Mike’s Real Estate Show

Friends, Here’s a reponse I made to a recent inquiry from a listener who is facing a possible ”Short” sale of his home. This means having way to much loan left at the end of the escrow! My thoughts below are based on the following example: Sales price $595,000, Loan amounts: $580,000 1st, $110,000 2nd–total loans: $690,000! That’s called being “upside-down” in our industry. I didn’t throw in the “pre-payment” penalty. Here are my thoughts which apply to any short sale. I’ve left out specifics for privacy issues:

Since you have two loans in place, you’ll need to talk to the second note maker, which, by the county records, seems to be the 1st note maker also. The procedure is they usually don’t talk to you unless you’ve got an offer in hand from a valid buyer contingent upon the lender(s) taking less than what is owed on the property. This, as you accurately stated, is a “short-sale” as the proceeds from the sale will be “Short” of what’s owed on the property. It is a very tricky business. You have to make the real estate community aware that the sale of the property is “subject to” the short sale, however, it can’t be guaranteed, and hence many buyers don’t want to fool with them.
     Back in the 1989-90 market when in Southern California 60% of ALL listings in the LA MLS where “Short-Sales” you had no choice but to deal with them. We are no where near those times. Even though defaults are up over 100% from last year they only account for 560 properties in the thousands of thousands of loans in Sonoma County. And usually only 5-8% of all defaults actually go to sale or through the complete foreclosure process. So in OUR MLS we have very few “short-sales” to deal with so the agents avoid them like the plague! I mean, why take a qualified buyer to a property which they might never own and make an offer contingent upon an indifferent lender deciding if they’ll take less to accommodate the buyer? Doesn’t make much sense.
     On your 2nd, this was not purchase money second but an added on “refinance” or Home Equity Line of Credit? If so it may be a “recourse” loan which means the subject property is NOT the sole means of satisfaction or payment by the lender. They may agree to reduce the amount but may insist on pursuing other means of collateral (cars, business, etc) for balance of payment. The first you have, if the original first when you bought the property, is a non-recourse loan, so their payment is directly limited to the security of the house.
     When you factor in the cost of the sale, brokerage fees, transfer tax, any inducement to get a buyer to buy your property then subtract this from  the “listed” price, not what you owe on it, then subtract THAT from the owed amount it gets pretty ugly real quick!
  Here’s a plan of action: Contact the Lender of both notes and explain your situation (believe me, they’ve been hearing this for the past year) and ask what can be done. Second, talk to a CPA to see what, if any, debt relief will do to your capital gains, tax liability. Third, a good real estate attorney to explain to you the ramifications of NOT paying on the loan and allowing it to go into default or selling under a “short” sale proviso. Some argue a “short-sale” is the SAME as a foreclosure. Also, a credit reporting agency and future real estate lender to figure how this all will affect your credit rating.
    Lastly–Just hold onto the property and keep making the payments, preserve your credit, don’t buy the new house, and eventually the market will do what it always has done–swing the opposite direction in which it is swinging now!!