Short sale is still relevant

short sale
Market conditions makes the short sale relevant (infographic from nar.realtor)

Believe it or not it’s been over ten years since the financial crises and Great Recession, and the short sale is still relevant! And this is why…

Coming on the heels of a dismal January, the National Association of Realtors March 22nd data release announced good news declaring a home sales “surge” during February (nar.realtor).  February’s closings increased 11.8 percent, compared to January!  But the bad news is that the number of sales also decreased 1.8 percent from last year. If you follow real estate news, you know that homes sales stats were disappointing during the winter. (Consider that 2018’s total existing home sales were lower than the previous year’s total, according to NAR’s statistics).  February’s adjusted annual home sale rate of 5.51 million is lower than the same time last year, and pales in comparison to the 6.48 million home sales in 2006.    

Although February was indeed a busy month, NAR’s March 28th data release of the Pending Home Sale Index predicts a slow start to the spring market.  Homes that went under contract during February decreased 1 percent from the previous month and decreased 4.9 percent from the previous year.  This “forward looking index” indicates that next month’s home sales may disappoint. 

But there is a silver lining.  Home sale prices continue to rise, meaning that home owner equity is not eroding. February’s median existing home sale price increased 3.6 percent from the same time last year.  And according to NAR’s statistics, home sale prices have risen for 84 consecutive months (which equates to 7 years of continued gains)!

There are many reasons for a short sale

Although home sale prices are rising, there are still many home owners who are underwater. According to Attom Data (attomdata.com), distressed home sales still account for 12.4 percent of all home sales.  Of course, this is far from the 38.6 percent in 2011.  And the percentage of distressed sale continues to decrease.  However, the number is still significant. 

It’s estimated there are millions of underwater home owners.  There are a number of reasons why home owners may be underwater, including (but not limited to) years of deferred maintenance, or a negative equity mortgage.  Many short sales today include investment properties.  Some home owners don’t know they are underwater until they list the home for sale. 

Although not as prevalent as in 2011, the short sale is still relevant!  Many underwater home owners don’t have to sell, as they are not financially distressed, and are happy to stay put for many years. However, some are compelled to sell for a number of reasons (such as divorce, bankruptcy, etc.).  Some underwater home owners may have a desire to move, but can’t because they are underwater (such as empty nesters and retirees). 

If you think your home sale may result in a short sale, get the facts.  Question what you hear from others and what you find on the internet.  There is a lot of information circulating about short sales.  A majority of the information is either misleading, erroneous, and/or outdated.  Consult with an attorney who negotiates sales to help you understand the legal aspects.  Also consult your accountant for the financial implications.

There is much to consider, and a lot at stake!  Be careful when considering your listing agent.  Due your due diligence and hire an experienced short sales agent that knows the process and is savvy about appealing lender values.  Many listing agents will give up on a short sale, mostly because it’s hard work. So most important, make sure your agent has a track record of getting the short sale to settlement.

Original published at https://dankrell.com/blog/2019/04/18/short-sale-is-still-relevant

By Dan Krell
Copyright © 2019.

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Negative equity stats likely erroneous

negative equity
What is a short sale (infographic from lender411.com)

Before the Great Recession, there was the foreclosure crisis of 2007. That was the year that the housing bubble popped and home negative equity soared. Many home owners negotiated with their lenders to keep their homes, while others lost their homes to foreclosure. The Mortgage Forgiveness Debt Relief Act of 2007 was one of the first measures to assist distressed homeowners during the financial crisis. The Act initially was to end in 2009 but has been extended annually. The Act was recently retroactively extended for 2017.

The purpose of the Act was to address tax liabilities that distressed homeowners faced when they tried to save their homes. Because debt forgiveness is typically considered taxable income, a mortgage balance reduction via mortgage modification or short sale would have resulted in a tax bill to a homeowner who was already experiencing a financial hardship.

Recent home equity gains in the housing market should help many home sellers who would have otherwise needed a short sale. Highlights from CoreLogic’s Q4 2017 Home Equity Report (corelogic.com) indicated that about 4.9 percent of mortgaged homes have negative equity (which is a huge improvement from the almost 31 percent reported in 2012 by Zillow’s Negative Equity Report). Additionally, CoreLogic reported that the national average of home equity gained by homeowners over the past year was in excess of $15,000. However, there is disparity in home equity growth by region.

Dr. Frank Nothaft, chief economist for CoreLogic stated:

“Home-price growth has been the primary driver of home-equity wealth creation. The CoreLogic Home Price Index grew 6.2 percent during 2017, the largest calendar-year increase since 2013. Likewise, the average growth in home equity was more than $15,000 during 2017, the most in four years. Because wealth gains spur additional consumer purchases, the rise in home-equity wealth during 2017 should add more than $50 billion to U.S. consumption spending over the next two to three years.”

The National Association of Realtors testified on March 14th to the U.S. House Ways and Means Subcommittee hearing on “Post Tax Reform Evaluation of Recently Expired Tax Provisions” to make the Mortgage Forgiveness Debt Relief Act permanent. In his testimony, Realtor Barry Grooms discussed the plight of many homeowners who are surprised to find that they are upside-down on their mortgage despite national home price gains.

Grooms made an argument why the Mortgage Forgiveness Debt Relief Act should be permanent.  The Act has been retroactively extended each year in recent years leaving many short sellers “sweating it out” until the end of the year.  Part of the decision-making process for a short sale is a potential tax liability. Many home sellers take the chance that the Act will be renewed retroactively. But others do not want to take the chance of incurring a large tax liability.

Negative equity statistics are likely to be erroneous. The number of homes with negative equity is probably under-represented due to deferred maintenance.

Yes, home prices have significantly increased, which has grown home equity. But the statistics for home equity assume that all homes are worth “retail value.” The retail value of a home is the full price a home can sell. In today’s market the home must be in better-than-average to excellent condition to sell for retail value.  We don’t know the real value of any home until it’s sold.

In his testimony, Grooms touched upon a number of issues why homeowners are selling for less than they owe. However, not addressed by Groom is the number one reason why homeowners are under-water and why many home sellers need to sell via short sale. Property condition. The property condition crisis was highlighted in a February 2013 article by the Harvard Joint Center of Housing Studies entitled “The Return of Substandard Housing.” The lack of updates and/or deferred maintenance in a home can significantly decrease its value.

By Dan Krell
Copyright © 2018

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Short sale marketing strategy

According to the Corelogic Insights blog, the volume of distressed home sales is declining. Consider that during the peak of distressed sales, which occurred in January 2009, the volume of distressed sales nationally comprised 32.4% of total home sales. Compare those figures to Corelogic’s December 2nd report, which indicated that nationwide distressed sales volume accounted for about 10% of all home sales during September 2015. However, distressed sales volume varies from state to state; Maryland recorded the highest volume of distressed sales (20.7%) among all states during September.

distressed home sale

Distressed home sales include bank owned properties (REO) and short sales. It’s important to note that prior to the housing bust in 2007, nationwide REO sales were below 6.2% of all sales. September nationwide REO’s accounted for 6.4% of all sales; while short sales accounted for 3.3% of all sales, and have maintained below the 4% level for over a year.

The plateau of short sales may be due the many home owners who remain underwater. In a June 11th press release, Zillow announced that the slow pace of increasing home prices are leaving many home owners underwater. The nationwide rate of negative equity among mortgaged home owners was 15.4% during the first quarter of 2015 (which is down from 18.8% a year ago); the negative equity rate in the D.C. metro area was reported to be 17.2%. For about half of all underwater home owners, home prices would need to increase 20% or more for them to break even (zillow.com/research).

If you are underwater on your mortgage, check with your lender, they may have some options to help you. However, if you are planning a move, a short sale may also be an option. Simply put, a short sale is asking your lender to take a lower payoff and “forgive” the difference.

If you decide to go through the short sale process, you should know that your sale will be subject to your lender’s approval. The lender will decide if they will accept the buyer’s offer based on the home’s “fair market value.” Many lenders use broker price opinions to assist them in determining a sale price; however some lenders may use other avenues.

You should be aware of a recent trend used by some lenders, which is bypassing the short sale process and forcing home sellers to list short sales on auction websites – even if there is an existing contract of sale! The given rationale is that the internet auction process provides a fair market value for the short sale. However, this stance by some lenders may lead some home sellers to breach of contract. In a recent conversation with several local (Maryland) state regulators, the present consensus is that “…they are aware of the situation, but there is nothing they can do about it;” however, they welcome consumer complaints: MD Commissioner of Financial Regualtion and Consumer Financial Protection Bureau.

Even though the concept is straightforward and the government has provided lenders guidance on short sales, the process can still be lengthy and full of surprises. The process does not guarantee a sale, and the lender could still foreclose if you stopped paying the mortgage. Additionally, the short sale may negatively affect your credit; and there may be legal liabilities to consider. So, before you embark on a short sale, you should consult an attorney about all of your options (which may include and is not limited to a loan modification, deed-in-lieu, or bankruptcy).

By Dan Krell
Copyright © 2015

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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

Boomerang buyers return – qualifying after foreclosure or short sale

Homes

There is homeownership after a foreclosure or short sale. Home owners, who lost their homes to foreclosure or short sale during the housing downturn and recession, are apparently returning to the housing market in increasing numbers, such that their home buying activity is attracting economists’ attention.

Ken Fears, the National Association of Realtors® Director of Regional Economics and Housing Finance, wrote for the NAR Economist’s Outlook Blog (Return Buyers Prefer Safe, Affordable Financing; economistsoutlook.blogs.realtor.org; June 25, 2015) about the research and numbers associated with home buyers who previously lost a home. These “boomerang buyers” accounted for about 8% of home sales during 2014. Considering that there were about 9.3 million home owners who lost their homes between 2006 and 2014, the estimated 350,000 boomerang home buyer sales during 2014 may be just the beginning of the “homecoming.”

If you are a boomerang buyer, there may be a home in your future. Conventional, FHA, and VA mortgage underwriting guidelines have typically allowed for foreclosure, short sale, or bankruptcy with re-established credit and a waiting period. However, easing mortgage requirements may make it easier for you to qualify for a mortgage.

Fannie Mae underwritting guidelines (fanniemae.com) require you to wait at least seven years after a foreclosure, which is typically measured from the reported foreclosure completion date. If you had a short sale, the waiting period is four years. However, if you had a bankruptcy, you’ll have to wait four years after a chapter 7 bankruptcy is discharged; and two years after a chapter 13 is discharged (but four years if the chapter 13 is dismissed). However, if you had multiple bankruptcies within a seven year period, a five year waiting period from the most recent discharge or dismissal date is required.

FHA (hud.gov) has changed significantly in recent years. Besides reducing waiting periods due to extenuating circumstances, there are various caveats that may further reduce your waiting period. Nevertheless, the typical waiting periods include: three years after a foreclosure, two years after a chapter 7 bankruptcy discharge, and one year if you are current on a chapter 13 payment plan. The waiting period after a short sale is differentiated depending if the loan was in default: if the loan was not in default at the time of the short sale and your previous 12 months payments were timely, you may be eligible for a FHA mortgage without waiting; however if the loan was in default prior to short sale, you will have to wait three years.

If you are eligible for VA financing (benefits.va.gov), you will have to wait two years after a foreclosure, short sale, and chapter 7 bankruptcy (one year into a chapter 13 payment plan with court approval). However, if your foreclosure or short sale was on a VA mortgage, then your eligibility amount may be reduced.

Waiting periods may be significantly reduced if you can document that your foreclosure, bankruptcy, or short sale resulted from extenuating circumstances. However, such applications are subject to underwriter discretion; and not all lenders grant such exemptions.

If you are a boomerang home buyer, it is crucial that you consult with a lender before embarking on the home buying process. Besides guidance on mortgage eligibility, your lender can help you determine the appropriate mortgage for your circumstances. And as your lender will tell you, timelines and qualifying requirements are subject to change.

By Dan Krell
Copyright © 2015

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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

Relief and uncertainty for short sellers

real estate

Although we’ve come a long way, the housing market is still feeling the effects of the financial and foreclosure crises. Consider that the CoreLogic’s October National Foreclosure Report (corelogic.com/about-us/news.aspx) indicated that there were 41,000 “completed foreclosures” (the total number of homes lost to foreclosure) during October, which is a 26.4% reduction of the 55,000 recorded during the same time last year; and about 65% lower than that of the peak during September 2010. Although moving in the right direction, the 41,000 completed foreclosures is a far cry from the 21,000 average monthly recorded completed foreclosures before the housing downturn (2000 and 2006).

Also seen as progress is the increasing number of home owners who are paying their mortgages; which is observable from the decrease of mortgage defaults since 2010. The November 2014 S&P/Experian First Mortgage Default Index, was 0.97%; and although this is slightly higher than the 3 months prior, there has been a -3.72% change from the November 2010 index of 4.69% (us.spindices.com).

Negative equity mortgages are making headway too. CoreLogic reported on September 25th (CoreLogic Reports 946,000 Residential Properties Regained 1 Trillion Dollars in Total Equity in Q2 2014) that “950,000 homes returned to positive equity” during the second quarter of 2014. The number of underwater borrowers dropped to 5.3 million (compared to 6.3 underwater borrowers reported in the previous quarter). However, as of Q2 there were 3.2 million underwater borrowers with first mortgages, and an additional 2.1 million underwater borrowers with first and second mortgages.

The number of home owners that continue to be underwater may have been the impetus for Congress to pass the Mortgage Forgiveness Debt Relief Act before adjourning for break; the legislation was subsequently signed by the President. A December 17th National Association of Realtors® press release (realtor.org) praises the passage of the legislation meant to help “distressed home owners and commercial property investors with transactions made during 2014.” NAR President Chris Polychron stated, “Realtors® strongly supported the bipartisan Mortgage Forgiveness Tax Relief Act, which was included in the package to prevent underwater borrowers from paying taxes on any mortgage debt forgiven or cancelled by a lender in a workout or after their home was sold for less money than was owed.

The Mortgage Forgiveness Debt Relief Act of 2007 was initially passed and signed into law December 20th 2007; which, if you remember, was a time when the housing market was in a sharp downturn. Any debt forgiveness from lenders (either from a mortgage refinance/ modification or a short sale) typically resulted in a huge tax liability (debt forgiveness is usually considered income). The legislation provided tax relief through 2009 to qualified underwater home owners and sellers seeking to avoid foreclosure. The legislation was extended several times thereafter.

Since the last extension expired December 31st 2013, the recent passage of the Mortgage Forgiveness Debt Relief Act was received as a reprieve by many underwater home owners expecting tax relief from debt forgiveness of short sales that closed during 2014. However, since the recent extension only covers mortgage debt forgiveness during 2014, those who have a short sale planned to close during 2015 find themselves in a tentative situation.

Current politics and economics have many pundits believing that any further extensions of the legislation may not be forthcoming. If you have a short sale planned for 2015, you should consult with your tax preparer about any potential tax liability you may incur.

By Dan Krell
© 2015

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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.