Hi folks. Judy Chapman wrote a very good article titled "To do a strategic short sale or not to do a strategic short sale ... that is the question".
If you haven't read Judy's post please take a minute to do so.
A couple of her readers didn't understand why a Lender would even consider a Strategic Short Sale. This article may help answer that question.
A Strategic Short Sale is a choice. It's a choice made by a seller (borrower) to sell their property to get out from under a mortgage that no longer makes sense and put their money elsewhere. These borrowers do not have a "normal" hardship.
Here's an real life case of a Strategic Short Sale situation:
I have as young family right now who bought their house in 2005. They paid $250,000 and put 20% down. They purchased using an ARM because the mortgage broker convinced then that in 3 years they could refinance into a fixed rate. This 3 year period was the amount of time the husband needed to complete his internship with his job and go into a higher salary.
Before they could refinance the bottom dropped out of the market. Their mortgage went up from $1,500 a month to almost $2,500 a month. Their home is now worth $55,000.
Anyone that reads this and thinks these folks should just stay and honor their obligation is just flat out wrong. And folks that "think" they would stay, if in the same situation, are just kidding themselves. There's not a Lender on the planet that would modify this loan so that it works.
So this family can stay trapped in their home for the next 25 years or they can sell now and move on with their lives. It's a no brainier. By the way, we are closing on this Strategic Short Sale in 2 weeks.
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But why would a Lender accept this Strategic Short Sale? Because they know that it is inevitable that this loan will go into default or have to be settled at some time in the near future. On average folks in the US have to move and sell every 5-7 years. This loan will still be way underwater at that time. So why not just take the loss now?
A Strategic Short Sale almost always requires the borrower to participate in the Lender's loss. What this means is the borrower will be required to make a cash contribution at closing and/or sign a new promissory note paying back some of the money owed over time.
A Strategic Short Sale is a settlement. It's the Lender agreeing to a lump sum of money now instead of continuing to accept payments over the existing life of the loan.
Never forget the time value of money.
Simpler explanation: You owe me $100. You have agreed to pay me $1 a month for the next 100 months. You come to me an offer me $45 today to wipe out your debt. I agree. Is that $45 today worth more to me than the $1 a month for the next 100 months? Probably. I can't predict the future so cash in the hand is a safer bet. Plus I can now re-lend the money and get it working for me again. Plus I received some money from the mortgage insurance company and the government for taking the "loss". It only looks like a bad deal on the surface.
Things aren't always what they seem. Make cents?
Are you facing foreclosure in Florida?
Do NOT be foreclosed on! Avoid foreclosure. Short Sales DO close.
Want to find out more? www.CentralFloridaShortSales.com
***I am NOT an Attorney nor do I play one on TV. Click the button below for my Bio.
Copyright © 2011 http://www.brokerbryant.com/ | All Rights Reserved
Do NOT be foreclosed on! Avoid foreclosure. Short Sales DO close.
Want to find out more? www.CentralFloridaShortSales.com
***I am NOT an Attorney nor do I play one on TV. Click the button below for my Bio.
Tutas Towne Realty, Inc handles Florida real estate sales, Florida short sales, Florida strategic short sales, Florida pre-foreclosure sales, Florida foreclosures in Kissimmee Florida Short Sales, Davenport Florida Short Sales, Haines City Florida Short Sales, Poinciana Florida Short Sales, Solivita Florida Short Sales, Orlando Florida Short Sales, Celebration Florida Short Sales, Winderemere Florida Short Sales. Serving all of Polk, Osceola and Orange Counties Florida. Florida Short Sale Broker. Short Sale Florida.
Copyright © 2011 http://www.brokerbryant.com/ | All Rights Reserved
Good post - most people, both in the business and not, do not clearly understand and explain a short sale as concisely as this.
Bryant - Make cents to me !!! A lot of folks (and realtors) cannot seem to wrap their mind around this. But I guess it depends on what state there are in and how many short sales they come across too. I agree that it is a no-brainer for that person in that situation to do what they can now to get out of that situation.
This post is right on. The banks always have more options available to them for recovery than the people they service do.
We often think that the lender should just renegotiate the value with the current owners. However they don't get the benefit of mortgage insurance and government bailouts if they do that. So the current owner is out, the lender collects their benefits and then the resell the house. It doesn't make much sense from the outside but I'm sure on the books it is a much smarter financial move for the lender.
I just cannot believe how much the values have tanked in your area of Florida. Crazy!
Bryant~ Completely off subject here.. I joined your Shortsale Superstars and I'll I can say is thanks for starting it. The information and contacts I have made are invaluable. For anyone involved in Shortsales it would be a wise thing to check this site out. www.shortsalesuperstars.com ( I know shameless plug... but somebody had to... hope I don't get in trouble :)
I have no idea why this isn't featured. Really good explanation from the consumers perspective and the banks future.
I am doing one now. Long story may post on it when it closes, but very similar situation.
Great explanations. In the end it is all about the money. Better to have $50,000 now then maybe possbily get $100,000 10 years from now assuming the borrower doesn't file bankruptcy or simply walk away and abandon the home.
Bryant, some lenders agree to this strategy others say tough luck, and I am with you with the reasoning on strategic defaulting. It has got so crazy out there people figure life is too short with a noose around your neck due to the marketplace.
Bryant,
Perhaps true financial wisdom would manifest if lenders started modifying SO THESE MORTGAGES WOULD WORK.
Best,
Steve
Bryant, absolutely, 100% correct. It's still amazing how many just don't get it.
Good point, BB. It will either be a short sale now or an expensive foreclosure later!
Hi BB- I am working with one of these right now. We will see how it pans out. The bank would be crazy not to short sell it as it would get next to nothing as a foreclosure. Too much work to do.
Bryant:
It is so sad when borrowers find themselves in this predicament. Their only option is to do a short sale and hope the bank goes along with it. Thanks for sharing.
Bryan,
Thanks so much for this great post! Hopefully other distressed homeowners will be able to understand this explanation. A short sale is a middle ground and a chance to break free of something they can no longer afford. It beats foreclosure hands down and under the right terms can be a win-win.
Wendy
Thanks for posting, in the past I haven't worked strategic short sales and may have turned away business. But my area has not been hit with the huge loss of value in homes.
Yes, I hear a lot of misplaced arguments about morality on this subject -- I really don't get it.
It is a business decision and banks do these kind of short sales all the time.
What a great explanation!! It is hard to believe that property values have gone down so much in some areas. We have been really lucky in our area that values have not dropped nearly as much.
The main thing I have been hearing is the problem with the time frame on closing the short sales. You would think if the bank says okay to a short sale they would go ahead and get it closed. But I am sure that is a different story for another day.
Thanks again for the information.
Bryant, Since it's not a 'moral decision' to buy a house and take out a loan in the first place, how can it be a 'moral decision' to sell a house the only way available to upside-down homeowners, especially when the bank agrees? Another great post! And thanks for the nod!!
Its a fact. . the lower in the scale of pricing for all my short sales listings the harder the decision. . the ones on the upper scale?. . a no brainier.
WHY IS THAT?
It make CENTS to me. Especially when the value is that low and the payment is that high.
And banks know they will lose a lot more if that home were to go into foreclosure. At least they are getting that part now.
BB...
This is great advice. Thanks for bringing Judy's post to my attention.
Thanks Bryant, this a wonderful post and while I kinda knew this you really reinforced it well. It is a shame that so many sellers are in this posiition and have wasted so much money on a property that dropped like a rock in value. My office is in greater Fort Lauderdale, so please send anything you have down here my way and I would be glad to do the same. I have a short sales specialist in house.
You example is a very good one. Those who have problems getting their heads around strategic short sales are most probably from areas (like mine) that did not see wild price swings like you did in Florida.
Your "simpler" explanation is exactly what servicing lenders agree to when they sell loans to other lenders. They could get paid X amount over the life of the loan, or take Y now for it. Y is a guranteed sum, X is a big "if"
A strategic short sale in your scenario seems fair.
It is ironic that business that do what amounts to this are appluaded for being savvy but when individuals do it they are whipped with the morality stick.
Bryant, you explained this in a way that it makes sense. The TVM puts a different light on a Strategic Short Sale.
I appreciate this information. I just finished a two-day seminar in short sales, and was told that banks will ONLY agree to a short sale when the sellers can't make their payments AND the situation has been caused by an involuntary hardship. From what I'm hearing on AR, it doesn't hurt to ask, even if the homeowners don't meet those criteria.
Thanks for the information. I have not dealt with a short sale yet, but for some reason I am thinking here in SD they allow a lender to get a deficency judgement if they want to. I guess I need to double check on that.
Exectly! Nice post! Too many preconceptions out there. A lot of people short selling are taking bigger losses than the lender to do so. Good luck with your cosing!
Makes dollars and cents to me. Thanks for the helpful post, you can never have too much info on Short Sales!
Very well written Beyant!
I must say I think you have brought much clarity to a touch and go topic for many agents in todays market.
Good post, Its a hard situation, but at least this allows people to move on with their lives. $250,000 homes being worth only $55,000 now that is hard to take.
Bryant -- Make perfect 'cents' with a loss like that ($250K down to $55K?) Unbelievable.
Good morning, Bryant. Brilliant explanation of why it can make sense for a lender to approve a strategic short sale... and why underwater home owners may want to consider it.
VERY well written.. I think one of the MAIN reasons so many brokers/clients don't "get it" is because they are not in a hard enough hit area to realize the plight of the consumers who have been left with NO choice... just as the family Bryant is explaining in his post.
Having left AZ for the Cary, NC market... I have worked with dozens of families in the same position as Bryant's client... believe me they don't want to go thru the financial mess they are in, but the reality is they don't have much of a choice.
I am still struggling to get a grip on a normal market after leaving the PHX market which was hit as hard as FL, planning to begin to search out sellers here who need assistance because of my expertise, there definitely is not droves of them, but they do exist.
The big question is always how how much will the bank want. Sellers ask me to give them an estimate, and that's difficult to do. There is a range, but lenders look at each seller individually. They examine the seller's disposable income, pick over bank accounts, run credit reports and in general size up the seller to determine how much they can squeeze request.
BB - Of course the Banks want it to make "CENTS" as well... Nice post and well written and explained. And thanks for the link back to Judy's post as well...
I like that you brought up a keypoint in a strategic short sale. The borrower is going to have to contribute, either cash at closing, or sign a promissory note. This is something a homeowner may want to consider before signing up for short sale.
It's nice to see someone actually posting relevant short sale information. Great post. keep up the good work.
Bryant- I left a reply to this on your facebook page. I think you explained strategic so simply and effectively. I agree because we do strategic short sales here in our area a lot. There is still so much misinformation out there about short sales and just like
Diane comment #30- that they told her in a 2 day seminar misinformation. Lenders to strategic short sales all the time. In fact, some banks use only financial formulas so they don't even have to look at the sellers' financials. It is a business decision as well it should be and remain so.
We have gotten some strategics closed with no seller contributions with smaller banks also.
Robert #43. It really depends on the borrower's financial position. I have a seller right now who has almost $1,00,000 in funds that are available. We are asking for a short of about $300,000. Maybe he'll need $50,000 or maybe they won't ask him for anything. The borrower is prepared to contribute as long as it's within reason. There is no rule of thumb.
Dianne #30. It's a shame that folks are still teaching that. It's not true at all. Even a HAFA short sale can be done without missing any payments. But there are lenders/investors that will require 30 days late. FHA requires 30 days late at time of closing.
I read that post and I thought it was great, as well.....you make great points, as well. I wrote a blog about this same subject and I got one commenter who basically said it was wrong. I answered:
"As a Realtor, it is not my responsibility to make moral judgments! Whether short sales are right or wrong; as long as it's not illegal, if someone comes to me for help with a short sale and their lender has agreed to a short sale then I must do my job.
We are Real Estate professionals and our duty is to be a real estate professional--not be the moral police. I, personally, would not just walk away from my home, but if I couldn't afford the payment and my only option was to short sell--I would take it."
I respectfully disagree with the premise of your argument that the family in your example should conduct a short sale. We are a country of laws and to violate the contract we have with our lender is not something we should take lightly. What are your thoughts about a lender who strategically modifies the terms of a fixed loan because it is in their best interest not to loan money to the borrower at the lower rate?
Furthermore, as real estate profesionals, we should respect property rights and contract law. We should be concerned at the bail outs for both lenders and homeowners, especially if it makes "cents"! ;)
Businesses have been making financial decisions based on balance sheets, income statements, and other financials analyses. Why is it so wrong when a family does it?
It really does make sense. And why make the family suffer for the next so many years when they can just get a fresh start. Like you said, everybody wins.
Tonia
That really is a substantial decrease in value. What if the seller does not have the cash to close?
The price of a home going from 250k to 55k is an almost unbelievable swing. I would understand why any home owner would want to look into the short sale process in such a situation.
BB: That was a great post that I reblogged for my readers. I guess there are some that also want to make a value judgement with short sales but I think we should get over that now. It's here to stay so get used to it already. We have to work with what we have!
I really appreciate all these great Short Sale post you have done. Yes I am reblogging them too.