For those of you that have been following the South Lake Tahoe Real Estate market, you know that foreclosures have been accounting for a large percentage of our current escrows and recent sales activities. Currently 12 of the 44 single family homes in escrow are foreclosures. On the other hand, there are only 3 short sales in escrow out of the 33 short sale listings on the South Lake Tahoe mls. With the changes that are happening with lenders and short sales, the number of foreclosures may soon be decreasing, and the number of short sale listings may be on the rise.
A short sale occurs when a homeowner owes more on their property than the property is actually worth, but the bank agrees to accept less than is owed as “payment in full”, in an effort to avoid the foreclosure process. A short sale is a great option to foreclosure for a homeowner because the homeowners credit will not be damaged nearly as much. In most short sale cases, the only damage to the homeowners credit will be the delinquent mortgage payments that will eventually fade off of the credit report. It is important to make sure that the lender reports the loan as “Paid in Full.”
With the recent changes to the Mortgage Forgiveness Debt relief Act, the debt that is forgiven on the first mortgage is no longer taxable as long as the house was your primary residence. If the house is not your primary residence, the IRS considers the amount of the loan discount taxable income.
Why would a bank want short sale a property and accept less than they are owed?
- Foreclosure is expensive for the bank and averages about $14,000 to $20,000 dollars.
- Banks are required to hold 3 to 5 times the amount of any foreclosure properties held as assets in reserves. If a bank forecloses on a $500,000 house, they are required to have an additional $1,500,000 to 2,500,000 in reserves that they cannot lend out and make money on.
- With the new stimulus package, banks are now getting a bonus from the government for closed short sale transactions.
Banks are now realizing that short sales can be a better option than foreclosure for both themselves and the homeowners, which is why we may be seeing more successful short sale closings in the future.
A bank will not just approve a short sale because the homeowner owes more that the home is worth. In order for a homeowner to qualify for a short sale they must meet certain requirements.
- In most cases the homeowner must be behind on payments (Countrywide requires that you are 90 days behind on payments).
- Homeowners must be able to prove that they have a legitimate hardship such as a loss of a job, divorce, illness, decrease in income, or increase in expenses.
- There must be little or no equity in the home.
The homeowner must provide the following documents to the listing agent, who will provide them to the lender:
- Authorization to release information
- Hardship letter
- Financial worksheet
- Listing agreement
- Two years tax returns
- Two months bank statements for all accounts
- Two pay period pay stubs
Although lenders are now realizing that short sales may be a better option than foreclosing on the property, short sales are still far from easy. Lenders are overloaded with thousands of short sale packages. It can take up to a couple of months to get a response from the lender.
It is very important that the listing agent is a short sale transaction has knowledge in short sales. Real estate agents who submit a complete short sale package are much more likely to get assigned to a loss mitigator and potentially get approved. There are also cirtian things that a real estate agent can do to help expedite the approval process, such as making sure that the loan number is on the top right and the bottom of each and every page of the short sale package. Being able to contact the loss mitigator and keeping in communication with them regarding the transaction is another difficult but important job of the listing agent. Ultimately it is the listing agent who the buyer and the seller will be relying on to facilitate the short sale transaction.
Why would a buyer want to purchase in a short sale listing?
Short sales are consistently listed at 5% less than the current market value. Going through the short sale process may take more time, but it may be worth it for the buyer.
When looking at South Lake Tahoe Real Estate, do not avoid looking at short sale listings. There may be less competition over the short sale listings than the foreclosure listings, and you may get a great deal on a house!
If you would like a list of short sale listings in South Lake Tahoe or foreclosure listings in South Lake Tahoe on the South Lake Tahoe mls E-mail Brent and Jill Johnson. If you have any questions about South Lake Tahoe real estate or about South Lake Tahoe mls listings, please contact us today!