What Do All of the Recent Foreclosures and Short Sales Mean?

It’s hard to miss all the news about foreclosures and, to a lesser extent, short sales. While other parts of the country have been harder hit, we are seeing a spike in foreclosures and short sales here in Oregon and Washington.

The effects on families specifically and the real estate market in general can be devastating. And while there are definitely some very difficult situations right now, the truth is that like anything to do with market trends, understanding the cycles of the business is the best way to know your options at any given time. This month, I’ll cover some of the basics about foreclosures and short sales, and then provide some specific information for local buyers and sellers.

The Nuts & Bolts…
Foreclosures happen when a homeowner stops paying their mortgage and the lender goes through a legal process to take ownership of the home pledged for the loan. The process generally takes between three and twelve months, between notice of default and when the home is offered for sale at an auction, which is conducted at the courthouse in the county in which the property resides. If the house is not sold at auction, the bank then becomes the rightful owner, and they will typically list the home for sale with a Realtor.

This graphic illustrates the extreme destruction that can happen when a home goes into foreclosure.

A short sale is when a lender accepts less than what’s owed on a home due to market value falling below the outstanding loan balance. What this typically means is that a homeowner has run into financial difficulty with paying their mortgage and they are on the path to foreclosure, but aren't there yet. Foreclosures are expensive for the lenders and hurt the homeowner’s credit. Knowing a foreclosure is imminent many homeowners will list their home for sale subject to their lender’s approval of a short sale.

For Buyers To Consider…
Buyers need to know that foreclosed properties may typically suffer from deferred maintenance and needed repairs. The lender may not agree to take care of these items instead selling the property “as is.” Consequently, any potential buyer looking to purchase this kind of property may have to have the necessary funds and/or expertise to make these needed repairs and deferred maintenance repairs themselves.

Buyers should also be aware of the total number of foreclosures in a community. A large number of foreclosures may be a red flag to potential job loss within the community and/or a possible degradation of a neighborhood as investors may be converting an area from home ownership into rentals.

When it comes to short sales, a buyer is dealing with both the homeowner and the lender. When making an offer, buyers need to be prepared for the homeowner’s lender (or lenders if the homeowner also has a second mortgage) to take one to two months to even get an answer of acceptance plus the normal 30 days to close. There can be several offers submitted and, because the process is confidential, there's know way of knowing how strongly your offer stacks up to competing offers. You can't lock in your interest rate if you’re getting financing until your offer has been accepted, and there’s usually no money available for repairs from the homeowner because they are in financial hardship. Lastly, as opposed to a foreclosure where the property is vacant, the buyer is buying a home from someone who is selling due to financial duress and sometimes these homeowners fail to continue their pride of ownership behavior through closing. Consequently, the condition of the home may deteriorate from when a buyer made their initial offer. Again, a buyer should have a budget set aside for these potential issues.

We are in a market where the supply of homes exceeds the number of buyers. Lending requirements are much more strict now, and buyers are waiting for the bottom of the market to buy; many are tied up in bidding on foreclosed homes and short sales because there’s a perception of getting a “good deal” with these properties.

For Sellers To Consider…
We’re in a normal cycle of the ups and downs of real estate. The silver lining is that homes are still selling. In fact, in some areas we're still seeing appreciation of home values; we’re just not seeing as many homes selling as in the past couple of years.

Which homes are selling? Those positioned in the top 30% for condition and location and priced aggressively when compared with similar homes. Knowledge of what is going on in the market at any given time is critical to successfully selling your home in the market we are in. Staging (see my February Blog), de-personalizing your décor (think model home), sprucing up, pricing your home correctly, and outstanding marketing from the start are critical elements for success in this market!

Whether you’re a buyer or seller, working with an experienced REALTOR™ who can guide you through the real estate process is an important component to a successful outcome.

Finally, I want to share some helpful advice I came across for anyone facing the possibility of a foreclosure. Please ask your financial advisor and legal counsel for specific instructions on how to proceed with your situation.

  1. Know the timeline
    Once you miss a payment by 30 days, your lender likely reports that to the credit bureaus. And with every missed payment, your credit score goes down. Plus, you'll start getting hit with late fees. Your lender will serve you with a notice of default according to your financing documents and then you’re looking at your home being sold at auction. This process can take months. Check out the book “Fight Foreclosure” by David Petrovich.
  2. Get a loan modification
    Try to get a loan modification before you even miss a payment. This is probably the least onerous of the options out there, if you can get it. This is basically a change in loan terms. A modification will lower your monthly mortgage payment or let you skip a few payments. The bottom line here is that the term of your loan can be extended. To request a modification, call your lender and ask to be transferred to the loan modification department. Make sure you have some recent pay stubs, current or prior year W-2 forms, bank statements, property tax bills and insurance bills. If possible, obtain appraisal information for your home. And the process can be frustrating. It could take weeks and requires you to be proactive, persistent and aggressive. Loss-mitigation departments are overwhelmed, under-staffed and under-experienced and lenders will likely devote more attention to your case, the closer you are to having your home sold at auction.
  3. Consider a sale
    If you can't afford your mortgage, your best bet is to sell your home. But if you owe a lot more on your home than it's worth, you may be able to get the lender to accept less than you owe on it by negotiating a short sale. Basically you sell the house for what you can get and the lender agrees to accept it. In some cases the deficit will be forgiven, but in other cases you may have to sign an unsecured loan for the amount. Negotiating a short sale isn't always easy. You generally have to write a hardship letter indicating why you can't make the mortgage payments and provide supporting financial information for them to consider working with you. The bank usually controls the negotiations and you don't have much say in the process. And keep in mind the process is slow. It can take 2 to 3 months from the first time you submit your package to when the lender starts the negotiation process with you.
  4. Think about a deed in lieu of foreclosure
    With a deed-in-lieu transaction, you hand over the deed to your house to your lender. In return, you are released from your mortgage. This usually keeps you from having to pay any deficit that might be owed on the property. The lender, on the other hand, avoids further legal costs related to a foreclosure. Keep in mind that lenders cannot be forced to accept a deed. In fact, in order for a bank to accept a deed in lieu, you may be required to have already tried a short sale and failed. If your bank does agree to a deed in lieu, make sure your responsibility to pay is discharged. Otherwise, you may still be on the hook for payments.

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