even though it feels like you're throwing hard-earned money into an abyss.
Below, we look at the predicament of a typical family. The "Smiths" are making payments on a house that lost one-third of its value over the past three years. We then ask three Certified Financial Planners for solutions, which they provide in their own words.
Enjoy,
Scott Wickersham
John and Sandy Smith, in their late 30s, are current on their house payments. They married last year. Sandy has a daughter, age 12, from a previous marriage. Near the market peak in 2005, Sandy purchased a two-bedroom/two-bath condo in lovely Boca Raton, Fla., for $225,000. It seemed like a good buy at the time.
Because John and Sandy married, they discovered that the space in the 1,500-square foot condo is not optimal for a family of three, so they put it on the market eight months ago. Their asking price is $199,900 -- significantly less than what Sandy paid for it.
John and Sandy's real estate agent held an open house on two consecutive Sundays recently. No one showed up -- not even a nosy neighbor.
A handful of units have sold since January; their listing prices ranged from $150,000 to $175,000. Three sold for in the neighborhood of $150,000. A fourth sold for $132,500. Some of the sellers owned their units for a very long time, so they sold at a profit, John says.
John and Sandy would like to move into a larger home, especially since prices have fallen. For a while they considered buying a second adjacent unit in their condo complex, but have since changed their minds. It would require a big investment to combine the two. They also considered buying a place and then renting it out, but are having second thoughts. "I think the only thing worse than having one house with negative equity would be having two," John says.
The mortgage amount is $190,000. The condo unit was financed with a hybrid adjustable rate mortgage with a 6.5 percent rate for the first seven years.
Says John: "Since getting married, the extra storage needed along with dual incomes and lower home values have made moving into a larger home more desirable. Unfortunately, it seems next to impossible to unload our condo for an amount that is anywhere near what we owe. In the end, accounting for our negative equity, buying a house today is as expensive for us as it was three or four years ago."
What are John and Sandy's options? Does this sound like your story? If it remotely does, please consider calling us for a free consultation. There are multiple choices available to you in today's market, and we have the experience to help navigate those waters.
Welcome to the very first post I have done on this blog. I think you will find it very informative, and hopefully very, very useful in helping you make decisions in your everyday lives. I'm always looking for comments and posts and discussions.
The article below is from the LA Times and Professor Brent T. White is echoing my thoughts on upside down loans/mortgages. If you are upside down on real estate you should consider walking away. Do not look at it emotionally… it needs to be a business decision. He touches on the ego and moral issues that the lender uses but it is even easier than that to describe… when the loan was taken out the agreement was if the borrower did not make the payments the lender would foreclose on the house and trash your credit (and possibly pursue shortages depending on the state you live in). But the reality is most lenders are not chasing foreclosure shortages because it does not make financial sense. So the deal was if you don’t pay they get the house and trash your credit and if you are down 50k, 100K, 250K the best deal you can take may be to let the house be foreclosed.
Reporting from Washington -
Go ahead. Break the chains. Stop paying on your mortgage if you owe more than the house is worth. And most important: Don’t feel guilty about it. Don’t think you’re doing something morally wrong.
That’s the incendiary core message of a new academic paper by Brent T. White, a University of Arizona law school professor, titled “Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis.”
White contends that far more of the estimated 15 million U.S. homeowners who are underwater on their mortgages should stiff their lenders and take a hike.
Doing so, he suggests, could save some of them hundreds of thousands of dollars that they “have no reasonable prospect of recouping” in the years ahead. Plus the penalties are nowhere near as painful or long-lasting as they might assume, he says.
“Homeowners should be walking away in droves,” White said. “But they aren’t. And it’s not because the financial costs of foreclosure outweigh the benefits.”
Sure, credit scores get whacked when you walk away, he acknowledges. But as long as you stay current with other creditors, “one can have a good credit rating again — meaning above 660 — within two years after a foreclosure.”
Better yet, homeowners can default “strategically”: Buy all the major items they’ll need for the next couple of years — a new car, even a new house — just before they pull the plug on their current mortgage lender.
“Most individuals should be able to plan in advance for a few years of limited credit,” White said, with minimal disruptions to their lifestyles.
What kind of law school professorial advice is this? Aren’t mortgages legal contracts? In so-called anti-deficiency states such as California and Arizona, mortgage lenders have limited or no legal rights to pursue defaulting homeowners’ assets beyond the house itself, White said. In other states, lenders may decide that it is not worth the legal expense to pursue walkaways, or consumers may be able to find flaws in the mortgage documents, disclosures or underwriting to challenge the original contract.
The main point, he said, is that too often people’s emotions get in the way of clear financial thinking about mortgages, turning them into what he calls “woodheads” — “individuals who choose not to act in their own self-interest.” Most owners are too worried about feelings of shame and embarrassment after a foreclosure, and ignore the powerful financial reasons for doing so.
Buttressing these emotions is a system that White labels “the social control of the housing crisis” — pressures and messages continually sent to consumers by the “social control agents,” namely banks, government and the media. The mantra that these agents — all the way up to President Obama — pound into owners’ heads, White said, is that “voluntarily defaulting on a mortgage is immoral.”
Yet there is an inherent imbalance in the borrower-lender relationship that makes this morality message unfair to consumers, White says: Banks set the rules during the housing boom, handing out home loans with no down payments, no income checks and inflated appraisals. Now that property values have dropped 20% to 50% in many areas, banks have been slow to modify troubled mortgages and reluctant to reduce principal debts.
Only when homeowners cut through the emotional fog and default strategically in large numbers, White argues, will this inequitable situation be seriously addressed.
How does White’s 52-page manifesto go over with mortgage lenders? Predictably, not well. Officials at Fannie Mae and Freddie Mac — investors who fund the bulk of all new mortgages in the country — disputed White’s characterization of how quickly after foreclosure a walkaway borrower can obtain a new loan. It’s not three years, they said, it’s a minimum of five years, absent extenuating circumstances such as medical or employment problems that caused the foreclosure.
“Borrowers who walk away from their mortgage obligations face serious consequences,” including severely depressed credit scores for extended periods, said Brian Faith of Fannie Mae.
In addition, he said, “there’s a moral dimension to this as homeowners who simply abandon their homes contribute to the destabilization of their neighborhood and community.”
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