A Tip for homeowners on how to avoid a Short Sale

The world of Real Estate is forever changing. We have had over 140 banks close their doors within the past few months, 100% financed SISA (Stated Income Stated Asset) Loans are for the most part next to impossible to find (unless you have FICO’s in the mid to upper 700’s), interest rates are up slightly from the high 4’s to the low 6’s, and Foreclosure and Short Sale percentages have increased. Within the past three months I have had several people contact me requesting information on how to avoid a short sale, and thought my readers may be interested in the same information.

The number one thing in any real estate transaction is communication. This is no different with your mortgage company. Simply calling your lender and keeping them in the loop is the first step. If you are having financial difficulties, tell your bank. Make payment arrangements, suggest diverted interest or interest only payments for a specific period of time. If your interest rate has just increased, or your loan has matured, call your lender and negotiate something that works for both you and the bank.

I can not believe that any bank wants to foreclose on homeowners. The expense of foreclosure is more costly than the bank making arrangements. Plus remember this; banks are not in the business to sell real estate. If a bank forecloses on a homeowner, they must jump through all kinds of hoops to get that house sold, and to only get back a portion of what is owed to them. Foreclosures also reduce market value of homes, thus reducing the amount of total loan dollars the bank will, in the future, lend in that particular area. For example, if a home is purchased with a loan amount for $450,000 in 2001, and the bank forecloses next week, the likelihood of the bank getting $450,000 when they sell the home is next to impossible. So realistically the bank will sell the property for lets say $350,000 (yes the bank already lost $100,000). The person, or business, purchasing the home for $350,000 gives the home a fresh coat of paint, replaces flooring and does simple handyman work. Total to fix the property is roughly $20,000. Purchaser now has $370,000 in the property. Sounds good right? Yes, but only if you have the money to purchase the property plus cash to fix the property. Now let’s say the money is available, all is good, but not realistic.

Let’s go one step further. The property sells for $350,000, plus $20,000 in repairs, and low and behold there are 6 more bank foreclosures on the same block. All in the same situation, grass dead, needing work, and have been empty for months on end. A current appraisal is done showing that nothing has sold in the area for over 4 months and at a much lower sales price (let’s say $375,000 for an owner occupied home that doesn’t need any work). What do you think this does to the value in the area? That’s right it reduces the value, plus makes the neighborhood look pretty bad with empty homes needing work. Bottom line for the bank is the loan amount in that area is now reduced by at least $75,000.

Yes banks are in the business to make money. Lending on homes at $450,000 is more profitable than lending on $375,000.

So, given this situation don’t you think that simply communicating with the bank will help keep you from having to short sale your property? Communication is not the end of the line, but I feel it’s the most important step one must take to help stop this whirlwind in our market today.