Tag Archives: short sale

I Want to Buy a Condo as a Short Sale but the HOA Just Foreclosed

Short SaleASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions. 

Don’t Come Up Short on a Short Sale 

Dear Leon, 

I’m a beginning property investor. I have been negotiating to purchase a condo as a short sale. The condo is worth $500,000 and owner still owes $1 million on the mortgage. We got short sale approval from the lender, but the homeowner’s association just held a foreclose sale and now owns the condo. The HOA is in the process of evicting the former owner. 

I still want the property. Should I contact the HOA and try to buy the property from it or ask it to stop the eviction so I can finish the short sale? 

Thanks, 

Justin 

Dear Justin,

There is dirty work that needs to be done here. I would back off just a bit and let the HOA do it for you.

If you buy the condo right now, you will be stuck evicting the former owner. Why not let the HOA do it? Rather than delay the eviction, let it go full speed ahead at the HOA’s expense.

What you can do right now is negotiate with the HOA to buy the property. As things stand, the HOA owns this property subject to that million dollar mortgage. One of two things will happen.

  • the HOA will do a short sale, or
  • the mortgage lender will foreclose on the HOA.

If the lender is still willing to go forward with a short sale, then you can buy the unit from the HOA. If the lender forecloses, you can negotiate to buy it from the lender as an REO. (Learn more about REO properties and how to purchase them.)

In addition to conditions you would require for any condo purchase, you should also require that the unit be vacant, that it be subject to your approval on a final walk through inspection,  that the lender agrees to the short sale, and that the time period in which the former owner can redeem the property has expired. The last thing you want is to buy a damaged property with the ex-owner still living in it, or else buy the property, improve it, and then have the ex-owner try to reclaim it.

I hope it works out for you. As investments go, these short sale deals often come up short.

Leon Bayer is a Los Angeles bankruptcy attorney.  He is a partner at Bayer, Wishman & Leotta, a California law firm specializing in bankruptcy.  The opinions and advice in this blog post are from Mr. Bayer alone, and should not be attributed to Nolo.  By answering a question on this blog, Mr. Bayer does not become your lawyer.

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FICO Provides Insight Into the Impact of Foreclosure, Bankruptcy, and Short-Sale on Your FICO Score

exitsigncreditThe other day I listened in on a Making Home Affordable training webinar entitled The Impact of Mortgage Assistance on Credit. The training was particularly noteworthy because of its presenter:  Joanne Gaskin, Senior Director of Scores and Analytics at FICO. Yes, Joanne did a great job presenting the material. But even more exciting — she was willing to answer listener questions about FICO scores.  It was clear that the audience was salivating — I mean, when do you get to ask FICO what goes on in their score-making world!

Here are some interesting tidbits I gleaned from Ms. Gaskin’s presentation:

“Simulated Statistics”

Ms. Gaskin presented a “simulated” chart of the impact of  the following on consumer scores:

  • late payments
  • foreclosure
  • short sale with deficiency
  • short sale without deficiency, and
  • bankruptcy.

The statistics were simulated because they weren’t based on actual consumers, but were FICO’s approximation of what would happen to the average consumer going through the various events. The chart presented the impacts for consumers starting with different scores.

Here’s what I learned:

Bankruptcy Is the Worst, Followed by Foreclosure

Bankruptcy had a slightly worse impact on scores than any of the other events.  Foreclosure was second to last in terms of the biggest negative impact. Short-sellers did slightly better — those without a deficiency faring better than those without. But there wasn’t a huge difference between all of these events.

Late Payments Have a Huge Negative Impact

Surprisingly, having a 30-day, 60-day, or 90-day late payment had a big negative impact on a score.  Granted, it was not as large as going through foreclosure, but scores dropped significantly all the same.  For example, a consumer with a starting score of 680 dropped to 600 with one 90-day late payment.  Foreclosure for the same consumer dropped the score to 575. That means that the late payment caused an 80-point drop; from there it was just a 25-point drop once the foreclosure happened.

The Jury is Out on the Impact of Loan Modifications

According to Ms. Gaskin, loan modifications are currently reported as CN and CO on credit reports. For now, the FICO score bypasses these codes, which means they are viewed neither positively or negatively. However, FICO will consider  whether you were paying as agreed prior to and post modification. If a lender reports a loan modification as “paying under a partial payment agreement,” this will be a negative for your FICO score.

The Higher Your Score, the Bigger the Plunge

Those with higher scores lost more points in each of the various events. For example, a consumer with a starting score of 820 had a 100 point drop with just one 30-day late payment. A consumer with a score of 680 dropped only 80 points with a 30-day late payment.  If the same consumers filed for bankruptcy, the first (starting score of 820), dropped about 270 points to end up with a score of 550. The second (starting score of 680) dropped only about 150 points, to end with a score of 530.

Each Case Is Individual

Keep in mind that these simulated numbers were just that, simulated. Each person’s situation is different. Your score may drop more or less than the average consumer based on your prior credit history and how the delinquency or negative event is reported.

To learn more about the individual factors that influence your FICO score after a negative event, see Nolo’s article Which Is Worse for Your FICO Score: Bankruptcy, Foreclosure, Short-Sale, or Loan Modification?

For tips on rebuilding your credit, visit our Credit Repair topic area.