I was poking around this morning doing some research on enhancing real estate searches for our Web site. We’re about to introduce building specific searches. While testing the listings for 340 On The Park I discovered that we are only allowed to show 9 listings, while there are actually 15 units for sale in the building. Why can’t we show those other 6 listings? Well, we could if we required you to register but we don’t want to do that because registration is a pain in the ass. Furthermore, it’s a real turn off for real estate buyers who are afraid that some pushy real estate agent is going to start harassing them – not to mention that many home buyers provide bogus registration information when faced with that requirement.

But why do we have to get you to register to see these other 6 listings? Because the real estate brokers that are listing those units do not participate in an arcane and convoluted program called broker reciprocity. As explained in that prior post real estate listings from brokers that participate in the program get put in the IDX feed, which is broadly available on all realtor Web sites without registration. If a broker does not participate, their real estate listings are only available in the VOW feed that requires registration to access on a realtor’s Web site.

What is surprising about the 340 On The Park situation is that 6 out of 15 listings are not in the IDX feed. That’s a huge number. Just the other day I did a quick estimate and determined that in the city of Chicago only about 2 – 3% of the real estate listings are missing from the IDX feed, which is consistent with what the MLS folks tell me. That’s the reason that we decided to not require registration on our site.

So why is 340 On The Park so different? It all comes down to the dominant broker in the building who has all 6 of those listings. Apparently, this broker does not participate in the reciprocity program. This is especially peculiar in light of the fact that a real estate broker has to actually go through the trouble of opting out of the broker reciprocity program. In addition, opting out of the program only prevents the listings from showing up on other realtors’ Web sites. The listing brokerage still has the ability to advertise the listing on any Web site they choose – e.g. Realtor.com, where these “missing” listings do appear and without registration. So the listing brokerage selectively withholds access from the Web sites of brokers like us who refuse to require registration for accessing MLS listings (we still have access to the properties through the MLS system but we can’t put them on our Web site without requiring registration).

All of these shenanigans highlight yet another problem you can run into using the top producer. So, if your home is currently listed and you want to find out if your realtor is holding out on you just check for your home on our site. If it doesn’t show up then it’s not getting the broadest distribution possible.

As I asked before, why would any broker not want their listings to receive the broadest exposure possible? Could it be that they are trying to restrict access to their listings so as to increase  the likelihood of their getting both sides of the transaction? Nahhhh. A real estate broker would never put their own self-interest above that of their client.

The following 10 steps are meant to provide a short overview of the steps that one should take in the home buying process.  While it is by no means a comprehensive list -it provides valuable tips and reminders to all home buyers.

Figure out how much you can afford
Talk with a mortgage professional.  In fact, talk to three mortgage professionals.  Not all lenders are created equal, there are bankers and brokers.  Get good faith estimates.  Compare bottom line only…meaning don’t just look at the rate being offered, consider all closing costs related. Get pre-approved, not pre-qualified.

Choosing the Right Property Type
In order to determine the best property type for you, think about how much you can afford and your reasons for buying. Each property type comes with its own pro’s and cons.  After consulting with a lender, you will know what you can afford in terms of dollars.  Now, you need to decide amongst a Condo, Townhouse or Single Family Home.  In fact, it may be more difficult to obtain financing on a condo than a single family home.  It is important that you consider the goals for your real estate purchase, both short term and long term. For example if it is going to be your primary residence, you want to make sure it can comfortably accommodate your current and future family i.e. children or in-laws. If the market takes an unfavorable turn and it become difficult to sell then you can still live comfortably in your home until the market recovers.

Finding the property
Now that you understand your budget and the type of property you are looking for, its time to start looking. So where do you start? I recommend finding a local real estate professional.  Buyers’ agents are paid at closing by the seller, not by the buyer.  The total commission is generally split between the buyer’s agent and the listing agent.   Bonus: If you choose a buyer’s agent from Lucid Realty you can receive up to 50% of their commission at closing. Basically, you are getting a “free” high level service and money in your pocket.  Your agent will want to know about you and how you like to live and other important criteria.  From there, the agent will send you properties to review and view in person.

You found the property
Before placing an offer on a home you should know how much it is worth to ensure the listing price is in line with the actual value.   Your agent should provide you with a CMA (Comparative Market Analysis). A CMA compares homes based on size, location, condition and several other factors to estimate the value real estate in a given area.  Hopefully, it will give you a better understanding of the local market.  It is also important to understand that everything is negotiable.  A good agent will help you learn as much about the seller and the property as possible.  It also is important to include contingencies in the offer as well. The most common types of contingencies are a mortgage contingency and an inspection contingency.

Hire A Real Estate Attorney

Once the offer is accepted, get it to a real estate attorney to review. Real estate brokers and agents are professionals at finding an ideal home and negotiating the terms, but attorneys are experts at reviewing and explaining contracts. As a result, it is best to have an attorney review all contracts before entering into any agreements with the seller. The best way to find a good attorney is to ask your real estate agent. Real estate agents regularly work with a number of attorneys in many different capacities and know which attorneys will be best based on your specific needs.  It is in the agent’s best interest to recommend an attorney that they know is competent, trust worthy and focused on protecting their clients’ interest.  It is also advisable to use a real estate attorney as opposed to a family friend who specializes in any other law to get the best representation.

Hire a Home Inspector
A home inspection is an essential part of the home buying process.  A home inspection will validate that you are investing in a good home or uncover significant defects that you would otherwise not have known about until moving into the home.  It is far more valuable to know what you are buying before you buy.   So what happens when defects are discovered by the inspector? In most instances the buyer and seller come to a mutual agreement on how to deal with the issues. Sometimes the seller may agree to take care of the issues. In other instances the buyer may assume the responsibility for a discount in the price. It really just depends on the specifics of the defects. As a buyer, it is best to know as much about your home before you purchase it as possible.  One word of caution:  be prepared for seeing a laundry list of really scary issues. This is normal. Many inspectors relish the idea of finding problems and some tend to exaggerate how bad things are.

Mortgage Application
Once of all the terms are finalized following the home inspection, complete your mortgage application. The first step would be to provide your lender or bank with the real estate contract.  In most cases, your agent will take care of this step for you.  They will ask for a signed copy of the contract along with other financial documents needed to complete your loan application. It is important to get this application in as soon as possible so the bank has as ample time to process your application. In accordance with the contract, the bank must provide the buyer with a commitment letter by a specific date. The commitment letter states that the bank is going to give you the loan. If the lender does not supply this by the specified time, they buyer runs the risk of forfeiting their earnest money.   You won’t lose your money if you don’t get your commitment in time but you may have to walk away from the deal or you have to ask for an extension – which can scare the hell out of the seller.

Get Insurance
After the bank provides a commitment letter, the only additional requirement from the buyer s the insurance binder. Before the bank can complete the loan the buyer must purchase home owners insurance.  Again, talk to three people.  Perhaps start with the person who insures your automobile – or perhaps one your agent recommends. The insurance binder is then sent to the lender prior to closing. Now the funds are all set to be released on the specified closing date.

Review the HUD
1-2 Days before you close, your attorney will provide you a settlement statement (also called a HUD) for your review. It is important that you, your attorney and your Realtor review the charges, fees and adjustments to ensure everything is correct. The HUD will have all of the information such as the closing costs, tax adjustments, utility adjustments your real estate rebate and several other fees. It will also state the amount you need to bring to closing. Any funds brought to the closing should be done in the form of a certified or bank check.  We recommend that you bring at least a few hundred more to closing to help avoid any unforeseen issues.  If you bring too much, the title company will issue you an overage check.

Closing Day
So what do you need to bring to the closing? You will need at least 2 forms of identification, and a certified or bank check for any additional funds.  The closing is typically attended by the buyer(s), seller(s), closing attorney, your attorney and the real estate agents involved in the transaction.  Your attorney will explain all of the documents to you prior to signing any of the disclosures at the closing. Once you are finished signing, you will receive your keys. Congratulations! You get your keys and now its time to figure out how you are going to spend your rebate!

For example, just yesterday I closed on a deal as a sales agent.  Several times throughout the course of the transaction, the deal was ready to fall apart.

First, the negotiations were almost killed over a few thousand dollars.  The seller came down as far as he wanted to, and the buyers offered as much as they could afford.  Both the listing agent and I were able to talk to our clients and get them to come down/up and then we had a deal.  Keeping calm and rational was key.  It was also important to ensure my client was seeing the big picture.  They were getting a nice home in a great neighborhood….there wasn’t anything better on the market that we found after seeing about 50 homes.

Then, the inspection report totally freaked out the first time home-buyers.  A list of more than 25 necessary repairs was noted by the inspector. At that point, it was in my hand to help the buyer understand what they should expect to be fixed and what they might accept since they were buying a used home.  More importantly, it was also in my hand to set the expectations with the listing agent as to what my clients would be asking for and WHY.  A verbal conversation can convey so much more than a letter drafted by an attorney.  At any rate, my client asked for certain repairs, and the seller agreed.  Whew.

Well, then came the appraisal/FHA inspection to approve the loan…which we figured would be fine since the seller had agreed to repair all the safety related items from the home inspection.  The FHA inspection in fact didn’t care about any of the issues identified (roof leaks, improper electrical wiring) BUT they wanted a fence painted or removed from the perimeter of the property.  The property lot size is 100 X100, which mean 1000 feet of fencing needed to be removed.  The house was built prior to 1978 and the fence paint was chipped and the logic was that it could have been lead based paint.

Objection #1 – Seller doesn’t want to take the fence down or paint it.  He didn’t want to incur a cost or go through the trouble, after all, he had already agreed to the other repairs.

Rebuttal – My clients will remove the fence on their own dime, but since it was a requirement of the loan, the removal had to occur prior to property transfer, and this of course presented its own set of issues. My client may not get the house and thus his labor would be wasted.  Okay, they decided to take the chance.

Objection #2 – If the buyer doesn’t get the loan, the seller now has an unfenced property.  He feels the fence is attractive to buyers, and while the fence was great – I couldn’t help but agree.  Kids and pets typically necessitate a fence.

Rebuttal – My client will waive their mortgage contingency, and the lender has provided a mortgage commitment document.

Objection #3 – Removing the fence will cause a devaluation of the property upon inspection.

Rebuttal – Okay, this objection was close to killing the deal.  Thankfully, the appraisal specifically stated that the fence had “No contributory value” which meant the value of the property was the same with our without the fence.  Nonetheless, my clients agreed to put the fence back up if for some reason they could not take ownership of the property.

Of course, all of this was occurring a week prior to closing and my clients current lease is up at the end of the month, so it was pretty crucial that we got it done in time for a re-inspection.  What did that mean?  That meant my client, who happens to be a female had to physically remove the fence herself, since her male partner was out of town.  She solicited her father for help.  I felt pretty bad about her predicament so my mother and I helped as well.

Bottom line, I knew my clients wanted this home and I knew it was a good value.  It sure would have been easier to let the attorneys hash all of the issues out – but I’m pretty sure that staying on top of all the details and ensuring constant verbal communication got us to the finish line.

The word “title,” can mean a number of things. In real estate, “title,”refers to one’s right to ownership, or any form of evidence of land ownership. Title is your rights to the land and improvements.

 What is Title Insurance ?

Title insurance is a protection mechanism that will protect you against any kind of damage caused by a defect in the title. Defect in a title?  What?  A title can be defective for a number of reasons such as forgery and impersonation.  Title insurance will protect against such defects as well as  the expenses incurred in defending the title (your right to ownership). Title insurance not only verifies ownership, it will also detect any possible “clouds” on your title. Clouds?  Unlike a defect,  a cloud implies that the title is not clear and these clouds could be in the form of IRS claims, liens, or other uncertainties of ownership.

Further, there are two different title insurance policies issued in every real estate sale. The first type is an owner’s policy, which will protect the new owner from any ensuing claims to the property. The second type is a lender’s policy, which will protect the lender against loss of an unpaid loan balance in the event of a claim.

Title insurance policies are important because they protect against possible non-recorded claims against your property and ensure free and clear ownership. As such, these policies benefit consumers in establishing safety and security in owning real estate.

To ensure the property is free to transfer title, the Title company will perform a search on the property using a “pin” or “permanent index number” which is each parcel of lands own unique ID number.  The title company will collect information about the property that is found in public records such as: the county recorder’s offices; property tax records; sometimes in county courthouses.  

Who Pays for Title Insurance?
Title can be paid in a number of ways, but the most common is for the buyer and the seller in a transaction to pay for  a policy. There are two types of policies: a lender’s policy and an owner’s policy. As far as the lender’s policy goes, it is usually paid for by the buyer of the real estate. The owner’s policy is paid for by the seller of the real estate.

Officially, a closing is the culmination of the entire real estate transaction and here is what happens:

• Documents that tranfer the ownerhsip of the property from one party to another (conveyance) and other required instruments are signed and delivered
• A monetary accounting is conducted between the parties based upon the Real Estate Settlement and Procedures Act (RESPA)
• Parties determine if condition of title is acceptable
• Funds are deposited with title company
• Money, in the form of checks is given to the Seller, Listing Agent, Selling Agent and on occasion the buyer, the buyer/seller attorney (referrred to as disbursements) per the HUD-1 by the Title company (escrowee) as directed by parties
• Ownership of the property is transferred
• After closing, the documents of conveyance are sent to the county recorder’s office for recording by the Title company

Below is a chart that shows the common costs in a real estate transaction along with who is typically responsible for paying them.  The chart was provided by First American Title. 

Lenders look at  ratios when they consider your application for a mortgage loan. A debt-to-income ratio is your monthly expenses compared to your monthly gross income. Lenders consider two ratios for your application:

• Monthly housing expenses as a percentage of income
• Total monthly debt as a percentage of income

Both ratios are important factors in determining whether the lender will make the loan.

Lenders usually require the PITI (principal, interest, taxes, and insurance), or your housing expenses, to be less than or equal to 28% of monthly gross income. Lenders call this the front-end ratio. In other words, if your monthly gross income is $5,000 or $60,000 annually, your mortgage payment should be $1400 or less:

$5,000 x 28% = $1400 – maximum monthly housing costs

Lenders usually require housing expenses plus long-term debt to be less than or equal to 33% to 36% of monthly gross income. Lenders call this the back-end ratio. In other words, if your monthly gross income is $5000, the combination of your mortgage, $1400, and other long-term debt should be no more than $1800:

$5000 x 36% = $1800 – maximum total debt

If your debt-to-income exceeds these ratios, talk to your lender about your options.  Some lenders allow up to a 41% back end ratio.

BASIC MORTGAGE OPTIONS

15-YEAR MORTGAGE

• Lower interest rate
• Build equity faster
• Less interest to pay
• Larger monthly payment

30-YEAR MORTGAGE

• Higher interest rate
• Build equity slower
• Can deduct more interest
• Lower monthly payment

FIXED RATE

• Interest rate stays the same for the term of the loan
• Interest rates could go down while you are locked into your mortgage at a higher than market rate

VARIABLE RATE

• Interest rate can increase or decrease during the term of the loan
• You might have a low rate for an three, five, seven, or ten years
• Monthly payments can be lower than fixed rate loans

BALLOON MORTGAGE

• A loan that has level monthly payments that will amortize it over a stated term (e.g., 30 years)
• Requires a lump sum payment of the remaining principal balance at the end of a shorter term (e.g., 10 years)
• Interest rate stays the same for the term of the loan

QUESTIONS AND CONSIDERATIONS TO USE WHEN CHOOSING A LENDER

BASIC INFORMATION ABOUT THE LOAN	Mortgage 1	Mortgage 2	Mortgage 3
Type of loan (fixed rate, variable rate, conventional, FHA?)
Minimum down payment requirement
Loan term (length of loan)
Contract interest rate
Annual Percentage Rate (APR)
Points (may be called discount points)
Monthly PMI payments (mortgage insurance)
How long must you keep PMI?
Estimated monthly escrow for taxes and insurance
Estimated monthly payment (principal, interest, taxes, insurance, PMI)
FEES: lenders have different names for similar fees. Listed below are some of the fees you may see on loan docs.
Application fee
Origination/Mortgage broker fees (may be quoted as points, origination fees, or interest rate add-on)
Lender fee
Appraisal fee
Recording fee
Credit report fee
OTHER COSTS AT CLOSING/SETTLEMENT
Attorney Fee
Title search/title insurance
Can any of the fees or costs be waived?
Estimated prepaid amounts for interest, taxes, hazard insurance, payments for escrow
State and local taxes, stamp taxes, transfer taxes
Flood determination
Prepaid PMI
Surveys and home inspections
PREPAYMENT PENALTIES
Is there a prepayment penalty?
If so, how much is it?
How many years does the penalty period last?
Are extra principal payments allowed?
LOCK-INS
Is the lock-in agreement in writing?
Is there a fee to lock-in?
When does the lock-in occur (at application, approval or another time?)
How long will the lock-in last?
When the rate drops before closing, can you lock-in at a lower rate?
IF THE LOAN IS AN ADJUSTABLE RATE MORTGAGE
What is the initial rate?
What is the maximum the rate could be next year?
What are the rate and payment caps each year and over the life of the loan?
What is the frequency of rate change and any changes to the monthly payment?
What is the index the lender will use?
What margin will the lender add to the index?
OTHER IMPORTANT CONSIDERATIONS
Will I work directly with you for the entire process?
What are the closing costs?
How long does it take to close from application date?

HOMEBUYER ASSISTANCE PROGRAMS

There are a number of different programs available for first-time homebuyers. The following are just a few examples of the programs available.

FEDERAL HOUSING ADMINISTRATION (FHA) INSURED LOANS

The 203(b) is the most common FHA loan, featuring:

• Low down payment
• Flexible qualifying guidelines
• Limited lender fees
• Maximum loan amounts

DEPARTMENT OF VETERANS ADMINISTRATION (VA) INSURED LOANS

Features of VA loans include:

• You must be an eligible veteran
• There are no down payment requirements
• Competitive and negotiable fixed interest rates
• Limitations on closing costs
• Longer payment terms

There is both a “streamlined” and regular version of this loan. The streamlined version has less cost and hassle and is only available to owner occupants and investors are not allowed. The FHA 203(k) streamline loan is available to borrowers of all income levels, to homeowners who plan to occupy the house, and for homes with one to four units.  There are three types of loans currently available, 15 or 30 year fixed or one-year arms.

According to the FHA website, there are three uses of the 203(k) loan:

• “To purchase a dwelling and the land on which the dwelling is located and rehabilitate it.
•  To purchase a dwelling on another site, move it onto a new foundation on the mortgaged property and rehabilitate it
•  To refinance existing indebtedness and rehabilitate a dwelling”

My post will focus on using the 203(k) loan to buy an uninhabitable property that is being sold in “as is” condition.

When shopping for a foreclosed property, the first thing to consider when choosing a lender is: Are they able to offer you this type of loan?   If not, and your property needs improvement prior to occupancy, you should find another lender.  Lenders who are able to provide the 203(k) loan can be found on the HUD website.

The following property types are eligible:

• Condos
• Town Homes
• Single Family Homes
• Mixed Use (Storefront)

To obtain a 203(k) loan there is a minimum $5,000 requirement of eligible home improvement projects on the existing structure of the property. Minor or cosmetic repairs may be included after meeting the first $5,000 worth of repairs.

Of course, if you are buying a condo, you will also be subject to minimum down payment and credit score requirements, which you can read more about here. In addition, only 25 percent of the total number of units in the development can be undergoing rehabilitation at any one time.

Another factor important to be aware of is that an approved HUD Consultant must oversee the repairs.  The process begins with a feasibility study, overseen by an approved consultant. Through this process, the FHA determines whether the improvements would be justified upon completion.  If the estimate of the property’s value after the repairs required in the feasibility study does not equal or exceed the loan amount, then no loan will be granted.

Prior to the start of any work, the consultant will provide a work write-up, which is an item-by-item breakdown of each item to be repaired and the estimated cost. Once agreed upon, the lender will order an appraisal based on the write-up. The appraisal will give an “after-improvements” value. After this step is complete, contractor bids can be solicited. Acceptable bids cannot exceed the cost given in the write-up.

After this step is complete, the loan goes through the normal underwriting and closing process and an initial payment for the purchase of the property is made. The lender holds the remaining funds until the work is completed. As the rehab progresses, requests can be made to pay contractors for work done to that point. The consultant will perform an inspection, and upon approval the lender will release the requested funds. This continues until the completion of the project. If money is left over, it can be used for additional improvements, or reducing the loan’s principal balance, but it cannot go back to the borrower.

Besides the hassle of completing the repairs, the other drawback of these loans is that they tend to come with an interest rate of up to 1% higher rates than the traditional FHA loan.  To get around this, borrowers can refinance the home after the repairs are complete.

Additional information on the 203(k) loan can be found on the FHA Website.

First, you need to understand the strange dynamics at work in a short sale. The seller still owns the property and is still the seller. However, the lender is really the one in the driver’s seat since they have to approve a deal that will result in them accepting less than a full payoff. The result is that the lender can’t do anything without the seller’s permission and the seller can’t do anything without the lender’s permission. And the lender may have all sorts of very particular rules about what they will and will not permit in a short sale. For example, they don’t want the seller getting a single dime out of the transaction because if there was a dime to be had it should rightfully be theirs since they are the ones getting short changed. And, as you might expect, this is bureaucracy at its worst. You are often dealing with some low level administrative type who gets yelled at all day and is suffering from a false sense of importance. They give meaning to their life by saying “no” and there is no master list of stuff that they say “no” to. In fact, that’s what makes life so much fun for the low level bureaucrat. They get to surprise you with their “no” when you cross the line. Present a request to them with the wrong packaging and “NO!”. For instance, you might get a bank to give you a credit for an unforeseen repair or you might get them to approve a lower price but they might balk at giving you a credit for lost rent or a proration of rent for the current month. Therefore, if you want one thing you might need to call it another thing. When you are dealing with a short sale you are not in a rational world. The bureaucrat will gladly lose $100,000 to foreclosure rather than pass up the opportunity to exercise their pathetic authority.

It gets even more complicated as you consider the seller’s position in a short sale. You need to understand a basic concept: As the buyer in a short sale you are NOT doing the seller a huge favor. If anything, the seller may be doing you a favor. First, you are dealing with someone who is financially on the ropes. Odds are they have no money. They may be considering other alternatives to a short sale such as deed in lieu of foreclosure, letting it go to foreclosure, or even personal bankruptcy. If the property is not their primary residence, the amount of money the bank is going to lose on the deal becomes taxable income to the them (the seller). So, the seller may not care one way or the other. They may have moved into their mother’s basement or just checked out of the process, waiting for the worst roller coaster ride of their lives to end. They may not be getting their mail or returning anyone’s phone calls. So you are not going to get any money from the seller, they are not going to fix any problems, and there is no point in having your uncle, who is an attorney but not a real estate attorney, badger them with official looking correspondence that make demands on them.

Here is the bottom line. When you buy a short sale, you are shopping in the bargain bin. This is a closeout. Irregulars. Merchandise sold as is (for the most part). No returns.

Can you handle that? If so, you might pick up a great bargain.

Get The Right People Involved

It definitely helps to have a realtor involved in this process because there is a lot of back and forth, coordination, and information transfers. It’s really helpful to have someone handle all that for you – especially if they’ve been through this process before. A realtor can also help convince the bank that the property value warrants a short sale.

You will want to consult with an attorney because they can be helpful at several steps in this process, starting with getting your lender’s attention. One way to get your lender to consider a short sale is to stop paying your mortgage. However, I hear that is no longer the only way to get their attention and I wouldn’t recommend doing this without first consulting with an attorney. Then you will want your attorney involved again later in the process when your lender presents you with different settlement options so that you can understand the implications of them. For instance, you can sign a 0% interest note for the deficiency or the bank can just forgive the debt. Each of these alternatives has specific implications for your credit history, your future liabilities, and your taxes. You will probably want your attorney negotiating the terms of your deal for you, though your realtor will negotiate the offer with the lender.

Because of the tax consequences you’re also going to want to involve your accountant. For instance, under certain circumstances, when a sale is completed, you may receive a 1099 C from the lender that documents how large the deficiency was. As debt forgiveness, this would normally be taxable except that there is the Mortgage Forgiveness Debt Relief Act of 2007 that provides for this phantom income to not be taxable if the debt forgiveness is related to your principal residence and the debt is forgiven during 2007 – 2009.

Contact The Lender

Once you believe your lender is ready to consider a short sale someone needs to contact the lender to start the process. This is something your Realtor can actually do for you. The first step is to figure out who to talk to and to document the process. In general, you want to be dealing with the Loss Mitigation department, not customer service. They can outline the steps and the required documentation.

Prepare The Documents

Before the lender will have any discussions with your realtor that are specific to your case they are going to want to have an authorization on file that explicitly gives your permission for the lender to talk to the realtor. After that, the lender will need a short sale package on file. Every lender has a different process but in general the following documents are required in the short sale package:

• Copy of the listing agreement with any amendments
• A hardship letter, written by you, explaining your circumstances that require a short sale. If there is any supporting documentation such as medical bills or termination letters, those should be included.
• Financial information request form, which provides a summary of your income and expenses
• Copy of pay stubs
• Copy of income tax return
• Copy of property tax bills

Pricing The Property

Once your lender is in receipt of your short sale package and they have been authorized to talk to your realtor your realtor should call your lender to discuss pricing and the lender’s process for responding to offers. This is where a realtor can really add some value by figuring out what the lender’s targets are and how flexible they are. In addition, by understanding the process your realtor can set the appropriate expectations with potential buyers and possibly even expedite the response. The last thing you need is a realtor who just lets fate take its course.

Next Time

In another post I’ll cover what happens after an offer is made. In the meantime, if you would like some additional perspective on the short sale, check out this Atlanta based realtor’s blog.

So what exactly is a short sale?

A short sale is a home sale where the proceeds of the sale are not going to be sufficient to pay off the mortgage. Consequently, the sale contract requires the bank’s approval. Exactly how a short sale is executed and how the payoff shortfall is resolved is something I’ll address another day.

So why should a seller pursue a short sale?

First and foremost a seller will want to consider a short sale when it becomes clear that they are not going to be able to sell their home at a price which will allow them to pay off the mortgage in its entirety and they don’t have the money to make up the difference. While the decision to conduct a short sale should only be reached after seeking appropriate legal and tax advice, generally it is seen as preferable to going through foreclosure. It can certainly be resolved faster, since it can be pursued prior to the lender completing the foreclosure process. The other way that it is seen as preferable to foreclosure is that it is believed to have less of a negative impact on your credit record, though I find conflicting information on exactly what the difference is:

• The NAR refers its members to the CBS News site (isn’t it odd that the supposed authorities on real estate refer people to CBS?), where they claim:

While in both cases, short sale and foreclosure, the delinquent mortgage will negatively affect their credit rating, at least short sellers avoid having a “debt discharged due to foreclosure” on their credit reports. Mortgage and credit experts say that, after bankruptcy, having a foreclosure on your credit report is the worst result and will reduce your credit score by over 250 points. You could also have to wait up to three years to qualify for a mortgage at a reasonable rate.

Short sales show up on a credit report as a “pre-foreclosure in redemption” status and can result in a credit score reduction of 100 points or less. After the sale, the mortgage may show up as “discharged.” People who successfully complete a short sale may also qualify for a mortgage at a reasonable interest rate in as little as 18 months. So, if buying a home is a future goal, then a short sale is the better option for many.

• Unfortunately, About.com indicates that the credit score impact is the same on a short sale as it is on a foreclosure, though they seem to agree with the CBS report on the other aspects of the differences.

And why should a buyer pursue a short sale?

Short sales can offer great values because the property is heading towards foreclosure, which is an expensive process for the lender. Consequently, the rational lender should be willing to accept a bargain price. Of course, we do not live in a rational world. If we did we wouldn’t be deflating the housing bubble right now. I hear countless stories of banks turning down short offers one day to only end up foreclosing many months later for even less money than they originally turned down.

Then there are the realtors who don’t even want to mess with short sales because it often takes forever to get an answer from the lender and sometimes commissions get cut. In fact, one national, discount real estate brokerage will not “support short sales” because “the chance of success is extremely low.” While there are elements of truth in all these concerns it’s not really right to short change a buyer by ignoring 40% of their opportunities.

Of course, the less that rationality prevails in the short sale world the better the values are for the rational players. I know of some exceptional values out there right now.