Any real estate agent is now familiar with the concept of a short sale and many upside down home owners have been explained the process by these agents, specifically after their rise in popularity during the recent real estate bust. What is a short sale? It is designed to allow borrowers with mortgages higher than the value of their house to sell their home for a reduced or “short” amount.
For example, a homeowner that owes $200,000 on their mortgage and wants to sell, can ask the bank to accept a lesser amount as a pay off of the mortgage. The borrower needs to establish that they are unable to make the mortgage payment due financial hardship and also have a ready buyer that is willing to purchase the home. The bank will determine the market value of the home and either accept, deny or counter the short sale offer from the borrower.
In our scenario let us assume that the buyer of the property offers $140,000 and the bank agrees, then the seller (borrower) and the buyer sell the house as usual and any proceeds of the sale go to the bank. Net proceeds reflect transfer costs, taxes and real estate commissions often knocking off another 10% of the sale price, so our bank would receive roughly $126,000 for the $200,000 they had initially loaned the borrower.
For a bank, a short sale is clearly an expensive alternative and contingent on all parties coming together, all at the same time, often a challenge in the real estate business.
The alternative, a deed in lieu of foreclosure is gaining speed and appears a better alternative for lenders. Simply put this legal jargon means that instead of a foreclosure, the borrower can just give back the home and doing so will not be considered a foreclosure. While some contend this method is more damaging long term to credit scores than a short sale, there are others that state the opposite. Given the fact that so many have opted to consider a short sale, foreclosure, deed-in-lieu or bankruptcy, it appears no one is alone in this crisis and lenders will one day need to consider the number of folks with bad credit and actions like the above on their reports.
Why banks are moving towards a deed-in-lieu? Money and time. Lenders are bound by State’s varying foreclosure laws, depending on which State the property is located, a foreclosure can take as much as 2 years to complete after non payment. In addition should a borrower attempt a short sale, this would delay the bank from taking possession and equals increased real estate commissions from 6-8% of the sales price.
Real estate agents agents are up in arms. By not participating in the process of a deed-in-lieu, agents cannot earn commissions. More often banks are going directly to individuals and offering top dollar to homeowners if they just hand them the keys and walk away. From the banks perspective they can take possession earlier and utilize their own contracted real estate agents, who often work at a discounted fee to market and sell the home on behalf of the bank, allowing the bank and not the homeowner to control the process.
Metro Detroit real estate broker Luke Johnson with Cranbrook Associates stated, “I am seeing more and more sellers that are getting as much as $20,000 to just walk away from their home and not to start the short sale process. It clearly has an impact on my business but some times is the best or only option for the seller.”
We recommend discussing with a financial advisor or lawyer the pros and cons and which option or offer may be best for your situation, should you find yourself upside down in your mortgage and needing to sell.
