Community News

With so much information floating around nationally about foreclosures and short sales, I thought I would share some facts that speak to both home sellers and buyers with a few definitions and guidelines, as well as specific local market data about distressed properties.

A quick reminder of some key definitions is important to begin. What is a “short sale”?  In general, this occurs when a homeowner owes more to the lender than the amount for which the home will net from a sale. The lender(s) agrees to accept a discounted payoff, meaning the lender will release the lien that is secured to the property upon receipt of less money than is actually owed.  Another familiar term is foreclosure.  This occurs when the owner is in default of their loan and the lender forces a sale on the “courthouse” steps. Usually, the lender in “first position” is the ultimate buyer at the sale and the property is re-offered for sale as an “REO”, which is a bank-owned property (Real Estate Owned by the lender). The primary national players in this arena are Freddie Mac, Fannie Mae, and Bank of America. There are still a few local bank foreclosures, but they are small in number in comparison to the loans that were sold on the secondary market and controlled by the “big 3” named above.  

There are several important factors for sellers who are contemplating a short sale. First, seek professional legal and accounting advice as soon as possible.  In Montana, there is no deficiency judgment on a first lien on a primary residence, and there is still federal tax relief available on the gain caused by a short sale (the difference between the loan balance owed and the amount the bank receives in payment).  However, the rules and tax implications become more complicated for second loans such as home equity lines of credit and properties that were purchased as a second home or investment.  A conversation with a trusted attorney and accountant is essential before moving forward.  There is also the impact that a short sale has on one’s credit. Though potentially not as damaging as a foreclosure or “deed in lieu”, a short sale will impact a seller’s credit score and their ability to purchase real estate in the future. Another consideration is to engage a real estate professional to assist in selling the property.  It is imperative to price the home competitively and to present it in the best possible showing condition. 

From a buyer’s perspective, a short sale can be complicated because the seller is not in control of the time frame or the eventual sales price.  When a buyer makes an offer on a short sale property, there is no guarantee that their offer will be accepted by the third-party lender or how long the sale with take to close.  It is essential for the buyer not to give notice if they are occupying a rental property or make any contractual commitments based on purchasing the home.  It is also important to understand that any loan lock can expire and interest rates may increase during the waiting period.  Another key element is that the seller can continue to solicit additional offers and present them to the lender for consideration. To read more about the “5 common buyer mistakes in a short sale” go to www.bankrate.com. 

Here are a few more vital thoughts for buyers, especially when looking at “REO” properties. Often homebuyers will ask their real estate agent to seek out short sale or foreclosure properties assuming that it is the best way to find a good deal on an affordable home. This can actually be a bad idea, especially for first-time homebuyers who may not be aware of the pitfalls involved with homeownership in the first place. Unfortunately, many foreclosed homes have fallen into a state of disrepair and have even been vacant for several months while the foreclosure process was taking place.  In fact, some properties become ineligible for traditional financing due to their condition and end up being sold to investors for cash, fixed up, and resold when once again financeable. Another fact to keep in mind is that a home that is bank-owned will not come with a traditional seller’s disclosure letting a buyer know of all the quirks and/or major issues that come with a home. It is truly a caveat emptor (“let the buyer beware”) transaction. 

Although the actual process of purchasing distressed and foreclosed properties has become much smoother, there is still the challenge of dealing with a bank that is not an “arms-length” seller. Buyers can reduce their risk by doing the following:  1) have the home thoroughly inspected by a professional inspection service, 2) place a home warranty on the property to cover major components that may fail within the first year of ownership, 3) plan on a “nest egg” savings reserve to take care of the unexpected, and 4) research adding “extended” or “enhanced” title coverage to the transaction.  

A key fact for all sellers to note is that even though they may not personally be in a distressed sale situation, they must be realistic in their expectations of the selling price. They are essentially competing against non-humans who have no emotional attachment to the home. Banks are looking at their bottom lines while sellers may be lamenting leaving a home full of memories and handprints in the concrete driveway.  A seller’s personal motivation for selling a home matters far less to a savvy buyer than price and value.

The Gallatin Association of Realtors® prepared a report on “Residential Distressed Sales” with our local sales statistics from 2010.  Overall, there were 1,186 residential sales in Gallatin County that closed from January 1, 2010, to December 31, 2010.  Of these, 91 (7.67%) were short sales and 218 (18.38%) were foreclosures. A further breakdown shows that in Bozeman and the surrounding area, there were 530 sales of single-family homes of which 33 (6.23%) were short sales and 61 (11.51%) were foreclosures.  The 212 condo/townhome sales in this same area measured up to 13 (6.13%) short sales and 35 (16.51%) foreclosures.  Belgrade reported 218 residential sales with 14.22% short sales and 34.4% foreclosures. Park County falls in the middle with 3.73% of the 2010 sales classified as short sales and 18.63% as foreclosures.  A quick glance at figures for this year’s closings from January 1, 2011, through May 15, 2011, shows an increase in distressed sales for Bozeman and the surrounding area now making up a total of 30.74% (10% being short sales and 20.74% being foreclosures) of the 270 sales.  Belgrade is fairly static with 16.28% short sales and 32.56% foreclosures out of 86 residential sales.  Park County has also increased to 30.61% of sales being reported as foreclosures, though no short sales, of 49 closings this year to date.