Short Sales in Residential Real Estate

Home values are down more than twenty-five percent from their peak in 2006 and continue to fall rapidly across the country. Some experts predict an additional fifteen percent decline in the upcoming year. As a result more than 12 million homeowners now have mortgage debt that exceeds the value of their homes.

WHAT IS A SHORT SALE?

A short sale occurs when the lender agrees to discount a loan balance and accept less than the total amount due incident to the sale of a home due to financial hardship. In today's economic environment more and more lenders are initiating short sale programs to assist people in selling their homes and thereby avoiding foreclosure.

WHO QUALIFIES?

Once homeowners find themselves in a circumstance where their home is worth less than the mortgage balance this is just the beginning of the process to determine if they are eligible for a short sale. Moving into 2009 more lenders appear ready to assist homeowners in loan modifications and short sales in an attempt to slow down the ever growing foreclosure crisis.

In virtually every short sale negotiation the lender will be looking for a statement of hardship from the homeowners which explains why they need relief and more specifically why the homeowners cannot pay the difference still due on the mortgage after the short sale. Declining property values coupled with a need to relocate or upwardly adjusting mortgages and unable to refinance are the beginning, in many cases, of the hardship picture. The declining home property value, increasing adjustable rate mortgages coupled with unemployment greatly defines the downward spiral leaving many homeowners in desperate need to sell their homes, which would not be possible without short sale assistance.

THE SHORT SALE PROCESS

The first and most prudent step would be to seek the assistance of a competent real estate lawyer to assist in the process. While each lender has their own specific requirements there is a consistency in the nature and type of documentation that can be expected.

The first step is to contact the lender to see if they have a person or department set up to respond to inquiries regarding short sales. While the situation seems to be improving as lenders become more and more organized in dealing with short sales it still may require some persistence in getting the proper individual on the phone to ascertain the lender's procedure.

Once contact is made with the workout or short sale department typically a lender will want an authorization signed by the borrower(s) which would allow the real estate attorney to communicate directly with the lender regarding the potential short sale. Many lenders will merely accept a letter, others will require a signed authorization and still others will require their specific written authorization form to be signed.

Once proper contact and authorization is in place the following requirements can be expected from your lender:

o Hardship Statement

This is a written statement which describes for the lender what has changed making it difficult/impossible for the homeowners to continue paying their current mortgage. Specifically, this is the statement where it is outlined for the lender if the homeowner(s) has lost a job or had a significant decrease in income, was hospitalized or had some other unexpected illness or medical emergency contributing to their problems, or simply had their mortgage adjust up making the payments no longer affordable. Again, your real estate attorney should assist you in writing this letter making a strong plea to your lender to accept less than the full payoff.

o Statement of Income/Assets

Most lenders will require a financial statement outlining all liquid assets, including savings accounts, checking accounts, money market accounts, stocks, bonds, cash and other real estate. Obviously this statement needs to be consistent with the facts outlined in the hardship statement in order for a lender to seriously consider the request. In many cases the borrower should be prepared to provide backup information including bank and other statements for the accounts disclosed in your statement of income and assets.

o Appraisal/Comparative Market Analysis

As part of the short sale process most lenders will require either that an appraisal be performed confirming the value of the property or in the alternative a current market analysis obtained from a real estate agent which will compare the suggested price of the home to that of similar homes that are either currently on the market for sale or have recently sold.

o Listing Agreement and Purchase Agreement

Many lenders also require a copy of a Listing Agreement with a real estate brokerage for the sale of the property together with a copy of the Purchase Agreement for the sale of the property as part of the short sale package. Obviously, any such Purchase Agreement should be carefully worded to include language that the sellers' obligations are expressly contingent upon lender approval. The lender may also require a preliminary settlement statement or net sheet which includes estimated closing costs and reflects the bottom line payoff to the lender.

In most circumstances after a complete short sale package is received by the lender it will take thirty to sixty days for approval and if granted sellers may move forward and close the sale of the house to the prospective purchaser.

CREDIT CONSEQUENCES

Selling a property by short sale will cause a hit on the sellers' credit report and in many cases the affect on credit and FICO scores could be the same as a foreclosure. As such, a short sale should only be considered, and in most cases will only be considered by your lender, to avoid a foreclosure. The good news for short sale sellers is that in most circumstances the wait involved before qualifying for a loan to buy another home is much shorter than if a foreclosure occurs. New Fannie Mae guidelines now require only twenty-four months seasoning before a short sale seller can again buy with a reasonable interest rate. In most cases a person who wants to buy another home after a foreclosure may end up having to wait as long as thirty-six to seventy-two months before a lender will offer a reasonable interest rate in relation to the current market.

One of the key areas that must be negotiated for sellers incident to the short sale is whether or not they will be subject to a deficiency judgment, meaning having to repay the difference between the loan amount and the amount paid to the lender at the short sale. In most cases it is up to the lender to decide whether to require a payback of some or all of the deficiency and as such the seller should discuss this matter with a real estate lawyer prior to finalizing a short sale. A lender's position regarding pursuing a deficiency varies from institution to institution and is greatly impacted by the hardship circumstance as well as the seller's income and assets. In many cases a good attorney can present the case to a lender and reach some agreement that is acceptable with regard to the deficiency.

TAX RAMIFICATIONS OF A SHORT SALE

While I am a licensed attorney, I am not a CPA and cannot advise on tax consequences. Generally speaking the cancellation or forgiveness of debt is included as taxable income. If a lender forgives that balance of a mortgage there is cancellation of that debt which could be taxed as ordinary income. Fortunately, tax relief has been enacted for such debts secured by a principal residence. Congress has passed the Mortgage Forgiveness Debt Relief Act of 2007 which is effective for discharge of indebtedness on or after January 1, 2007 and before January 1, 2010. The federal bailout legislation passed in October, 2008 extended this relief through December 31, 2012. In most circumstances, under this law, the forgiveness of debt incident to the sale of a qualified principal residence is excluded from taxable income.

CONCLUSION

Given the ever changing challenges of today's economy short sales are going to become more and more prevalent. With continued declining property values homeowners are in need of assistance and both lenders and the government are recognizing this need and enacting programs to provide for that assistance. While a short sale will have a negative impact on credit in many cases it is the only opportunity a seller may have to avoid foreclosure and will potentially afford the short sale seller the opportunity to qualify to purchase a new home sooner. The need to get out from underneath the negative equity is something that has been recognized by our government and the IRS but should only be considered after consultation with the appropriate real estate and tax professionals.

Always seek legal counsel before attempting to pursue a short sale. A real estate agent, although qualified in other aspects of real estate, is not qualified or licensed to give legal advice.

Joseph Curran is a Virginia attorney with more than 25 years of experience representing banks, mortgage lenders, homebuilders, and real estate companies with offices in Prince William County, Virginia. http://www.curranwhittington.com

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Luxury Second Home Real Estate: Five Ingredients to Ensure A-1 Sales

It's been said that making sales in leisure resort real estate is not rocket science. Perhaps not, but it is a discipline that requires attentive strategies be employed to enhance sales pace and to mitigate risk. Consider the following tenets:

1. Coordinate Marketing and Sales Activities with a Properly Funded Budget. The marketing and sales function is the most important component to the profitable operation of any luxury second home real estate venture. This activity is as equally important, if not more so, than as the quality of the product itself - "the sticks, bricks and furnishings", if you will. The long accepted adage of "Build it and they will come" is being challenged daily in today's competitive real estate boom. Even among projects of equal quality, the better marketing and sales entity will inevitably capture a disproportionate share of the market.

As a point of definition, Marketing covers all of the activities required to get a qualified prospect in front of a salesperson. The Sales function covers what happens from that point forward. The two must obviously work hand in hand. We believe marketing and sales efforts must be dovetailed to achieve the common goal of cost-efficient sales that are retained long-term, in order to generate additional downstream revenues. It quickly becomes clear that a well-tuned and balanced marketing and sales campaign can have a very significant impact on the development company's financial performance. A faster sales pace and shorter sellout reduces both the developer's and lender's exposure time and expense.

So, how to get there? Prepare and administer a coherent and appropriate marketing plan that is understood by all - one that can be modified as the circumstances dictate. One requisite of any such plan or campaign is the significant and rapid flow of money necessary to pay for the many promotions, especially in pre-sales start-up activities. There are always several programs that are simultaneously used that all require quick and significant funding.

Strategy: An adequately funded start-up budget to accomplish any pre-sales goals prior to lender funding is essential. Delays in paying for marketing activities can be disastrous. Worse yet, running out of dollars before your marketing program is launched is sheer project suicide.

2. Utilize One Sales Team to Represent All Leisure Real Estate Products. From our experiences in the industry both past and present, we know some simple truths about the leisure real estate buying market. The first fact is that no one buys a real estate product sight unseen. A second corollary is that the bulk of the sales will be generated from prospects that are repeat visitors to the destination resort area. And, the third corollary is that no prospect has a clear idea of which product is right for them until they hear of their options. No one walks through the door wanting to buy a fractional or a condo-hotel interest. The prospect's opening statement may be that they simply want to hear about the condos for sale.

Relationship selling techniques are in vogue and are appropriate for leisure real estate sales. Here, a sales representative first builds trust with his/her prospects and then proceeds with a discovery phase to determine their prospects' needs, attitudes, preferences and motivations along with a finding of how often they might use the second home product. The agent can then present the real estate options in light of the solutions afforded to that particular prospect and to advise each prospect on which of the multiple products is best for them. Prospective buyers resent being flipped to another agent after they've vested themselves in the one agent, who has now become their friend and trusted consultant. This overriding factor underpins our philosophical approach that emphasizes a single sales team approach to presenting leisure real estate product options.

Strategy: If you are a resort developer with a mixture of residential program offerings, cross train your sales representatives on all second home leisure real estate products. Consider abandoning the idea of maintaining separate sales teams that sell strictly lots, or strictly whole ownership or shared ownership interests or strictly condo-hotel interests. You'll find that your product options will not cannibalize one another and the project will make more sales faster while experiencing less rescission.

3. Get the Right People on the Team. In order to have a successful ongoing marketing and sales operation, a team of talented, disciplined and motivated people must be assembled and paid well for results. We believe it is imperative to bring in a few key people experienced in the particular product format you plan on offering around which to build your team. It is much more costly to get off to a slow start or not get off at all for lack of talent or expertise.

To achieve the results projected, we believe in acquiring good people, training them and paying them well to retain them. Highly trained and motivated salespeople can maintain significantly higher closing percentages than those of average salespeople.

Strategy: Recruit, train and properly compensate a professional sales team for your leisure real estate project. Hold all accountable to performance standards for the project and tie compensation to performance as much as possible. Having the wrong people on your sales team can be very costly to the project, both in lost sales and wasted marketing dollars. The losses can amount to millions of dollars.

4. Deliver Well Qualified Prospects to the Sales Team

An exemplary and consistent flow of well-qualified prospects will yield much higher closing percentages for your leisure real estate project. Between marketing and sales, the more important and variable of the two is marketing. All other things being equal, the sales staff with its capabilities and closing percentages is predictable and controllable. The overall success of the sales offering is, more often than not, made or broken by the marketing component.

For most properties in resort destination areas, we expect to see real estate product sales consummated by prospective buyers that are generated from three general sources:

A. Group One: Those guests that are physically already there visiting the resort area.

B. Group Two: Those prospects who are planning on coming to the resort area, but who are as yet unfamiliar with the project's real estate product offering opportunity.

C. Group Three: Those prospects who know the resort area, but who are not planning on visiting the destination this upcoming year.

Interest from prospective buyers tends to be piqued when they see a resort's new buildings coming out of the ground. And, as that activity becomes evident and exciting, prospects will walk into the preview center to ask "what's it all about" and investigate whether there is a significant opportunity for them. Until construction stages begin and during pre-sales activities, the question remains as to how to get those guests and prospects mentioned above to inquire about your real estate opportunity.

Strategy: The thrust of any project's marketing and sales pre-sales plan, along with the attendant expenditure of marketing dollars, should be strictly focused on just this tactical approach - getting well qualified prospective buyers who are sold on the destination resort area to visit the preview center.

5. Get Sales Posted Quickly to Create a Project Buzz. The thrust of any marketing campaign for an upcoming pre-sales season should have an emphasis on "Awareness" - getting the word out on your project's offering. For Groups One and Two, this awareness campaign will work to ensure that prospects will stop in the preview center to check out your opportunity while at the resort area. For Group Three prospects, the awareness campaign may actually serve to encourage those prospects to rearrange their schedules to accommodate a trip to the resort area sooner than they had planned.

All in all, the marketing campaign should direct prospects to your resort website or sales center, where they can opt in for more information and to set an appointment. The ability to generate walk-in traffic will be the key to absolute sales success. With a properly designed project that incorporates a use plan that makes perfect sense to the consumer, people will buy and sales will flow steadily.

Strategy: The immediate mission is to get sales on the board quickly in order to build momentum and the sense of a successful project. Salespeople need confidence. A sense of urgency must be instilled in them as well as in the prospects. Making sales steadily builds that confidence, creates a "buzz of success" for the project and satisfies everyone involved with the project - the consumers, the developer, his investors and lenders and the sales representatives. Win-win for all is the name of the game.

For more information on the sales and marketing of fractional ownership, private residence clubs, and on condo hotels, including listings and photos of current and past projects, visit the Star Resort Group website at www.starresortgroup.com

John R. Kazanjian, is Executive Vice President of Star Resort Group. He is a co-founder of The World?s Finest Resorts and has served as CEO of Resort Development & Advisors. His 30-year career has focused in fractional ownership resort real estate and vacation ownership development. Visit the Star Resort Group website at http://www.starresortgroup.com for more information on the sales and marketing of fractional ownership, private residence clubs, and on condo hotels, including listings and photos of current and past projects.

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