July 27, 2020
We’re officially in a recession now that the job market is unstable and people are out of work.
Even though the moratorium is causing lenders to stay lenient when it comes to demanding homeowners pay their rent, short sales are becoming more popular due to the current pandemic and shifting economy.
Whether you’re a buyer or seller, a short sale can be the opportunity you need to get a home at a great price or avoid a detrimental situation to your credit.
Here are some important things to know about short sales in California in 2020.
A short sale will usually occur when the homeowner can no longer afford their mortgage payments and they fall behind on their payments. When these two situations take place, the bank considers the home to be in “pre-foreclosure.”
At this point, there is one additional trigger that must occur to allow the homeowner to consider selling their home as a short sale. You must owe more on the home than what it’s worth, meaning the home can only sell on the open market for less than what’s owed to the bank.
Both the bank and the homeowner will come up “short” on the amount that was originally agreed to in the loan agreement and will have a monetary loss.
Before letting the home go into foreclosure, the homeowner has the chance to try to sell their home in a short sale transaction..
For example, we’ll use a scenario where you have bought a $200,000 home with a $50,000 down payment, and your mortgage loan was for $150,000. Let’s say you already paid down $10,000 so you now owe $140,000 to pay back to the bank.
But, due to a financial hardship, you are no longer able to pay the mortgage.
If the market value has dropped significantly and you find that you can only sell the home for $120,000 (which is less than the $140,000 you owe on the home), then your options are to either let the home fall into foreclosure or convince your bank to let you do a short sale on the home for $120,000.
When your home forecloses, it is not only seized by the bank, but the act of doing a foreclosure affects your credit. Most people who are at the point when the bank is ready to foreclose on their home have received many calls and letters from the bank requesting payment.
Dealing with a mortgage loan you can’t pay is both stressful and scary, and many homeowners choose to do nothing to avoid the situation. However, choosing to sit idly by and let the bank foreclose on your home is a serious financial mistake.
Having a foreclosure on your record is considered to be one of the worst financial dings on your credit score you can have (it’s high up there with student loans). Not only may you find it difficult to take out another mortgage, but having a foreclosure on your record could also make it challenging to get an auto loan, take out a credit card, and more.
Plus, It’s important for any homeowner to understand that foreclosing on your house could affect you for the next 7 years.
When you short sale your home, your credit will still be affected.
The good thing is that it’s not as detrimental, but you likely won’t be able to take out a mortgage again for 2 years.
Know that even if you short sell your home, you might be able to request the bank does not report it to credit agencies, but they’re not obligated in any way to not report it.
After a short sale, you might need to pay income taxes on the forgiven part of the sale. Plus, the bank might still come back in the following years to demand repayment on the forgiven part of the loan. However, there are ways to help remediate that, which I’ll touch on in a second.
As a seller doing a short sale, it’s important to bring on board a real estate agent who’s skilled in negotiating short sale transactions. It’s easy to not be very concerned with what your home sells for since you’re selling it at a loss anyways.
But, if you’re not careful, having a poor real estate agent who doesn’t negotiate properly on your behalf, could cause your home to fall into foreclosure even though it’s on the market. That’s why the worst thing you can do is list it with a real estate agent who is unfamiliar with short sale transactions.
Some banks tend to take a little longer to work through a short sale and can be difficult to deal with. On the other hand, there are many individuals working for the bank handling your transaction that may be swamped with requests from multiple homeowners asking for a short sale.
You might be a little tempted to try and skirt around your real estate agent so you can deal with the bank directly, but this could cause more harm than good.
A skilled real estate agent will know exactly what documentation the bank will need and in what order to create a smooth and seamless transaction.
For the buyer of a short sale home, you’ll also need a real estate agent that’s skilled with walking a buyer through a short sale.
Although a lot of the heavy lifting may be on the listing agent when it comes to pushing the transaction through, your agent’s duties are just as important.
A buyer’s agent skilled in short sale transactions will:
Your buyer’s agent should be your trusted liaison for you and keep you informed about the status of the transaction.
Now, if you’re thinking about buying a short sale, the best thing you can do is be patient. Understand that closing may take a little longer than a traditional transaction. But, when it’s the home of your dreams, it’s well worth the wait.
Hear me when I say this…Your real estate agent can make or break a short sale for you!
Make sure you have a Realtor who understands the laws, the extra paperwork that goes along with a short sale transaction, and most importantly…has excellent follow up systems.
When there are a lot of homeowners having to sell or foreclose on homes, realtors have to learn specific processes for short sales because they are more complicated than a regular home sale.
If the agent you’re considering is not returning your calls in a timely manner, or when they say they’re going to, just imagine how they’re going to follow up with the listing agent or your bank once you’ve entered into a short sale.
A great listing agent will set you up for success even after the short sale occurs.
They’ll help connect you with a good credit repair agency, help make sure your short sale won’t affect you tax wise later on, and will help lift the burden of dealing with the emotional stress that comes with avoiding a short sale.
They’ll help you get set up to move on with your life.
As a buyer, an excellent short sale agent will make sure you’re set up with a phenomenal lender so that you get the best terms on your home loan in accordance with the condition.
They will constantly stay in touch with the selling agent to help you close the deal on time, and will fight hard to get you the best deal possible.
If you need to either sell or buy a short sale home, be sure to work with a Realtor who has plenty of experience with short sales in order to expertly negotiate and help you navigate the deal successfully.
If you’re looking to sell a home or buy a home in the Sacramento, California and surrounding area, contact us at Quantum Real Estate. We’ll walk you through the process and expertly negotiate on your behalf when selling or buying a short sale home.
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