What is it and how can it work for you?
In a Short Sale, you have to negotiate with the bank holding the mortgage, and get them to accept less than what the seller owes. We are seeing a lot of transactions like this in the current market. Your buyers and sellers may have questions regarding the advantages and dis-advantages of the Short Sale. One thing for sure, you might have to be in it for the long sail.
In my humble opinion, I think it's better to do a Short Sale, than a foreclosure or bankruptcy. I feel that the advantages of the Short Sale far out-weigh the advantages of a foreclosure or bankruptcy on your record. A foreclosure does affect your credit and the ability to purchase another home anytime in the near future. I'd like to share some notes I took from last weeks seminar regarding these transaction types. You can also go see the short sales expert.
Why do banks negotiate and accept Short Sales?
There are many reasons banks that will agree to a Short Sale but the most common include:
- The mortgage is past due or in a foreclosure
- The property is in poor condition
- The owner has suffered a hardship and can't make the payments
- The area or neighborhood has depreciated in value
- New homes built are being chosen over the resale properties
- The banks shareholders are concerned when there are too many
defaulting loans on the books - Some banks are required to prove a loss each month
- An REO is a liability, not an asset. Too many liabilities will cause
any business to go under if not dealt with properly and quickly
What are the steps to a successful Short Sale?
Each bank may have different requirements and regulations, this is just a sample scenario
- Find a distressed property
- Meet with the homeowner to put something together
- Get a signed "Authorization to Release Form"
- Create a contract to reflect your offer to the bank
- Call the loss mitigation dept. at the bank
- Fax them your offer along with the following:
a. Cover Letter explanation of why you can't offer full price
b. The owners signed sales contract
c. Justified Sales Comps of the area
d. Pictures of the property condition
e. An estimated net sheet or closing statement
f. A hardship letter from the homeowner concerned of bankruptcy
g. Detailed list of estimated costs for needed repairs
What happens to the homeowners credit?
When you negotiate a successful Short Sale, remember that the agreed upon price is payment in full. However, the homeowners may still owe the difference between the mortgage balance and the discounted amount if the bank pursues the owners via a "deficiency judgement". If granted, this judgement will affect the homeowners and their credit report just as any judgment would. You must get the bank to agree to accept "payment in full without pursuit of any deficiency judgment."
In addition, you need to explain to the homeowner that the discounted amount (the difference between the mortgage balance and the Short Sale) may be declared as income on their tax return by means of a "1099". The homeowners should always consult with their accountant or a legal professional for advice.
This information is being provided to you based on a recent "Short Sale / Foreclosure" seminar, in which agents were informed of different marketing ideas regarding distressed and Bank owned properties (REO's). This post was created to share those ideas and concepts, and hopefully provide a better understanding of the Short Sale for you and your clients. Here is what other members have posted regarding Short Sales on Active Rain.
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Brad,
We're getting more and more requests to sell homes that owe more than they'll sell for so this is all timely info. I always enjpy your articles - thanks for the info (have 2 potential short sales right now...)