Pre-foreclosures and Short Sales
In todays marketplace, foreclosures and home sales contingent upon a short sale is ever growing. There are many different kinds of foreclosures that you should be aware of, such as foreclosures, bank foreclosures, and HUD foreclosures. In this article I want to touch on the preliminary stages of foreclosures. The pre-foreclosure and homes that are subject to short sale.
What is a Pre-foreclosure?
A pre foreclosure is the procedure in which the lender or mortgage holder will allow a mortgagor to avoid going into foreclosure by selling their property for less than outstanding balance of the loan. This is something that the homeowner and their lender need to work out beforehand.
If the homeowners do not talk with the lender, and place the home on the market, they could need to negotiate a short sale with their lender when an offer is presented.
(Example: John has a home that he can no longer afford. He decides to sell his home in result to his financing. He had in the past borrowed against his home to purchase a truck he need for work. He now owes $244,000 on his home. Now that he has to sell, he realizes that his home is only worth $229,000, since comparable properties have been selling near that price range! If he does not have the $15,000 to payoff his mortgage in full. Also keep in mind the other fees that go along with the sale of real estate; including title and escrow fees, attorney fees in applicable, a portion of unpaid property taxes, notary fees, delivery fees, documentary fees and/or state transfer fees, and commission if a broker is involved. Now it is now up to the bank to decide if they will negotiate on that remaining dollar amount owed. Because John owes more on the his home than it is worth, he is at the discretion or the bank.)
If, using the example above, a buyer submits an offer for the full listed price of $229,000, and the homeowner accepts, that buyer needs to be made aware that the seller will be negotiating with the bank and involves a slight risk.
The buyer risks not knowing a solid closing date, dealing with lawyers, not knowing if the seller’s lender is going to work with the seller on resolving the issue, and potentially not being able to purchase the property until being put through the actual foreclosure process.
The seller risks falling into foreclosure, result of not being able to negotiate a settlement, compiled interest that goes along with defaulting on the mortgage, possible pre-payment penalties, and a large amount of stress. Also, the IRS often will get involved with short sale properties because they are seen as a relief of debt and may be treated as income.
Every situation is different when dealing with pre-foreclosures and short sale property. The biggest tip I can give you is, if you are in a similar situation or know your sale may be subject to a short sale, Don’t run from it! Talk with the people and try to work out the best option for you and your lender. Many times the lender will hold a note or forgive some of the interest owed in hopes to regain their borrowed money.