Although short sales lead the pack when it comes to complaints from buyers, sellers, agents and lenders, they are an effective way to help distressed sellers get out of their homes and on with their lives while minimizing costs to lenders, and they’re also a favorite of many in the federal government, who view them as a means to alleviate housing-related suffering. So it probably is not surprising that there are many options for homeowners out there when it comes to short sale incentives. These “incentives” are used to create a positive situation out of a negative one for homeowners and lenders compelled to do a short sale, and are designed to provide homeowners with the monetary means to move while also creating a more profitable situation for the lender who is losing money on the sale. However, while many incentive programs sound fantastic – Bank of America, for example, is offering Florida homeowners up to $20,000 to short sell their homes instead of going through foreclosure – we have to wonder if reality lives up to the hype. In this special report, we’ll examine the options and incentives available to homeowners in a short sale and explore how to take best advantage of these offers when they are available.
A Brief Overview of Short Sales
A short sale is a real estate transaction in which a lender agrees to accept less money on a property than is owed in order to keep the property out of their real estate owned (REO) portfolio. For example, if Bob is defaulting on his loan and Jane wants to buy Bob’s house for $40,000 less than Bob owes on it, the bank may agree to let Jane buy the house at the reduced price even though the loan will not be paid off in full and forgive Bob the difference in order to keep that house owned and occupied by someone who will pay the mortgage. In many cases, taking the lower offer and taking a one-time loss is less expensive for the lender than foreclosing on and then maintaining the property until it sells on the open market.
However, while short sales may make sense on paper, many lenders do not like to do them because they have a major adverse effect on lending balance sheets. In fact, while the foreclosure process is ultimately more expensive in most cases, doing more foreclosures and fewer short sales actually can keep a bank’s books in the black. For this reason, the federal government has been offering lenders incentives to do short sales, and, in response to these incentives and public opinion, many lenders have started offering homeowners incentives to do short sales as well.
There are several reasons why short sale incentives exist, and they all are fairly practical ones. For starters, it is often more expensive for a lender to foreclose on a property than it is for the lender to take a loss on a short sale. This becomes even more the case when there are federal incentives involved in the scenario. The federal government offers incentives to both lenders and homeowners to do short sales because legislators believe that short sales are better for the economy and the housing market (and their political careers) than foreclosures. One example of this is the Home Affordable Foreclosure Alternative (HAFA) program. Lenders are encouraged to participate in this program and help troubled borrowers find alternatives to foreclosure, such as short sales. When lenders and borrowers together successfully navigate a HAFA short sale, both may be rewarded financially for the decision.
Traditionally, lenders have agreed to short sales because taking a loss on a property would cost less than having to maintain and market that property should it become part of the lender’s real estate owned (REO) portfolio. In today’s slow real estate market where homes may remain on the market for months or even years, the short sale option can be very attractive to lenders. Also, by getting the delinquent homeowner out of the home via a short sale, the lender diminishes the chances that an angry homeowner will trash the home during the eviction process. It should be noted that currently REO properties are staying on the market for a far shorter time than they have for the past few years. If this trend continues, lenders may feel less pressure to incentivize short sales.
Finally, doing short sales is good for the public image. And if there is one thing that lenders are currently struggling with, it’s their public image. Frankly, the federal government is struggling with its public image as well. By encouraging short sales, both of these entities are able to demonstrate in a tangible fashion that they are concerned about homeowners and the housing crisis.
Incentive Programs in Your Area
So now that you know why short sale incentives exist, let’s get to the real issue: Who offers them and how can you take advantage of them? Here are a few simple ways to get started:
- Ask your lender
This is not always productive, but it is a good way to get started. Just remember that not all employees are fully aware of programs that are offered and that you may get a negative response when there is actually a program right for you. If you hear “yes,” then that’s great news and you should get started! However, if you hear “no” then just keep looking.
- Check government websites
Whether you believe that the government should play a role in the housing market is not the issue here, so if you’re looking for short sale incentives then you should absolutely check out federally-sponsored websites. The HAFA site is a good place to start (HAFA offers a $3,000 short sale bonus to sellers and has one of the better payout track records), as is the official HUD fact-sheet on the topic. You should also check out state and local programs. The best way to do this is simply search “short sale incentives [your state here].” Be aware, however, that you will need to do some research to make sure that any programs you unearth are legitimate. You should never pay for short sale help up front, and a course on the topic is not the same thing as an incentive program even if it promises you can make money doing short sales.
- Check bank websites
Bank of America in particular is eager to make sure you know exactly what they’re doing in different states to help. They have an official site dealing with the topic and are operating pilot programs in a number of areas in the country, including some that offer up to $20,000 in assistance with your move upon completion of the short sale. Most major lenders do offer some form of online assistance if you wish to get started on a short sale and include information on potential incentives. Some of these lenders include Wells Fargo, JP Morgan Chase (simply offers a start-up packet online with a warning that you need to keep copies), and CitiMortgage, to name a few. The best way to find out what your bank offers online is to search “[your lender’s name] short sale incentives.” At a minimum, you will find the initial application package and you may find much, much more. Don’t be afraid to investigate news coverage and ask your lender about programs more than once. Not all short sale specialists or loss mitigation experts are fully trained or well-versed in their own lender’s incentive programs. It’s an unfortunate fact that if you want to get the money, you’re probably going to have to do a lot of the legwork for them.
- Investigate other eligibilities (military, public service, etc.)
Federal programs and private advocates often offer special assistance with short sales for veterans, active service members and other people involved in public service like policemen and firemen. In fact, depending on where you are hoping to move, you might even get funds to help you relocate from a nonprofit organization. For example, part of Detroit, Michigan’s revitalization efforts included offering policemen free and reduced housing within the city limits. There are also many homeowner advocacy groups working with individuals in unique circumstances to help them navigate the short sale process and get as much as possible out of the situation. Check out local groups in your area and make sure to investigate any “specialized” qualifications that you may have based on past service or employment.
Getting Paid (That’s the “Rub”)
Unfortunately, if you read any media coverage about short sales, one of the first things that you are going to notice is that there is a lot of “hoopla” about all the great incentives and homeowner help programs offered – and a lot of cases where nothing ever came of it. Bob Southard, a Solid Source real estate agent from the Atlanta area, cynically compares short sales accompanied by incentives to “unicorns, mythical creatures that everybody searches for, everybody has heard of, but nobody finds.” He warns that although there are programs out there offering a variety of incentives to homeowners to get short sales done, the real issue is getting them done – not getting paid after they’re done. “Mostly it still takes 30 to 90 days [to complete a short sale],” he says, contrary to many lenders’ promises (and politicians’ demands) that the process take only 10 to 14 days, noting that it is all too common for a bank to foreclose on a short sale home with a ready and willing cash buyer before the short sale process is complete.
Of course, that there are many advantages to pursuing short sales whether or not you get the “bonus package” at the end. “One day sellers want a normal life again,” he says. “Doing the short sale is the first step to saving/rebuilding credit.” And ultimately, your credit will determine a great deal about your financial situation down the road even if you do not get a check from a lender or the government to help you move.
If you do opt to pursue a short sale and there are options for short sale incentives available to you, remember that you need to commit to the process for the long term. Short sales are not easy; lenders are not organized or cooperative, and the entire process can be very stressful. In order to make the short sale happen, you need to be prepared to make copies of everything, document every aspect of correspondence between you and your buyer and you and your lender (and, for that matter, between you and everyone else), track deadlines and make multiple follow-up calls and, on top of all that, insure that you are consistently and carefully documenting your own compliance with the incentive program throughout the process. And remember, in the end, you will have to move, so save every penny you can to help with the process.
Short sales are a great way to exit a property without having to go through the default and foreclosure process. Be confident and optimistic about your options, and make sure that you are aware of every incentive option out there in order to get the most out of your short sale experience, literally, that you possibly can. Your lender is unlikely to keep you informed, so the burden of education will be on you. You can do it, and good luck!
If you are in default, approaching default or just wondering about short sales and other options to foreclosure, check out our BEREL Special Report, “Understanding Your Main Options to Foreclosure” and share it with your friends.