Short Sale Options for Homeowners

There’s so much confusion out there as to what are the best options for a homeowner when they are in a default situation and upside down on their mortgage.  This is understandable because there is so much confusing information out there that one wouldn’t know where to begin and who to trust.  The first thing that needs to be done is to carefully evaluate the situation.  All actions and decisions must be made in the perspective of number one, there is negative equity, meaning the property is worth less than what is owed, that means you almost have to think the opposite way you would think if you had positive equity (conventional real estate).  Secondly, because of the adverse financial circumstances being experienced by the homeowner the inevitable foreclosure is coming.  I highly emphasize that it is not a question of IF, it is only a question of WHEN. 

 

So to summarize, a) the home has negative equity, and b) the homeowner is going to lose their house.  Sellers that lose their home to foreclosure are typically forced to file for bankruptcy in order to discharge all of the hundreds of thousands of dollars of personal debt end up in a worst situation possible.  They not only have a foreclosure on their credit but a double whammy of a bankruptcy.  The best situation is the sellers who are able to successfully sell their house via a short sale and have avoided the actual foreclosure from completely occurring, and because of the short sale paid off hundreds of thousands of dollars in indebtedness that they were personally responsible for. 

 

There are essentially 4 options for the homeowner:

 

1.       Remain in the property as a “squatter” using multiple bankruptcy filings until the foreclosure auction occurs and they are evicted.  This allows the homeowner to stay in the property for as long as possible at little or no cost.

2.       This option is very unrealistic.  The homeowner lists the property with an agent for an amount high enough to pay all of the liens in full and pray that some buyer will come along and pay that price.  Ultimately, the result is that the homeowner lives in the property without making payments, experiences foreclosure, and then is often confronted with the need to having to file bankruptcy in order to discharge the personal responsibility of hundreds of thousands of dollars of debt.

3.       This option is frequently recommended by many traditional real estate agents who do not understand all of the complexities of the short sale world is for the homeowner to list the property seeking a short sale buyer and hope that the short sale buyer has the patience and endurance to wait out the 90 plus day process as the seller(s) or their agent negotiates with the lien holders all of the things necessary to get the short sale approved.  The biggest concern and drawback is this approach is that the buyer will get frustrated over waiting 90 or more days and move on to another house that is already available.  Second and more insidious concern with this is that the real estate agent and the seller are not always properly equipped to handle the negotiations with the lender.  The lender is in the process of seeking to collect a debt and they will use any and all means at their access in order to try and obtain money and information.  Unless the agent is extremely familiar with the entire short sale process as well as the BPO process they can make fundamental or critical errors that will either delay or destroy the short sale process.

4.       For the homeowner to list the property seeking a short sale and to work with a competent and knowledgeable investor who seeks to buy property.  In exchange for the investor agreeing to wait the 90 plus days to be able to buy the property the investor assumes the responsibility for negotiating the short sale so the investor knows where the process is at all times.  The investor may choose to keep the property for their rental portfolio or decide to quick turn the property for a profit.  The advantage to this approach is that there is a competent, persistent, committed end buyer who has submitted a legitimate arms length contract to the Bank in order to buy the property.  An additional benefit to this strategy is that the investor is knowledgeable about the entire short sale process and is able to handle the BPO in a manner that will more likely result in a favorable short sale outcome. 

 

I have had so many experiences where the seller would like to work with me as the investor/buyer but the real estate agent sways them away with their opinions.  These agent typically do not give me the opportunity to explain the process or, if they do, they are still leary and don't trust the process.  I then watch as the listed house, with no equity and no buyer, eventually goes to the sheriff sale.  My hopes are that more agents become more open minded to this new real estate market and team up with competent investors to better assist the struggling homeowners to avoid their foreclosure situation.