James R. Samsing's Real Estate Blog

With a majority of sellers in my local markets of Avondale, Goodyear, Glendale, Litchfield Park, and Surprise, Arizona "upside down", this is a question I am often asked. There really is only one answer for families in this situation...a "short sale."

A short sale is an agreement where the lender on the property agrees to accept less than the full balance owed on the mortgage. Short sales are complex transactions that typically take 4-8 weeks to complete and require an experienced (and persistent) Realtor to manage. I have previously written several blogs about how to complete short sales which can be read here: Short Sale Blog

Why should homeowners consider a short sale?

There are a number of reasons to consider a short sale. For example, if you need to sell as the result of a job relocation and cannot afford negative rents on your property, a short sale would be the preferred option. Many homeowners in my local area are stationed at Luke Air Force base in Glendale, AZ and have been forced into doing short sales when they are transferred to another base. Another reason to do a short sale is to save your personal credit. In the past 12-18 months many homeowners have found themselves in the unenviable position of not being able to afford their home due to a job loss, rate adjustment or family emergency. In a normal market, many of these families would be able to refinance or sell their property. But today, the only sensible option is to sell through a short sale.

Is a short sale right for you?

Every homeowner's situation is unique and there is no one right answer to this question. When counseling homeowners I generally focus on 3 key questions:

1. Why do you need to sell? If you don't absolutely need to sell then a short sale should be the last option considered.
2. Are there other options available to you? I generally recommend homeowners consider other options before resorting to a short sale. Refinancing, loan modification and renting the property are generally preferred options to a short sale.
3. What do you plan to do after the short sale is completed? Homeowners need to consider the consequences of a short sale and plan for their future housing needs.    

What are the impacts of a short sale?

There are 3 consequences every home seller should evaluate before making the decision to apply for a short sale.

• What is the impact to your credit rating? Short sales generally appear on a credit report similar to a large charge off. I have seen several that appear with the unusual phrasing "Debt Paid in Full Less Than the Full Amount." It has been my experience that by themselves, short sales generally lower credit scores by 50-100 points. If a homeowner is able to keep their payments current up until the home is sold, they suffer very little in terms of derogatory credit when completing a short sale. For those homeowners who become delinquent on their mortgage, the credit score will be more adversely affected by the late payments than they will by the short sale. Regardless, a short sale on a credit report is substantially better than a foreclosure (or deed in lieu) and allows the home seller to be able to qualify for new mortgage financing in a much shorter period of time. The current minimum waiting period after a foreclosure is 4 years for Fannie Mae & Freddie Mac. Homeowners who are able to maintain a perfect mortgage payment history through a short sale may be able to qualify for a mortgage after only 1 year. And finally, please know that you do not need to be behind on your mortgage payments to qualify for a short sale. I have seen many short sales approved where the homeowner is able to make payments throughout the short sale process. There does, however, need to be a pressing "hardship" for the bank to consider accepting a short payoff.    

• Is there a potential that the unpaid debt could remain as a consumer loan? This is particularly a concern where the homeowner has a 2^nd or "piggy back" mortgage on the property. Many 2^nd mortgages, especially home equity lines of credit, contain provisions that allow the note holder to convert any unpaid mortgage balance into a consumer debt. It is also fairly common for banks to request that a consumer assume some form of future liability as a condition for approving a short sale. As I mentioned before, every homeowner's situation is unique and each seller should evaluate these options individually. But it has been my experience that it rarely makes sense for consumers to accept any deficiency debt to be applied to their personal credit; particularly in states like Arizona which normally prohibits deficiency judgments on owner occupied 1-4 unit residential property. 

• What are the tax consequences? The good news is that the federal government recently created new tax exemptions for homeowners who complete short sales. Generally speaking, homeowners who occupied their properties and did not withdraw substantial equity from their home are eligible. However, it is always advisable that you consult a licensed CPA/Tax Accountant to determine what your potential tax consequences will be before proceeding with a short sale. You don't want to find out months later that you have a $25,000 capital gains tax bill from your short sale.  

Short sales are complicated transactions but can be the best option for struggling homeowners. I hope these comments have assisted those who are considering a short sale.

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My local service area which includes the Phoenix West Valley cities of Avondale, Goodyear, Litchfield Park, Surprise and Glendale has been one of the hardest hit real estate markets in the country. As a result, most new clients in these cities always want to start with foreclosures. Thanks to dozens of late night infomercials and a host of real estate companies touting foreclosure auctions, the average consumer assumes that bank owned properties always sell below the market. They have been trained into thinking that they can find houses for 50 cents on the dollar and that banks are desperate sellers looking to rid themselves of any house on their books.

Unfortunately this misguided information often leads consumers to overpay for property or to miss the best deals in their search area.

I just spent the past 2 weekends at the REDC auctions in Phoenix and Mesa. I personally inspected every home in my local market and watched as hundreds of these homes were sold. While it is true that a small percentage did sell well below market prices (about 15-20%), the overwhelming majority of properties at these auctions sold at or near the current market price. This is particularly true when you factor in the "Buyer's Premium" of 5% that the auctioneer adds to the winning bid. Many of these homebuyers were obviously unaware of the condition of the home they were buying, underestimated the cost to cure the property, or simply did not know about current active listings that were comparable to their subject. In one case a buyer purchased a home for $85,000 (+ a 5% buyer's premium) when there was an IDENTICAL (model match) home in BETTER condition NEXT DOOR that is currently listed for $75K! Ugh.

And of course there is the "Previously Valued To" figures thrown out by the auctioneer. I love those. The auctioneer puts that figure in big bold print above the property address every time. As though somehow knowing that the home was once worth $350K is going to change the fact that it's worth $95K today. But I imagine there are some consumers who get fooled by these numbers.

The point I am obviously making is that not all banked owned properties are "deals." Yes, it is true you can find REO property offered well below the current market. And yes, now really is a great time to buy. But every transaction is unique and must be evaluated on its own merits in light of current market conditions.

So where should home buyers turn if they really want the best deals? I would argue that short sales, on average, are better deals than foreclosures. In fact, as my local markets have started to pick up over the last 45-60 days, I would say that short sales have become an even better deal relative to foreclosures.

How is this possible? Consider the following:

1. A Short Sale typically sells for the same or lower price than a foreclosure. This is because:
   1. The seller is disinterested in price - they just want to clear the debt and save their credit rating.
   2. Banks will agree to take less because they are avoiding the cost and delay of foreclosure proceedings.
2. Short sales are generally in far better condition than bank owned homes. Unlike foreclosed properties which are often missing appliances and have significant deferred maintenance, short sale properties are often kept up by the seller to ensure they sell. In many cases the seller is still occupying the property. As a result, there is far less cost to cure a short sale property than there is an REO. 
3. Short sales attract fewer buyers because of the time delays and hassles. Consequently, there is less price competition from other buyers.

The key difference with short sales is that you need to be a patient buyer. Short Sales generally take 4-8 weeks to get an approval from the bank. This is substantially longer than bank owned properties where you usually receive an answer within a few days.

As I mentioned earlier, every transaction is unique and should be evaluated in light of current market conditions. Naturally I would recommend that consumers employ a qualified Realtor to assist with the analysis. But if you are a buyer who does not need to close right away, then I would implore you to ask your Realtor to make short sales a part of your search.

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In recent weeks I have been dealing with the false perception amongst some of my clients that a home buyer in today's market needs to have a sizable down payment. It seems that between the government assertions that we "need to get credit flowing again" to the media's constant negativity about banks and the housing markets, prospective home buyers have been scared into thinking that affordable low down payment loans are no longer available. Not only is this NOT true, but the current economic crisis has actually created NEW and BETTER buying opportunities for home buyers with little or no money down.

How is this possible? The answer is simple.

First, home prices have fallen so low that properties once out of reach of government loan programs like FHA, VA & USDA, are now well within these government loan limits. For example, in 2005 it was almost impossible for an airman stationed at Luke Air Force Base in Glendale, AZ to qualify to buy the medium home price in the surrounding communities of Litchfield Park, Goodyear, Glendale, or Surprise. Today these real estate markets have fallen by more than 50% with homes priced at $300,000 in 2005 now selling for under $150,000. With rates under 5% that same airmen can buy a beautiful home for less than it would cost to rent! With zero money down!!!    

Second, the glut of foreclosed homes owned by the government and big banks has forced these institutions to offer special financing and incentives to lure buyers. These wonderful NEW programs, combined with historically low interest rates, are better than anything offered during the "boom" years.     

So, how do you take advantage of these changes? Here are some of the easiest ways to buy a home with little or no money out of your pocket:

1. Obtain FHA Financing. In most parts of the country the median home price has fallen well below local FHA loans limits. In my market (West Valley Phoenix, AZ), a vast majority of properties are eligible for FHA financing. Some key advantages of FHA loans:
   1. 3.5% Down Payment
   2. Easier to Qualify than Fannie Mae or Freddie Mac
   3. Seller paid closing costs
   4. Inexpensive, guaranteed mortgage insurance (Cheaper than PMI)
   5. Interest rates comparable to conventional loans which are at historically low levels!
2. Buy a Fannie Mae or Freddie Mac Owned Home. Both of these "Government Sponsored Enterprises" have enormous inventories of properties listed for sale. You can view Fannie Mae owned homes by clicking FNMA OWNED HOMES and Freddie Mac homes by clicking FHLMC OWNED HOMES. Some special characteristics of buying a GSE owned home:
   1. 3% Down Payment with NO Mortgage Insurance
   2. Easier qualifying guidelines than traditional conventional loans
   3. Special seller incentives including seller-paid closing costs
   4. GSE owned homes are often priced well below the current market!  
3. Buy a HUD Owned Home. While the US Department of Housing and Urban Development does not have as large of an inventory as Fannie Mae and Freddie Mac, they still maintain a sizeable quantity of government owned homes. You can view HUD homes for sale by visiting HUD OWNED HOMES. Some things to consider when buying a HUD home:
   1. $100 Down Payment. Yes, that's right, $100!
   2. Seller Paid Closing Costs
   3. Interest rates comparable to conventional loans which are at historically low levels
   4. HUD owned homes are often priced well below the current market.
4. VA Loan for Veterans. VA loans exist for US Veterans and active duty service personnel. Like FHA loans, VA loan limits often exceed median home prices in most markets. Some key features of VA loans:
   1. Zero Down Payment
   2. Seller Paid Closing Cost
   3. No MI Insurance (although there is a VA Funding Fee added to initial loan)
   4. Easier to qualify than Fannie Mae or Freddie Mac
   5. Interest rates comparable to conventional loans which are at historically low levels
5. USDA Loans. Although designed for "Rural" property, USDA loans can often be used to buy residential property in select zip codes. USDA defines "rural" as communities with fewer than 20,000 in population so many suburbs are eligible under this program. USDA loans require zero down payment and have easier qualifications than conventional loans. However, there are specific income and property requirements so you should speak to a USDA loan expert before considering this option. You can learn more about USDA loans by visiting USDA Single Family.  

Please keep in mind that this is not an exhaustive list of low down payment sources. There are numerous state and local programs that may also be available. For example, my local cities of Goodyear, Avondale, Glendale, Surprise and Phoenix all offer some form of government assistance for buying foreclosed properties. You should check with your local Realtor for information regarding these programs.

Finally, I should note that all of these loan programs do typically require good credit and full income qualifying. Generally speaking you will need a minimum credit score of 580-620 to qualify, and your total debts cannot exceed more than 38%-43% of your gross monthly income. And these programs are designed for owner occupied buyers, not investors.

There truly has never been a better time to buy property than right now. I only hope that prospective home buyers are able to see through the clutter and negativity to realize what a tremendous opportunity awaits them in today's real estate market...

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