REO/SHORT-SALES
A growing number of buyers are entering the market through purchases of REO/Foreclosures or Short-Sales. To better understand these purchasing vehicles we felt it best to fully define each term:

THE SHORT SALE
A short sale is when a bank or mortgage lender agrees to discount a loan balance due to an economic hardship on the part of the mortgagor. The home owner/debtor sells the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender in full satisfaction of the debt. In such instances, the lender would have the right to approve or disapprove of a proposed sale.

Extenuating circumstances influence whether or not banks will discount a loan balance. These circumstances are usually related to the current real estate market climate and the individual borrower's financial situation.

A short sale typically is executed to prevent a home foreclosure, but the decision to proceed with a short sale is predicated on the most economic way for the bank to recover the amount owed on the property. Often a bank will allow a short sale if they believe that it will result in a smaller financial loss than foreclosing as there are carrying costs that are associated with a foreclosure. A bank will typically determine the amount of equity (or lack thereof), by determining the probable selling price from a Broker Price Opinion BPO or through a valuation of an appraisal. For the home owner, advantages include avoidance of a foreclosure on their credit history and partial control of the monetary deficiency. A short sale is typically faster and less expensive than a foreclosure.

In short, a short sale is nothing more than negotiating with lien holders a payoff for less than what they are owed, or rather a sale of a debt, generally on a piece of real estate, short of the full debt amount. It does not extinguish the remaining balance unless settlement is clearly indicated on the acceptance of offer. Often a bank will choose to allow a short sale if they believe that it will result in a smaller financial loss than foreclosing.

Lenders have a department (typically called a loss mitigation department) which processes potential short sale transactions. Typically, lenders do not accept short sale offers or requests for short sales until a Notice of Default has been issued or recorded with the locality where the property is located. Lenders have a varying tolerance for short sales and mitigated losses. The majority of lenders have a pre-determined criteria for such transactions. Other distressed lenders may allow any reasonable offer subject to a loss mitigator's approval. "Red tape" is very common in short sales, similar to REO and HUD properties, requiring potentially multiple levels of approvals and conditions. Junior liens, such as second mortgagees, HELOC lenders, and HOA (special assessment liens), may need to approve of the short sale. Frequent objectors to short sales include tax lienors (income, estate or corporate franchise tax - as opposed to real property taxes, which have priority even unrecorded) and mechanic's lien holders. It is possible for junior lien holders to prevent the short sale.

While it is frequent if not common for a lender to forgive the balance of the loan in question, in some instances the deficiency is sometimes passed on to the debtor as ordinary income through the issuance of a 1099 and thus subject to federal income taxes. Each situation is unique.

The benefit to buyers is the potential to purchase a property at a price significantly under market value. The main pitfall of this type of purchase is the time from the submission of an offer to settlement can be as much as 4 months since the lender has varying levels of approvals needed to finally accept a buyer's offer.

Regarding the impact on one's credit, a short sale does adversely affect a person's credit report, though the negative impact is typically less than a foreclosure. Short sales are a type of settlement. Like all entries except for bankruptcy, short sales remain on a credit report for seven years. Depending upon other credit information it is typically possible to obtain another mortgage 1-3 years after a short sale.

While it is frequent if not common for a lender to forgive the balance of the loan in question, it is unlikely that a lien holder that is not a mortgagee will forgive any of their balance. Further, it is common for a lender to omit updating mortgage balances zero balance after a short sale. However, willfully misrepresenting information on a credit report can constitute libel in some jurisdictions, and lenders may be sued in civil court for engaging in this behavior.


THE FORECLOSURE
Plain and simple, a Foreclosure is the legal process in which a bank or other secured creditor sells or repossesses a parcel of real property after the owner has failed to comply with an agreement between the lender and borrower called a "mortgage" or "deed of trust". Commonly, the violation of the mortgage is a default in payment of a promissory note, secured by a lien on the property. When the process is complete, the lender can sell the property and keep the proceeds to pay off its mortgage and any legal costs, and it is typically said that "the lender has foreclosed its mortgage or lien". The entire foreclosure process can take as long as 6 months and is very costly to the bank so in most instances a short-sale solution is preferred.

Buying a foreclosure is an easier process than the short-sale however, since you are dealing with the owner (the bank) who can do as they wish. Unfortunately each bank conducts their sales differently as some hold offers without counteroffers while other respond as in a normal sale.

In both Short-Sales and Foreclosures the bank has a preferred selling price in mind. Typically 90% to 95% of asking price is desired since this number is already far below market value.

STEPS TO BUYING WILDWOOD FORECLOSURES and SHORT SALES

1/CONTACT ME
Contact me at 609.402.8900 for additional information or use our HOMESEARCH option to select the type of property you are interested in and type "FORECLOSURE/SHORT SALE" in the comments section.

Within 24 hours we will furnish you with a complete listing of all the Foreclosures and Short Sales in not only Wildwood but if you choose all of Cape May and Atlantic Counties.

2/PREPARE FINANCING
One of the most important items that needs to be in place BEFORE you choose to make an offer on a Foreclosure or Short Sale is financing. Keep in mind whether you are buying a bank-owned property or a short-sale the bank is looking for a "slam-dunk"! Cash is king, and when coupled with a quick close can equal a tremendous  opportunity to buy a property at a deep discount. Proof of funds such as a bank statement should accompany all offers. If you will be financing your purchase a pre-qual will need to accompany your offer. The best way to strengthen a financed offer is to have everything in place in order to facilitate a quick closing.

3/ VISIT THE PROPERTY
Typically foreclosures and short sales require the property to be sold "as-is". Under the law no one can require you to waive your right to inspections but the bank will not permit alterations to the purchase price to reflect items in need of repair as they are only concerned with the bottom line.

The best solution is, once you've decided on a property, have your home inspector look at the property before you make your offer. In this instance if you are willing to move forward you can then make your offer and waive your inspection since it's already been done. This would look very attractive to the seller.

4/ MAKE YOUR OFFER
When buying short sales and foreclosures keep in mind you are not the only person looking for the "deal of the century!". I have seen many buyers lose a property for a minute amount that in hindsight they were willing to pay. Make your offer the best and final at the most reasonable terms.


MY EXPERIENCE
I have been involved in numerous short-sale/foreclosure transactions so I can say without a doubt no two are alike. If you are contemplating this type of purchase call me on my cell at 609.402.8900 today for further information.

Joe Zarroli is an Official Certified Specialist for REO, Preforeclosure, Foreclosure and Short Sales in the Wildwoods.

 

 

 

REO Glossary of Terms

A

 

Absolute Auction - An auction with no minimum bid amount. The highest bidder gets the property no matter how low the bid.

Abstract of Title - A summary of the conveyances and other facts relied on as evidence of title.

Accrued Interest - Interest accumulated on the mortgage since the last payment.

Action - The 'notice of' is the published legal beginning of the demand for payment in a foreclosure proceeding.

Appraisal - An opinion of value.

Assessed Value - Value placed on property by the County for the purpose of computing real property taxes. In Florida the assessed value is usually 15-20% below market value but will vary by area.

 

 

B 

 

BPO - Broker's Price Opinion also called a Comparative Market Analysis. A method of appraisal in which selling prices of similar properties are used as the basis for arriving at the value estimate. Institutional sellers usually rely on a BPO prepared by a real estate agent and a professional appraisal to determine a listing price.

 

 

C 

Certificate of Sale - A certificate issued to a buyer at a judicial sale (e.g. foreclosure)  

Certificate of Title - In Florida this certificate is issued to a buyer 10 days after the foreclosure sale.

Certified Funds - Same as cash. Buyers monies must be brought to the closing in this form.

Closing - The final accounting of the real estate sale. The closing Statement outlines the costs on both the buyers and the sellers side of the transaction.

Contingent - Dependent upon conditions or events. There are conditions the institutional seller will consider in an offer to purchase such as the ability of the buyer to obtain a mortgage or perform inspections. The sale of another property to raise sufficient funds is an example of a contingent usually not considered.

Contract - A promise. Only when an offer to purchase has been fully executed (signed and initialled) by buyer and seller does it become a contract.

 

 

D 

Default Judgment - against someone because they failed to show up in court.

Deficiency Judgment - Decision requiring a borrower to pay the lender the difference between the mortgage balance and the amount realized at the foreclosure sale.

 

 

E 

Earnest Money - An amount of money given with the offer to purchase as a "good faith" gesture of the buyer's serious intent. Although not required by law in Florida, most institutional sellers require a minimum $500-$1000 deposit in a trust account with an offer

Escrow - The deposit of funds with a bonded neutral third party with instructions to carry out the provisions of a contract. Earnest money deposits are usually held in the trust accounts of either a real estate Broker, title company or attorney.

 

 

F 

Fee Simple - Complete legal ownership of a property.

Federal Housing Administration (FHA) - The federal government agency which administers FHA insured loans.

Federal Tax Lien - An obligation to the federal government as a result of non-payment of taxes.

F.N.M.A. - Abbreviation for the Federal National Mortgage Association affectionately known as "Fannie Mae", an agency which buys blocks of loans from banks. Due to its size, Fannie Mae Foreclosures make up a significant percentage of our Florida inventory.

F.H.L.M.C. - Abbreviation for the Federal Home Loan Mortgage Corporation affectionately known as "Freddie Mac", an agency performing a similar function to Fannie Mae and now much larger. Special financing is offered on Freddie Mac Foreclosures.

Foreclosure - Forced sale of property ordered by a lender due to delinquency in mortgage payments. A foreclosure sale terminates all rights of the mortgagor.

 

 

G 

G.N.M.A. - Government National Mortgage Association affectionately known as Ginnie Mae is an agency in the secondary mortgage market dealing primarily in recycling VA and FHA mortgages. Grantee. The buyer.

Grantor - The seller.

 

 

H 

 

HUD - Abbreviation for the Department of Housing and Urban Development, an agency which oversees FHA. FHA foreclosures are called HUD Homes.

 

 

I 

Institutional Lender - Financial institutions whose loans are regulated by law such as banks, credit unions and commercial loan agencies.

Involuntary Lien - A lien imposed against property without the owner's consent such as taxes, special assessments, federal income taxes, etc.

 

 

J 

 

Junior Lien - A lien that does not have first priority making the property security for payment of a debt.

 

 

L

 Lien - An encumbrance using the property as security for the payment of a debt or obligation of the property owner.

Lis Pendens - Lawsuit pending. This usually recorded in Florida to give constructive notice of pending litigation.

Loan to Facilitate - Some institutional sellers offer financing to make their properties more attractive in the market.

 

 

M 

Market Value - The price a property will bring in the open market under normal conditions.  

Mechanic's Lien - A lien placed on property by laborers or material suppliers who have contributed to an improvement.

Mortgage - A legal conveyance of property to a creditor for security (from the Latin meaning death pledge). Mortgagee - The lender.

Mortgagor - The borrower.

MLS - Multiple listing service run by local Realtor associations.

 

 

N

 

Notice of Default - A notice filed to show that the borrower under a mortgage is in default (behind on the payments).

 

 

O 

Option - The right to buy or lease with specified terms for a specified period of time.

OREO - Other Real Estate Owned by institutions. Sometimes used to refer to foreclosure properties but can refer to branch offices, etc. owned by the bank

 

 

P 

Points - A charge made by the lender for loaning money. One point equals one percent of the loan.

Portfolio Loan - Loan originated and held 'in house' as part of a lender's investments.

PMI - Private mortgage insurance required as part of the monthly payment in loans less than 80% loan to value (less than 20% downpayment).

Pre-foreclosure - Period between when a borrower becomes delinquent and the property is foreclosed upon.

Principal - A person acting for him/herself in a transaction. Also the amount of a loan exclusive of interest.

 

 

Q 

Qualifying - Process of demonstrating a person is credit worthy and has enough money to buy a property. Institutional sellers may require "proof" in the form of a letter from a lender or some verification of the source of funds if the sale is cash.

Quick Sale Value - Price estimated to sell in less than normal market time and therefore below market value.

Quiet Title - Legal process to eliminate title problems.

Quitclaim - A form of deed in which the grantor is giving the grantee rights to a property but makes no warranties about rights others may have.

 

 

R 

Realtor - A broker or sales agent who is a member of a local real estate board affiliated with the National Association of Realtors. R.E.O. - An abbreviation for Real Estate Owned most commonly used to describe properties acquired in foreclosure and owned by institutions.

Right of Redemption - Right to buy a property back for a limited period of time (usually 10 days) after a foreclosure sale.

 

 

S 

Secondary Mortgage Market - Fannie Mae, Freddie Mac, Ginnie Mae were originally chartered by the federal government to stimulate the economy by either buying or recycling packages of loans from financial institutions.

Sheriff's Deed - Deed given by court order to satisfy a judgment.

Short Sale - In some instances in Florida a lender may agree to adjust the amount owed in order to get the property sold.

Special Asset - Term also used to describe properties acquired in foreclosure and owned by an institution.

Special Warranty Deed - See warranty deed. "Special" indicates there are limitations.

 

 

T 

Title - Evidence that an owner is in lawful possession; instrument evidencing ownership.

 Title Insurance - Policy written by a title company to protect a property owner against loss if the title is imperfect.

Title Search - Process to determine validity of the title to real estate.

 

 

W 

Warranty Deed - Assures the title conveyed is good and possession will be undisturbed.

 Workout - A special process in which some lenders and property owners may seek a solution to impending foreclosure by a payment plan or refinance