Short Sales- are they a valid solution for you?

Hardship, Foreclosure and the Homeowner
In an uncertain real estate market and troubling national economy, too many homeowners are faced with the immense challenge of maintaining their mortgage by living paycheck to paycheck, taking a large pay cut, having to pay unexpected medical bills, or losing their job entirely. In addition to perhaps having little to no savings and little available credit, the situation can be very grim.

There are options for homeowners feeling stuck in this situation and faced with certain foreclosure. Some may be able to sell their home with barely enough money to pay off their mortgage. Some may be able to sell their home with barely enough money to pay off their mortgage. Others may be able to refinance, however a majority of homeowners in this situation do not have enough equity to acquire a new loan.

Options include reinstatement, loan modification, forbearance, and the list goes on; however, many of these options are a drawn-out process that do little to ease the future financial pressure and foreclosure still looms even if put off for several months. Foreclosure is entirely avoidable, however, through the process of effecting a short sale.

A short sale is a real estate transaction in which the proceeds from the sale do not cover the balance owed on a loan or loans on the property. Lenders, quite simply, accept a discounted payoff on the loan and allow the sale to close escrow. The bank or mortgage lender will agree to discount the loan due to an economic hardship on the part of the mortgagor, and the homeowner will sell the mortgaged property for less than the outstanding balance of the loan, turn over the proceeds to the lender or bank, most often in full satisfaction of the debt.

A short sale is accomplished through negotiation with a bank’s loss mitigation or workout department on the part of the real estate professional, but the lender has the right to approve or disapprove any proposed sale. Main factors contributing to the lender’s decision are the borrower’s financial situation and the current state of the real estate market. 

It is neither the lender doing the homeowner a favor nor an easy way out for the homeowner, but a process enabled by the real estate professional nor homeowner when they are committed to avoiding foreclosure. It can be likened to a circus, under a not-so-big top in which the animals and acts do not seem inclined to respond to the skilled direction of their leader, the real estate professional.

The main goal of a short sale is to prevent foreclosure; however, the bank’s decision to move forward with a short sale is dependent on whether there will be a smaller financial loss taking the short sale or in the carrying costs associated with foreclosure. Typically, a bank will determine the amount of equity by determining a probable selling price from a broker price opinion (BPO) or appraisal, and decide to approve or deny the short sale based on the offered short sale price difference compared to the costs of foreclosure.

Banks will not accept all short sales, and a trained, knowledgeable real estate professional is paramount to the process of getting a short sale approved. Advantages for the homeowner are avoidance of a foreclosure on their credit history and some partial control of the monetary deficiency.In foreclosure a homeowner will receive a 1099A (Abandonment) which there is very little tax relief for. In a Short Sale a seller would receive a 1099C (Cancelation of Debt) Based in section 108 of the tax code found at www.irs.ca.gov with a letter of insolvency from a CPA and IRS form 982 there is less exposure to an ongoing tax liability from a 1099C over a 1099A

Additionally, the process of a short sale is faster and less costly than a foreclosure. Controlling that deficiency and paying off one’s debt via a short sale is a sure-fire way to sidestep immense financial hardship and get back on one’s feet. While a short sale does adversely affect a person’s credit history, the impact is far less than that of a foreclosure.

In San Ramon itself, since January 2009, there are 33 Active Short Sale Listings; 165 Pending Short Sales and 149 Sold Short Sales.Do Banks Accept all Short Sales? No. That is why it is critical from the correct presentation of the short sale package to the lender, to working with the lenders’ loss mitigation departments is our best weapon to keep the file moving towards approval.

Would a Bank Accept a Short Sale if the Homeowner is Current on Payments? The answer is, maybe. Some lenders will accept a Short Sale file for approval on loans that are not delinquent; however, this is very rare. Other lenders will not accept the file until the loan is delinquent. One way to find out whether your lender will accept a short sale file for approval on a loan that is current is by submitting a short sale file to your lender.

A short sale/ pre-foreclosure trained and certified real estate agent is central to the process of executing a short sale.They are responsible for identifying financially distressed homeowners as candidates for a short sale as well as compiling a file for submission to the lender in hopes of having the short sale approved through their loss mitigation department. The homeowner trusts the professional to work hard to avoid foreclosure via the short sale, and the professional is the linchpin on which the entire process hinges. Even more than just allowing the homeowner to “sell” their house and exit on their own terms, the real estate professional enables the homeowner to save themselves the embarrassment of excessive legal postings or the threat of a visit from the sheriff as well as helping them maintain their dignity in a time of financial hardship.

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