Foreclosures and short sales are everywhere! As a new real estate agent coming into this market, you have so much to learn. Every real estate licensee needs to understand foreclosures and short sales, know the forclosure process in your state and what options are available to avoid foreclosure. It is advisable that you also understand loan modifications, REO’s, bankruptcy and insolvency.
As a previous short sale specialist assisting homeowners in foreclosure, I wanted to write a blog to give you a basic understanding on each subject; however, it is advisable to seek professional training.
A FORECLOSURE is a legal procedure that happens when the bank or lender takes a home away from a homeowner because of defaulted mortgage payments. The foreclosed home is sold at auction on the court house steps starting with a minimum bid to include the loan balance, interest and attorney fees. A potential buyer must bring full payment to the auction. Most foreclosed homes do not sell at the auction and are returned to the bank or lender.
Here is a good article on foreclosure statistics: www.foreclosurehelpandhope.org.
REO: When the home fails to sell at auction, it converts back to the bank as a “bank owned property” called an REO (Real Estate Owned). The bank owns the property and the mortgage no longer exists. Banks have their own REO department and listing agents to list the property for sale. If you are assisting a buyer in purchasing REO’s, you will need to have understanding on how REO’s work, how to write REO offers and how to properly negotiate with the REO agent. REO’s are sold as is and many are damaged properties and there are no negotiating repairs.
Check out this great website on REO’s and foreclosures: RealEstateAbc.com
A LOAN MODIFICATION is a formal request by a homeowner asking the lender to modify (lower their payments) their loan so they can afford to keep their home. The home owner will need to submit an application providing their financial information, tax returns and demonstrate a true hardship. The seller must state that they are living in the home and that it is not being used as a rental. The unfortunate reality is that most lenders have hundreds of thousands of loan modification requests. It can take up to a year for the bank to make a decision. Most lenders will not modify a loan if the homeowner is current on payments. During this time, you have to make sure the home isn’t foreclosed on. Foreclosures have occurred during the modification period and some home owners never knew there was an auction date. Make sure to have your clients read their mail! If you clients are unable to make their mortgage payments, have them talk to their lender.
If your seller is considering a loan mod, have them contact the Making Home Affordable Program: 1-888-995-HOPE. This is the government program created to help homeowners in crisis. Make sure your seller has a back up plan in case the loan modification dosen’t go through. In one situation, a request for loan modification took 11 months and when approved the mortgage was raised higher instead of lowered. Why did this happen? The original loan didn’t have PITI (Principal, interest, taxes and insurance) and the lender lowered the actual payment but then added PITI and the result was a $200 increase in payments. Not good for a homeowner who is struggling to afford the original payment!
SHORT SALES: Many home owners facing foreclosure try to sell their homes in an attempt to avoid being foreclosed on and having their credit completely destroyed. In today’s market, most homes are underwater (Home is worth less than what is owed) and have to sell for less than what is owed on the loans. This is called a short sale. The lenders will have to approve the sale and all terms in the transaction every step of the way. If there are multiple loans, all lenders must be involved and approve the terms of the sale. Short sales can be very time consuming as banks are overwhelmed with short sales and loan modification requests and take a long time to respond. This can frustrate a buyer and cause a buyer to back out of the deal. It’s not a fun process for anyone! Make sure to get proper training before attempting to work a short sale!
INSOLVENCY: Insolvency means your debts are greater than your assets and income. Homeowners are required to fill out forms disclosing all assets, incomes and debts when applying for a short sale. If a homeowner is insolvent, the junior loans may choose to write off some of the loan balance. When a lender writes off a debt, it is considered “unearned income” and is taxable so the lender issues a 1099C. Our government has decided not to make home owners pay taxes on 1099C’s during 2010 and 2011. If your client receives a 1099C, have them seek professional tax advice. If they receive a 1099C outside of the forgiveness years and they have to pay the taxes, they may be able to get out of paying if they can prove insolvency.
BANKRUPTCY: NOTE: THIS IS NOT LEGAL ADVICE. Please advise your clients to talk with a bankruptcy attorney if they are considering filing bankruptcy. Some homeowners are filing bankruptcy just before the foreclosure auction date to stall their foreclosure. The foreclosure date will be stopped until the bankruptcy court releases the home for sale and could allow enough time to find a buyer if the home has been on the market. If your client makes too much money, they will not be eligible to file a CH 7 bankruptcy, which is a total wipe out of all debts. Another option is a CH 13, a repayment that allows you to wipe out mortgages. In Oregon, I was recently told that new laws allow you to totally wipe out junior mortgages in a chapter 13. But please seek legal advice to confirm this! You can also reaffirm loans on automobiles and work out payment plans for other unsecured debt. The bad news is the bankruptcy court will be in your life for the length of the “repayment plan” which is 3-5 years! In a Ch 13, the bankruptcy court will manage and pay your bills and you have to report all incomes earned and unearned. Some incomes you will have to give up to the court such as bonuses and inheritance.
Talk to a good attorney in your state before considering any of these options. Most offer FREE consultations!
Here is a one good bankruptcy firm in the Portland, Oregon area: Todd Trierweiler & Associates. East side: 503-253-7777 and West side: 503-906-7981.