Short-Selling (part 2)
Posted by mkdryden on June 29, 2007
This is a continuation of the weekend article from my prior blog entry about the plight of the Detroit areas high foreclosure rates. As we left off borrowers and the lenders are collaborating to avoid having the property foreclosed on. From a lender’s perspective a foreclosure help them in a many ways. It lowers the delinquency rate within their operations metrics. It also looks better when they approach a prime lender for money and they check the delinquency metrics.
As a debtor short selling is a great to get out of the property scotch free. They can avoid trying to sell a home that might not be competitive due to various factors in the market. Right now it is a buyers market in the Detroit area. A seller has to compete with properties that are already foreclosed. Also the heavy depreciation has affected the Detroit area. In 2006 a majority of southeastern Michigan homes depreciated at a rate of 9% or more. This trend of depreciation I assume may carry on for a few more years. Acting as a leveling off of over inflated appreciation from the 1990’s due to fraudulent appraisals.
Here is a simple example of a short sell. You have a borrower risking a possible foreclosure and the amount they owe the bank is in the amount of $120000. They realize that there property is valued at $100000, which is far less than what the loan amount is. Therefore they cannot refinance or expect a buyer to get a loan for more than the appraised value. The process proceeds along in the following way.
The owner contacts the lender requesting that they consider a short sell of the property. If the lender agrees the buyer must then line up potential buyers. Once offers are made on the property the bank will weigh which offer is the best out of 3-5 offers. Obviously the lender would accept the highest offer. Let’s assume the highest offer was for $83000. Upon sell the bank would then forgive the owner of shortage due to the lower selling amount.
This is a win-win for everyone. The lender finds someone to take the property off of their books. The owner won’t have a foreclosure on their credit report or face the humiliation of being evicted from their home. The new buyer is able to get a great deal on a home and have nice equity off the start.
As Dan Gilbert said to our class “buy when there is blood in the street.”
www.detnews.com
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