Short Sale vs. Foreclosure: Is there a Difference on Your Credit?

The Story

I had a client call me the other day… his story was similar to many we have all heard over the last year and a half. He had been trying to sell his investment property for over two years but was very resistant to dropping the price, which he recognized was necessary to get any offer of purchase. His life savings had been depleted trying to keep current on this property and he had reached the end of the line. He was depressed, frustrated and resigned to losing the property and taking a credit “hit”. The bottom line for him was whether he should he “go to the trouble of trying for a short sale” or just “let it go to foreclosure”. He definitely wanted the easier road, which he thought would be a foreclosure. The consequences would be similar between the two . . . . right?

What do Lenders Say?

I flashed back to about two weeks prior when I was teaching a Short Sale and REO Transaction class for a local lender. The Senior Loan Officer had some material to share with us. First, she showed us actual credit reports of clients who had gone through a Short Sale. There was a “Before” and “After’ credit report for the same borrower. The Short Sale basically dropped this borrower’s credit score by one hundred (100) points. The mortgage also showed as “Paid in full but settled for less than was owed.”…. Okay, this was kind of what we would have anticipated and is certainly consistent with the information we have received from the lending institutions over the last year. Then we see the real show stopper. The Loan Officer hands out the new Fannie Mae underwriting guidelines that go into effect May 31, 2008. Guess what? The rules have changed.

REALITY BITES

The reality for my client on the phone becomes painfully clear. My advice: You better find a good agent who is competent and experienced in handling a Short Sale transaction. Under the new Fannie Mae guidelines the effect of a Foreclosure on a borrowers’ credit worthiness is substantial, devastating and decisive. A Short Sale may reduce your clients’ credit score and will stay with them for about a one year or twelve month period of time. For all our clients who have “let it go to foreclosure”, I have some very, very bad news. Effective May 31, 2008, according to the Fannie Mae guidelines, a client who has filed a foreclosure will be “ineligible” for a period of five years. That is FIVE YEARS (5 years) for a foreclosure compared with a one year “ineligible” for a Short Sale. That difference is significant and will have an immediate effect on our business.

Don’t be Surprised

It should be no surprise to us that the lending guidelines would adjust. We should have all seen this coming, right? Certainly the prior estimates of a 2 year credit hit for a Short Sale as compared to a 3 year hit for a Foreclosure were astonishing and somewhat unbelievable, leaving many of us to wonder if the effect of either outcome made no significant difference to our Seller, then why did it matter which outcome they pursued? The implementation of these new guidelines solidifies the rules and changes the desired outcome for many of our Sellers. As a result, I think we will all become experts on the Short Sale transaction.

This great article is from FARRForum.

Realtor coaching, real estate coaching, coaching for real estate agents, Realtor coaching classes, Tim and Julie Harris, Harris Real Estate University, Harris Realtor Coaching, Tim and Julie Realtor coaching.

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It all happens tomorrow…the F- r- e -e Agent Short Sale Secrets Teleconference.

Again, that’s tomorrow Wednesday 05/28/08 at 12:00pm PST/ 3:00 EST/ 1:00 MT/ 2:00 CENT.

Now, go to this link now for all the call-in info:

http://instantteleseminar.com/?eventid=2930034

You may recall that this event completely filled up a couple weeks ago. If you were shut out of that call this is your opportunity to learn what you missed.

When you attend the call tomorrow we will interview 2 agents who have created
huge businesses from  short sales….you will meet..

John Brady. John was interviewed by Fox News, HGTV, ABC World News and is featured in The New York Post. He will double his sales this year over last from knowing how to create a short sale business.

Dan Grieb. Dan was recently featured in his state’s Realtor Association monthly magazine. He has become one of the top agents in his area because he has created a short sale business.

NOW, click here for the call in info:

http://instantteleseminar.com/?eventid=2930034

On this call you will learn exactly how to:

Can Mortgage Borrowers Be Punished for Walking Away?
In a recent interview with the San Francisco Chronicle, Freddie Mac consumer outreach manager Robin Stout Migala claimed that there are many reasons why homeowners shouldn’t walk away from homes, including federal income tax liability and the chance that lenders may pursue walkaway borrowers.

Although Robin’s statements may be true in certain circumstances, it is equally likely that borrowers may not face the above-mentioned consequences.

As Mike ‘Mish’ Shedlock pointed out in a blog post Monday, some states (like California) are non-recourse states, which basically means that borrowers owe lenders nothing more than the house should they default. There are also non-recourse loans in recourse states with the same provision. As for tax liabilities, there are provisions in the Mortgage Forgiveness Debt Relief Act that allow tax free debt forgiveness.

The bottom line is that there will be consequences for those who do walk away–like a drop in credit scores–but the end result may not be as bad for borrowers as Migala implies.

2009 Money Magazine Housing Devaluation Predictions.

Money Magazine recently put out a city-by-city home price forecast as well. Using data from Fiserv Lending Solutions, First American CoreLogic, city and county assessors, and realtors, the magazine determined that U.S. home prices will fall an average of 9.7 percent.

Miami is expected to see the most lost equity. Money Magazine is predicting a 24.9 percent drop. Cities in Texas and New York are expected to fare the best.

Metro Area Median Home Price Forecast May 09 (% chg)
Albuquerque, NM $174,000 -10.5%
Atlanta, GA $205,000 -2.3%
Baltimore, MD $264,000 -12.5%
Boston, MA $363,000 -10.5%
Chicago, IL $279,000 -6.8%
Cleveland, OH $145,000 -4.3%
Denver, CO $254,000 -10.8%
Detroit, MI $120,000 8.6%
Edison, NJ $358,000 -15.8%
Fort Lauderdale, FL $309,000 -22.2%
Honolulu, HI $625,000 -16.2%
Houston, TX $150,000 1.2%
Jacksonville, FL $197,000 -9.6%
Kansas City, KS $148,000 -0.6%
Las Vegas, NV $277,000 -18.3%
Los Angeles, CA $528,000 -16.8%
McAllen, Texas $109,000 4.0%
Miami, FL $329,000 -24.9%
New Orleans, LA $158,000 2.2%
New York City, NY $471,000 -13.2%
Philadelphia, PA $200,000 -11.1%
Phoenix, AZ $237,000 -18.3%
Portland, OR $306,000 -14.7%
Riverside, CA $340,000 -16.9%
Rochester, NY $121,000 2.7%
Sacramento, CA $330,000 -8.9%
Salt Lake City, UT $229,000 -9.8%
San Diego, CA $522,000 -9.7%
San Francisco, CA $840,000 -10.1%
San Jose, CA $750,000 -12.5%
Seattle, WA $430,000 -9.0%
Springfield, MA $195,000 -9.5%
Stamford, CT $562,000 -13.9%

Click Here Now To Listen To A Free Audio Download About This Article

There is no doubt that our real estate markets are in a full blown recession. In most real estate markets property is depreciating at 2% + per month. For example, in California property has depreciated 24% from March 07 to 08.

Be clear, we are not anywhere near the ‘bottom’. Markets will get much more challenging for sellers. More foreclosures, more short sales, more depreciation.

Agents need to buckle down and be financially, mentally and emotionally prepared for real estate markets (and the nations overall economy) to be in a recessive state for some time to come.

Here is the thing…when you accept the challenge to get your business and personal finances in order you will thrive in this market. Our students know this…This is not a sellers market, this is not a buyers market…this is an agents market. Agents who have the skills and knowledge are making tons of dough in this market.

First quarter 08 20% of all closings in the US were short sales. Do you know how to do shortsales yet? If not download our free 7 part short sale crash course. Click Here Now.

7 Part Plan For You To Take Control Of your Finances:

1) Wake The Heck Up!
Stop spending money out of habit. For the next week keep a log of everywhere your money goes. Be totally awake and aware whenever you grab for your wallet. Start questioning yourself on every purchase.

2) Know How Much YOU Cost To Exist.
You are spending money every day. Even if you never leave your house. Your housing expense, your utilities, your food etc.
Know exactly how much you are spending per month (see point 1) and then divide by 30. (30 for the average days in a month). That will tell you exactly how much YOU cost to exist every day….Bet its more than you think.

3) Go Through Every Bill And Question It.
True story: We had a Realtor call us the other day asking to enroll in our short sale program. Her challenge, she was broke. We suggested that she should go through all of her monthly bills and question them. Start with your insurance, price shop. Cut back on Starbucks. Is a cup of coffee really worth $3? She did this and found $1800 that she could completely cut out of her monthly overhead. You need to do the same.

4) Drop Your Spend-y Friends.
You know who they are. These are the friends who always want to “go shopping”. People who live to spend should be kept at an arms length in this market. Some people see all of their worth in how others see them. Ask yourself if you think this way as well…become aware of your thought regarding your consumption.

5) Stop Thinking Of Yourself As A Consumer.
When was it that us Americans went from being called ‘citizens’ to being called a ‘consumer’. You are not what you consume. You are not what you drive, what you wear. Define yourself by your own terms.

6) Track Your Time…Hour By Hour.
For the next week, now that you are tracking your expenses…track your time. Keep a log of what you are doing hour by hour for the next week. Be honest with yourself about where your time is going. Here is the thing, chances are you are ‘working’ 8+ hours per day but, only doing things that will result in a pay check for 1-2 hours per day.

7) Pay Off All Your Debts.
Imagine what you would feel like if you had no debts. Most agents work because they have to. They have so much legacy overhead. Meaning, they are paying off the luxury bling-bling lifestyle that they may have been living from the past sellers market. Pay that debt off.

Bonus Point….

Save Money And Protect It.
Now that you are in control of your spending, have paid off your debts…start saving. Simple savings plan system. Take 10% (or more) from every penny you earn. If your Mom gives you $100 for your birthday save $10. You get a commission for $10,000…sock away $1000. Pay yourself first. When you get that commission check go to the back and transfer 10% into a savings account THEN pay the other bills.

To celebrate the last week of Massive Action March HREU is offering something

we never have before…

When you enroll in a HREU Class you will be given the opportunity to enroll in a second class for half the price!
Listen, we have never offered this before and don’t ask us to offer this again.

This week only.

Here is a list of the classes that are currently accepting new students:

Agent REO Secrets. Learn how to build your REO business.

Agent Short Sale Secrets. The top short sale coaching program in the nation for agents.

Buyer Agent Boot Camp. Learn how to work with buyers in this market.

Scripts For Your Success. Learn the new scripts, new techniques designed for this market.

Prospecting For Your Success. Learn how to prospect in this market using the new proven techniques and scripts.

Agent Tech Coaching. Step by step coaching program to build a blog and get your online business creating leads.

Real Estate By Referral. Build your real estate business around referrals. Complete step-by-step system.

Now, call our office to enroll 866-422-9497 extension 702.

Or Enroll Online Here.

Remember, you have no risk when you enroll in a HREU class because we offer a Double Your Money Back Guarantee.

Joe Langston is sending his clients (and market) and video update. Here is his first video message…

JOES VIDEO

Videos like this are an excellent way to stay in touch with your market and at the same time generate leads.

Look for more information on how to bring your real estate business into the 21st Century…AgentTechCoaching.com

coming soon.

By Julie Harris

Massive Action March is a HUGE SUCCESS!

There have been many fantastic emails coming in. Many of you are re-connecting with past clients you haven’t spoken to in a year or two. Some of you have been surprised at the open arms you’re finding when you reach out to those people and in most cases people are pleasantly surprised by the results they’re getting, so keep those stories coming in.

I’ve had a lot of other stories about some interesting ‘For Sale by Owner’ experiences people are having, proving people who are doing this on their own haven’t actually given it a lot of thought. They’re just trying it out, throwing a sign out seeing if they can save some money for a couple weeks, but they’re not that committed to actually doing it on their own.

Think about it, who wants to actually sell their house on their own? All of you have done it, so you should have a great appreciation for what they’re going through. It seems like an appropriate phone call for you to be making since you sell real estate for a living and they clearly have a house to sell. Keep the challenge going.

The quote for today was discovered on the voicemail of one of our fantastic coaches.

”We make a living by what we get, but we make a life by what we give.”

– Sir Winston Churchill