Lew Nonnenmocher, RE/MAX on the Coast 
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CERTIFIED DISTRESSED PROPERTY EXPERT (CDPE)
Lew is a CDPE

Short Sales and Foreclosures are nothing new.   They've been around for as long as mortgages have.    However, in the past six or seven years, we haven't heard much about them.  If you think about it, you would have almost had to try to go into foreclosure during the boom years of real estate.   There were folks purchasing homes, then three months later selling them and making $20,000 to $100,000.   In fact, in the condo world, folks would put down $10,000 on a $300,000 "to-be built condo, then before the condo would even be completed those folks would assign the contract to someone else for a $50,000 assignment fee.  Those days are gone.

When the mortgage debacle started it was mostly due to lenders providing variable rate mortgages to people who really couldn't afford the adjusted interest rates.  The though was, before the mortgage adjusted "we could just refinance" since we expect significant appreciation in the next year.  Additionally, years ago, I remember watching George H. W. Bush say on national television that "any American who wants to own a home, should have the ability to do so".   I agree with that premise 100%.  Unfortunately people and lenders took this one step further by indicating that "any American who wanted to own 4 or 5 homes without sufficient income should have the ability to do so".  To be honest, I have very little empathy for those folks who speculated by going out purchasing multiple "investment properties" when they knew they didn't have the income to support it.   They speculated/gambled and lost.

On the other hand, the economy started hitting the job market.  Many folks who, a year or two ago, who could normally afford the home they're in, lost their jobs and were unable to pay their mortgages.

About two and a half years ago, a family came to me and indicated that they were probably going to have to foreclose on their home since they couldn't afford their monthly payments and their home was worth less than what they owed.  Without getting into the details, let me assure you, there were extenuating circumstance which left these folks in financial disaster.   I asked them for a few days to do some research on how I can best assist them.

Over the next couple of days, I pretty much dedicated all my time researching possibilities.  I read ever publication I could get my hands on, researched the internet, and talked with various lender.  The conclusion was they could possibly do a short sale.

Very briefly, a short sale is when the owner owes more on the property than the property is worth. In all likely hood, they are already one or two payments behind. They contact their lender and request that they attempt a short sale (lender agrees to accept less than what is owed on the mortgage to avoid foreclosure).

Question 1: "Am I eligible for a short sale?"  Below are the requirements:

  1. The homeowner must have an Acceptable Hardship

    Hardship - A material change in the financial situation of a homeowner that is or will effect their ability to pay their mortgage.

    Examples of Acceptable Hardships are:

    Loss of Job

    Business Failure

    Damage to Property

    Death of Spouse

    Death of Family Member

    Severe Illness

    Divorce

    Mandatory Job Relo

    Medical Bills

    Military Service

    Mortgage Adjustment

    Insurance or Tax increase

    Reduced Income

    Separation

    Too much debt

    Incarceration


  2. Homeowner must be financially Insolvent - Must not have the ability to pay down the mortgage

  3. Must be owner's primary residence.

  4. Lender(s) must agree to participate in a short sale.

Question 2:  When should I start attempting to complete a short sale?

The short answer to this is as soon as possible.  Since there's a requirement for you to be behind on your mortgage, your lender can start foreclosure proceedings at any time.  Your objective would be to complete the short sale prior to final foreclosure.   Lenders are taking anywhere from 30 days to six months to approve a short sale after a contract has been written on your home by a buyer.  You can expect 2-4 months to obtain a buyer for your home.  So the earlier you start the process, the better.

Question 3:  Why would I do a Short Sale versus just letting my lender foreclose?

Answer:  Two quick reasons:  (1) No money loss on your part (2) Significantly less damage to your credit.

1. Mortgage Forgiveness Debt Relief Act of 2007 - This act was passed into law on December 20th, 2007.  Prior to the passage of this law, for any debt that was forgiven in a short sale the homeowner would receive a 1099 tax statement and would have to report this debt to the IRS.    Essentially, if your debt forgiven on a short sale equated to $50,000, you would previously been accountable for 15% of this debt.

However, as a result of this law, anyone completing a short sale between January 1, 2007 and January 1, 2010 no tax is due.

2. In short, a foreclosure can significantly degrade your credit score and will prevent you from purchasing another home for up to seven years.  Additionally, since your credit score is significantly lowered, it will negatively effect the interest rate on a car purchase, credit cards, ect.   Since, when you complete a short sale, the debt is recorded as "Paid in Full" on your credit report, the only damage which results will probably be the late mortgage payments.  You can recover from this many times within a year.

I will end there for now.  However, if you or someone you know is having financial difficulties and is in danger of loosing their home, please have them give me a call.  I will listen to their specific situation then recommend a course of action.   I have completed several short sale for folks, and though they are challenging, they're also rewarding for me and the client.  I pursued my Certified Distressed Property Expert Certification since I have met too many folks who need good professional assistance.  There are a lot of Realtors who profess to be the foreclosure or short sale expert, but ask them how many they've completed successfully and if they are a CDPE.  You may be surprised.


 
 
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