Selling Short?
So Jeff, What is a short sale? This is a question that has been popping up quite a bit lately. I'm hearing it from sellers, buyers, and even people just curious because they've been hearing the term on the news or in the papers. So, what really does a short sale entail?
A short sale is defined as a sale of a home where the net proceeds aren't enough to cover the sellers mortgage amount, closing costs (property taxes, transfer taxes, title insurance, and real estate commissions), and any other costs to sell their home. Therefore, if the home owner is unable or unwilling to bring the difference to the closing table, they might be in need of a short sale.
What, How, Huh!
Very simply that all means if you wish to sell your house and you bought it at the peak of the market, or maybe refinanced it a year or two ago, or maybe completely overpaid for the property, or are unable to afford it and are facing potential foreclosure, that you might not be able to sell it for what you owe on it. Well, the first question I get from a seller is- How do you know I can't get MY price! Well, utilizing a carefully prepared CMA and a very simple net proceeds sheet, I can help to determine whether or not you'll have positive or negative proceeds at closing. Once, we've figured out that a seller is in fact going to be in the negative we have a few difficult decisions to be made. As a seller you can either not sell the property and wait for it to appreciate over time, attempt to sell the property and bring any money to the closing table to cover the difference, or try and sell short.
Okay Jeff, I get it-So what I do if I need to sell short?
The very first thing a seller needs to do when they know that they are going to need a short sale is to contact there lender as soon as possible. This sounds easy, but in reality can be one of the biggest hurdles of them all. I recommend contacting the loss mitigation department because they are usually going to be the department that handles whether a short sale will be accepted or not. Another thing that must be understood is that a bank isn't going to just pay the difference unless you're in serious need and are facing some serious hardships. The bank or Lender is generally not interested in helping someone out who has excellent credit, plenty of money in the bank, always pays on time, and has a consistent income. This being said, there are times when someone has a couple of those features but knows they are going to be laid off or lose their job and can be proactive and work with the bank. So, now that you have contacted the lender they are going to want to know why you need a short sale. They will want to see bank statements, W2's, Tax returns, and a hardship letter. The letter should explain in full detail why you can't pay the full amount of the loan (i.e.-a letter explaining that the seller is unemployed). Next, you will want to get your house on the market in order to find a qualified buyer. Once you have a purchase agreement on the house you will submit it to the bank and hopefully they will accept the terms and conditions of the agreement. Now once the offer is submitted you will have to be very patient. Response times can vary from lender to lender, but it usually takes two weeks to 60 days, however I've seen it take as long as 90 days.
How will a short sale affect me
Now that you have sold your house utilizing a short sale, what can you expect? Well, sometimes a lender will ask a seller to sign a promissory note for the difference of what you owed and what you sold for. So under that logic, you might end up with a bill that will eventually have to be paid. Additionally, if the lender doesn't charge you the difference than they might report the difference on you credit score giving you a very large negative in your credit history. As if that weren't all you had to think of, you might also be looking at potential taxation issues as well. You see, currently the IRS considers the amount of debt forgiven as income which is subject to income taxes. This means that even though you didn't actually receive any money, you are still going to be taxed as if you did. The House of Rep's and many individual states are currently working on legislation to at least temporarily combat these issues do to the amount of short sales and foreclosures that are occurring throughout the country.
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