A Short Sale is a transaction in which a seller owes more money on the mortgage than the sale of the property will likely produce when sold. For economic reasons, the seller is unable to bring sufficient funds to closing to cover the difference between the mortgage balance owed and the proceeds from the sale and a loan modification or refinance of their current mortgage is not an option.
The seller must request that their lender accept less than the balance owing. There is no obligation on the lender to accept a Short Sale request. The Short Sale process begins with the seller submission to and acceptance of a Short Sale Package by their lender. Lender acceptance is the key. The lender decision will be based upon their determination of what will produce the best economic outcome for the lender. The Short Sale package must document the seller’s financial hardship and include the following:
1. Short Sale proposal or cover letter acceptable to the lender.
2. Short Sale payoff application prescribed by lender.
3. Seller hardship letter detailing their financial reasons for the Short Sale request.
4. Seller financial information supporting their hardship letter. This would include copies of pay stubs, tax returns, bank statements, medical bills, proof of job loss or other documents required by the lender.
5. Seller’s realtor must include a CMA (Comparable Market Analysis) establishing property’s estimated value.
6. Any other documents requested by seller’s lender.
7. The process could also involve the approval by a second lender if there is a second lien on the property.
Once this information has been reviewed and accepted by the lender, the listing agent may enter the property in MLS as available for Short Sale. Keep in mind that this does not guarantee that any offer to purchase can be accepted by the seller. Any offer must first be approved by the lender in order for the Short Sale to proceed.
For the seller, the primary advantage of a Short Sale would be avoiding a foreclosure on their credit history. However, it still has credit consequences that must be considered i.e. lowering seller credit scores, inability to obtain loan approval on a future home loan for a extended period of time, inability to obtain credit for other installment and revolving debt or the imposing of higher rates, credit denial or higher premiums for insurance, and the possibility of a deficiency judgment and/or tax consequences. The lender may also forgive the remaining indebtedness. In spite of these draw backs, a Short Sale will still be more beneficial to the seller than Foreclosure. The key will always be keeping lines of communications open with the lender and working with a realtor designated as a Short Sale and Foreclosure Specialist.
For the buyer, a Short Sale may present a buying opportunity. However, it must be remembered that the Short Sale offer must be approved by the lender which in some cases can take weeks or more if at all. This could cause the buyer to miss other buying opportunities, miss moving deadlines, lender rate locks, and create the need to update their loan docs and approval with the lender they have contacted to provide financing for their Short Sale purchase.
When the homeowner is unable to refinance and a loan modification or short sale does not work, there is only one option left, Foreclosure. A Foreclosure will result in the sale of the property and eviction of the owner. The length of time this will take and legal proceedings involved are determined by individual state foreclosure laws and the lender.
State laws dictate whether the legal process is a Judicial Foreclosure or Non-judicial Foreclosure. A Judicial Foreclosure (a court ordered Foreclosure) can take an extended period of time spanning weeks, months or more than a year. Texas is a Non-judicial Foreclosure state (a court order is not required to foreclose) which means the legal process is much shorter. A Non-judicial Foreclosure process will involve the following:
1. Borrower has defaulted on the terms of their mortgage note and deed of trust.
2. The beneficiary (lender/investor) of the deed of trust authorizes the named trustee to proceed with Foreclosure.
3. Notice of default is recorded at least 21 days prior to the date of Foreclosure. During this time, the lender may accept redemption by the home owner paying all past due amounts including penalties and attorney fees.
4. Sale of property is advertised
5. Property is sold to highest bidder who pays cash. The date and location of the sale are prescribed by law. **
6. Buyer receives a Trustee Deed.
** The date and location of the Foreclosure sale is prescribed by Texas law. The Foreclosure sale must take place on the first Tuesday of each month without exception (no rain outs or holidays may interfere with the sale). The location of the sale must be determined by each county. In Harris County, Texas, Foreclosure sales are conducted at the Family Law Center, 1115 Congress, Houston, Tx 77002. To bid, the buyer must have cash or cash equivalent (cashier’s checks). The minimum bid will usually start with the balance owed on the mortgage plus attorney fees. The Trustee conducting the sale allows absolutely no time for the buyer to provide cash later. The winning bidder must pay immediately. Most bidders will take cashier checks payable to themselves in different denominations to the sale. If they win the bid, the cashier checks are endorsed over to the trustee. The trustee will usually mail the bidder any change that is due. Since there are hundreds of Foreclosures being conducted by different trustees, the buyer should familiarize themselves with the appearance of the trustee and their location around the Family Law Center. In general, the trustees will start the Foreclosure sale with properties having the oldest Deeds of Trust since these properties will usually have the most attractive equity and greatest buyer interest. In a Foreclosure/Trustee sale, the previous owner has no right of redemption once the foreclosure sale has been completed.
For the buyer, opportunity exists to purchase a property with a below market value offer. However, there are some potential problems:
1. The opportunity to gain access and conduct property inspections prior to the date of Foreclosure sale will be nearly impossible.
2. After completion of the purchase at Foreclosure sale, the buyer may have to initiate legal action to evict the occupants.
3. Buyers may have to contend with tax liens which are not extinguished by Foreclosure. The previous owner may have filed for bankruptcy just prior to the sale necessitating permission from the bankruptcy court to release the property from the bankruptcy proceedings.
The bottom line for buyers at Foreclosure sales is doing your home work before concluding a purchase. Go through one or two dry runs by visiting the Family Law Center during Foreclosure sales on the first Tuesday of the month. Invest in a few publications to become familiar with the properties coming up for sale like the Daily Court Review, Foreclosure Listing Service , Houston Foreclosure Info , and other sites that can be found on line and through the public access section of the Houston Association of Realtors.
Once a foreclosure has occurred and there was no winning bid at the Foreclosure Auction, the property ownership than transfers to the lender/investor who must now market the property as an REO (Real Estate Owned).
Houston Sheriff’s and Constable Sale
On the first Tuesday of the month, property sales by Constable Precincts are also conducted at the county designated location which for Harris County is the Family Law Center. These sales are performed at the same time the Foreclosure Auctions are being held which makes for a very busy first Tuesday of the month at the Family Law Center. This is another reason why a buyer who is interested in acquiring property through a Foreclosure Auction or Constable Sale should observe how the process is handled at the Law Center. There will be a lot of noise from the different auctioneers and constables as properties come up for bid not to mention the normal business going on in and around the Family Law Center which is open for business as usual.
Constable Sales are typically held for properties seized for delinquent property taxes. A successful bidder must immediately produce cash or cash equivalent (cashier checks) to the Constable’s staff as payment. Unlike a Deed of Trust Foreclosure, property sold at the Constable sale do allow the previous owner right of redemption. If the property was used as a homestead prior to the seizure and Constable sale, the right of redemption runs two years. If the property was not a homestead, right of redemption runs for one year. For this reason, buyers should also do as much research on the properties for sale as they would for properties at a Foreclosure auction if not more.
Properties not sold at the Foreclosure Auction become REO’s (Real Estate Owned) by the investor/lender. At this point, lenders are motivated to recover as much of the balance previously owed while also minimizing any future loss. Properties are than assigned to asset managers that may be in house or outside the lender. Asset managers oversee the REO property from listing through sale. Asset managers are responsible for placing the REO listings with a realtor for marketing and sale. A great source for listed foreclosures is the public access point at the Houston Association of Realtors , HUD Home Store and John Henry Properties.
Houston home real estate foreclosures, short sales, and REO’s,
Houston real estate foreclosure, short sales and REO certified specialist, John Henry Properties
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