Short Sale and the SubPrime Crisis

A Short Sale is an attempt by the owner of Real Estate to sell his or her property for less than what is owed on the Mortgage. The foreclosure process may have begun or it will soon begin. If the foreclosure is under way, it is referred to as a "Pre-Foreclosure."

If the owner is able to find a ready, willing and able buyer, then the First Mortgage Holder ("The Lender") must agree to release the lien on the property for the agreed selling price. If there is a Second Mortgage holder, they must also agree. However, the Second Mortgage holder will settle for substantially less than what is owed him. This is because the Second Mortgage holder realizes that if the property is foreclosed and, after the attorney's fees, court costs, and additional interest is added by the Court, they will receive little or nothing.

Because the court system is overwhelmed with so many Foreclosures, it may take several months for the process to be completed (possibly as long as nine months). Once the property is foreclosed, an Order will be entered by a Judge (referred to as a "Judgment"). The Order sets the amount the Lender is to receive and the date that the property will be sold at public auction.

The title to the property remains with the original owner until sold. At the present time, most lenders are postponing the public auction sale knowing that the property will not sell for the foreclosed amount, thereby giving the owner additional time to find a buyer.

If the property does not sell for the foreclosed amount at the public auction, the Lender then takes title to the property. The property is now referred to as "Bank Owned." The Lender does not want this property, they only want the money. They are not in the real estate business and they must hire a Realtor to liquidate the property.

We will attempt to keep this explanation as simple as possible about this complex issue. There are basically two types of loans, Conforming and Non-Conforming (also know as "Sub-Prime Mortgages"). The problem is that with Sub-Prime mortgages, Lenders lowered the requirement that borrowers had to meet in order to qualify and lowered the loan-to-value ratio in order to make more loans. Most of the Sub-Prime lenders then sold these mortgages to a third party ("The Secondary Market"). The Lenders knew that their risk was very low (since they would not hold these mortgages very long) and the demand from the Secondary Market for these loans was great. After the tech bubble burst, investors were looking for more secure investments and mortgage-backed securities looked like the answer. The demand increased and the large investment companies created products to meet this demand. They packaged these Sub-Prime mortgages together and sold them to investors.

The Lenders made their money when they sold the mortgages to the investment companies and continue to make money servicing them. The investment companies made their money when they sold them to the investors. Now, the investors are holding the bag.

A Promissory Note is a Loan. Contained within the Promissory Note are all the agreed upon terms (amount, interest terms, etc.). The Mortgage is the security that the borrower pledges if he fails to perform according to the terms of the Promissory Note.

In order to mitigate the damage to the US economy, the Lenders are trying to slowly liquidate these properties over time so that the market can recover and absorb the losses. They are trying to make the losses as invisible as possible.

1. There is no guarantee as to the quality of the title and no title insurance policy is issued.

2. This would be an all cash transaction and no financing contingency will be allowed.

3. All monies for title searches, surveys, inspection etc. will have to paid out of your pocket before the auction with no guarantee that you will be the winning bidder.

4. The property is being sold "As Is," with no guarantees.

As a buyer, this is a great time to invest in real estate if you intend to use it for your business or to live in it as your home. In order to realize a significant appreciation on these properties, it will take at least 5 to 7 years as values may continue to drop in the near future.

The greatest value can be realized by purchasing Short Sale properties before foreclosure and the additional costs are added to the property and before the title is transferred to the bank. When you place your offer to purchase through a Realtor for Short Sale properties, all your rights are protected (such as guaranteeing a marketable title, receiving a title insurance policy, inspection periods, financing contingency, flood zone information, termite inspection, lead base paint information, mold report, radon gas information, etc.).

If a property is referred to as Foreclosed or Foreclosure it usually means the property has been through the foreclosure process but has not yet been sold at a public auction, title remains with the original owner.

You would be surprised! The banks do not want anyone to know how desperate they are. In the case where the Bank owns the mortgage and did not sell it on the secondary market, the process is efficient and reasonable. This is especially true in the cases where the bank made many interest only or adjustable rate loans to investors planning to "flip" the property. Now, many of these loans are in default.

In the case where the bank does not own the mortgage and is acting as a trustee for the investors, the process is a little more difficult. In most cases, these banks hire an Attorney to handle the foreclosure process. These law firms are nothing more than foreclosure factories. Because neither the bank nor the attorneys have any interest in the mortgage, it is difficult to get any action on a valid offer. In some cases we have had to go back to the judge to get a response to a valid offer to purchase a property.

The Bank owns the property, they either received at the foreclosure public auction, because it did not sell for the amount of the Judgment or the owner signed over the title to the property in lieu foreclosure "Deed in Lieu of Foreclosure".

Yes! One of RealPro Group’s specialties are these type of complex transaction.