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The current real estate
market is producing
a phenomenon we last saw over a decade ago, and hoped we
wouldnât see again,
the short sale. If you
for those fun times, hereâs what weâre talking
Say you didnât
heed my advice over the past few
years about avoiding exotic mortgages and you got wired into a 100%
consisting of an 80% 1st
mortgage and a 20% 2nd with an adjustable
interest rate. Now the rate has adjusted
once or twice and your income hasnât quite kept up, leaving
you a tad shy of
the monthly nut your (formerly) friendly lender wants. Or maybe
your job or lost the person who had a job â whatever, the
funds just arenât
there for the mortgage. Youâve looked into selling the house
but thereâs no
equity built up. You owe $525,000 and at best you might sell it for
but more likely youâd get closer to $375,000, leaving a
shortfall on your side
of the ledger sheet. What do you do?
youâve got three options:
Â·Â Â Â Â Â Â Â Figure
out a way
to get the extra money
Â Walk away
and let the property go to foreclosure
Â Â Sort Sale
If you coulda figured
out a way to get the
money, you wouldnât be in the situation to begin
with so that option is
Most sellers have worked long and hard to build
their credit rating and would like to avoid having it all trashed by a
foreclosure. There are all kinds of negative consequences
to a foreclosure that
will cost you for years to come. That limits your second option.
A short sale, or short
pay-off, is a transaction in
which your lender
agrees to accept less than is owed to allow the sale of
property. Youâll also find short sales referred to as
by some since it is usually your last, best hope of avoiding that
In a typical short sale,
the lender agrees to accept
the net proceeds from the sale in return for releasing the lien and
you to transfer title. The net proceeds are the sales price minus
closing and selling costs. In the above scenario where the mortgage
$525,000 and the sale price is $400000, the net to the lender is about
$372,000. The 1st and 2nd mortgage holders have to agree to accept some
percentage of that net amount applied toward your debt. If you just
have a 1st mortgage, it's usually somewhat easier to
negotiate.Â If the shortfall is not to a 1st
mortgage holder but to a 2nd, it will be more
difficult and they
will almost invariably require a promissory note since a 2nd
mortgage may not be considered a âpurchase moneyâ
Why would a lender agree to
lose money on you? Well,
most lenders will evaluate the transaction on a number of
1.Â Â Â Â Â Â Â
What are the
circumstances leading to the need? Was there a divorce, death of a wage
taking one wage earner out of the picture? How about a job loss or
because you bit off more than you could chew and the market
changed may not be enough reason.
2.Â Â Â Â Â Â Â
make sure they net
more through a short sale than they would if they go ahead
with a foreclosure process. Theyâre going to want to make
and not a fire-sale and that the estimated closing costs
and commissions are equal to, or less than, they will have to pay
3.Â Â Â Â Â Â Â
doesnât have the money to make up the shortfall.
Theyâll want a
financial statement showing all assets, liabilities, income and
statements and tax records. Even if your income comes up short, if
an IRA or other portfolio, theyâre going to want you to use
it. (See coming up
with extra money above).
the seller will receive any proceeds
from the closing on a compromise sale since thereâs no equity
to work with, and
they may still end up owing money for a home they no longer live in.
short sales rarely
create any capital gains problems for a seller, there may be
detrimental tax consequences from âforgiveness
of debtâ and sellers would be
wise to consult
a tax advisor.
Buyers and sellers
should also be prepared to be
patient since the
process can take 2 to 3 times as long as a normal
as you will likely be working with your loan servicer, the underlying
and a mortgage insurance company at the very least. Once your short
approved based on your paperwork, make sure all their conditions and
likewise in writing. Too many he-said/she-saidâs
between the different entities
can easily derail the process and you donât want to end up
getting sued by a
buyer on top of everything else.
the problem will not make it go away
and delay can be detrimental. This also isnât the time to
cut corners or look
for the cheapest agent. There are scams galore out there
that will do no more
than add insult to your injury and leave you in far worse shape than
While itâs true your lender does not want your home back,
they will not agree
to a short sale just to be nice guys either. They must be convinced of
validity of your need
and that their
interests are best served by a short sale
instead of just foreclosing and kicking your debt-ridden butt out on
street. If you find yourself in these circumstances, please contact a professional and experiencedRealtorfor
assistance. Not all agents are Realtors,
not all Realtors
are experienced in short sales. Â It's your future - be smart
Wunderlich - Selling Southwest California Homes including
Temecula, Murrieta & The Southern California Wine Country
Remember, Don't wait to buy real
estate - Buy real estate and wait.
Disclaimer: ActiveRain Corp. does not necessarily endorse the real estate agents, loan officers and brokers listed on this site. These real estate profiles, blogs and blog entries are provided here as a courtesy to our visitors to help them make an informed decision when buying or selling a house. ActiveRain Corp. takes no responsibility for the content in these profiles, that are written by the members of this community.