In the past few months, I received many inquiries from sellers who want to know more about short sales. What is it? What is involved? How do we go about it? What is its effect on the credit score?
So I started providing my version of a PRIMER ON SHORT SALES which I tweaked as I went along, picking up information from various resources as well (such as Nolo.com)
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DEAR SELLER
Short sale is not an ordinary way to sell property and in fact, it is quite involved and time-consuming. But it can be and has been done. It is preferable in many respects to a foreclosure.
WHAT IS A SHORT SALE?
Short sale is a type of pre-foreclosure sale in which the lender allows the property securing a mortgage or deed of trust loan to be sold for less than the full amount due, and accepts the proceeds from the sale as payment in full. The lender may allow a short payoff sale due to factors such as the borrower's deteriorated financial circumstances, the property's physical condition, and local real estate market conditions.
Before clear title to real property is transferred from seller to buyer, all liens and encumbrances including, but not limited to, mortgage(s) or deed(s) of trust, judgments, property taxes, and costs of sale must be paid. While under no legal obligation, the lien holders must agree in advance and in writing to facilitate the short payoff sale.
Note: if you have delinquent homeowner association fees, your HOA can/may/will file a lien against your property and even issue a notice to foreclose. So it is best to continue paying your HOA because these fees can interfere with the short sale process.
HOW DO YOU QUALIFY FOR A SHORT SALE?
Regardless of what many short sale pros may have you believe, most lenders will approve a short sale only as a last resort to foreclosure for the following reasons:
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Borrower's insolvency
- The proposed purchase price is more than the lender would be able to sell the property after foreclosing on the loan
- The value of the property has decreased to an amount that is below the loan balance due to local and national economic conditions, OR
- The property was refinanced at a higher value based on an inflated property appraisal report, OR
- The property is in such a physical condition that it is not financially feasible for the lender to put it into a marketable condition.
Regardless of who stands to benefit from a short sale, most lenders have a very stringent hardship test that the financially distressed homeowner must meet in order to seek relief in the form of lender-approved short sale.
WHAT CONSTITUTES HARDSHIP?
Reasons why people apply for a short sale
- Unemployment
- Reduced income
- Divorce
- Separation
- Medical bills
- Too much debt
- Death of spouse
- Mortgage payment increases
- Business failure
- Job relocation
- Illness
- Damage to property
- Military service
- Incarceration
- Decline in market value (needing to sell, but property is worth less)
WHAT MAKES A SHORT SALE SUCCESSFUL?
A successful short sale involves the following steps:
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Prequalification of the homeowner, the property, the real estate market and the lender to determine if it would make financial sense for both the borrower and the lender to agree to a short sale
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Researching and gathering information, documents and data to be submitted in support of the proposal to the senior and junior lien holders (generally lenders)
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Marketing the property to find a ready, able and willing buyer/investor
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Preparing a compelling proposal indicating the benefits the lender(s) (and other lien holders, if any) stands to gain from the short sale versus allowing the property to go to foreclosure
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Submitting the proposal to the lender(s) and any appropriate entity and/or individuals
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Negotiating terms for approval
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Closing the deal.
TAX EFFECTS AND OBLIGATIONS
This is something you should discuss with your CPA and real estate attorney.
In the meantime, here are couple of links you should read to understand how short sale is taxed or not
FEDERAL http://www.irs.gov/individuals/article/0,,id=179414,00.html
CALIFORNIA http://www.ftb.ca.gov/aboutFTB/newsroom/Mortgage_Debt_Relief_Law.shtml
ARE THERE OTHER ALTERNATIVES?
Temporary Loan Relief Alternatives:
- Forbearance is an agreement to temporarily let you pay less than the full amount of your mortgage payment during the forbearance period. Mortgage companies may consider forbearance if/when you can show that funds from a bonus, tax refund, or some other source will let you bring the mortgage current at a specific time in the future.
- Reinstatement occurs when you pay your mortgage company the total amount you are behind, in a lump sum, by a specific date. This is often combined with forbearance.
- Repayment plan is an agreement that gives you a fixed amount of time to repay the amount you are behind by combining a portion of what is past due with your regular monthly payment. At the end of the repayment period you have gradually paid back the amount of your mortgage that was delinquent.
- Loan Modification is a written agreement between you and your mortgage company that permanently changes one or more of the original terms of your note to make the payments more affordable.
Permanent Loan Relief Alternatives
- Assumption permits a buyer who qualifies with the existing lender, to take over your mortgage debt and pay the mortgage payments. As a result, you may be able to sell your property and avoid foreclosure. This should not be confused with "Subject to" where a buyer takes over your payments without the lender's consent.
- Short Sale. If you can sell your house but the sales proceeds are less than the total amount you owe on your mortgage, your mortgage company may agree to a Short Sale where they will write off the portion of your mortgage that exceeds the net proceeds from the sale.
- Deed In Lieu of Foreclosure if you agree to voluntarily transfer title of your property back to your mortgage company in exchange for cancellation of your mortgage debt. This option may be unavailable if there are other liens on your home, such as judgments from other creditors, second mortgages, or tax liens.
- Bankruptcy. Most definitely, please consult your attorney and CPA. This has similar adverse effect as a foreclosure. Here's a link to an article titled "How bankruptcy can help with foreclosure"
Be aware that transferring your home to a third party will not have the same result as transferring it back to the original lender.
SETTING EXPECTATIONS
Short sale is anything but a "short" process
PATIENCE!
Selling a short sale property is a long tedious process
Getting a Loan Negotiator assigned to the case will entail many phone calls and other means of communicating
This is a more involved process than a regular sale
List price must be very aggressive in order to attract the biggest pool of buyers
The quicker we get an offer, the better the seller is protected from foreclosure
Offers tend to be lower than list price. Sellers should not take it personally
When an offer is submitted, Seller can accept...but Lender makes the final decision
PATIENCE!
It Is not unusual to wait 3-6 months for the lender to respond to an offer --- accept, reject or counteroffer. Lender may override the Seller's decision
Seller will not pay selling expenses, and will not receive any funds from the sale
Lender pays sales commissions, back taxes if any. But lenders may refuse to pay delinquent HOA fees, fines and attorney fees
SPECIAL NOTES TO THE SELLER
- You are not responsible for selling expenses. The Lender pays the realtors to list and sell the property.
- You will NOT get any sales proceeds from the sale
- Set your ego aside about how much your property is worth after what you paid for it, improvements you made, etc.
- Remember, that time is of the essence. You only have so much time to try to sell your property as a short sale.
- Get all the required documents as soon as possible so that your realtor can begin communicating with the lender and marketing your property
- Price the property aggressively to attract the largest pool of buyers so that you can get sell it quickly.
- You can accept (ratify) the contract and you can send this off to the lender; but if another offer comes in that looks better than what was accepted previously, the lender can override the your decision, and accept the offer that is financially better for the lender.
- Offer isn't ratified until the lender accepts the offer ---- it is a committed buyer who agrees to open escrow upon acceptance by the seller and before receipt of short sale approval from the lender(s).
- Always encourage and entertain back up offers.
SHORT SALE PROCESS
SELLER
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Sellers engage Realtor to list property
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Sellers inform Lender that Realtor is authorized to contact Lender on their behalf
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Sellers work with Realtor to prepare Short Sale Package to justify short sale and convey this information to the Lender
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Seller prepares home for sale, and for Realtor to list the property
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Seller compiles documents that the short sale lender requires for a complete short sale package. Typically, these documents are:
- Hardship letter
- Financial worksheet showing seller's income and expenses
- Two months most recent mortgage payments (all mortgages)
- Two months most recent most recent checking account statements (all borrowers if separate)
- Two months most recent savings account statements (all borrowers if separate)
- Two months most recent other account statements (all borrowers if separate)
- Two years most recent tax returns (all borrowers if separate)
REALTOR
- Gets letter of authorization from the Seller
- Provides must-do checklist to Seller
- Compiles all necessary documentation and disclosure for a short sale
- Prepares comparable market analysis
- Activates listing on the Multiple Listing System (MLS)
- Markets the property for sale
- Notes on the listing that this is a short sale with price and sales commission subject to lender approval
- Meets with and submits comps to BPO (Brokers' Price Opinion) agent
OFFER
- Offer is submitted to Seller who can/will accept, reject or counter offer
- Upon acceptance by the Seller, Realtor forwards the contract to the Lender for final approval of short sale and acceptance of the contract, and includes the complete short sale package (seller's documents, comparable market analysis, copy of the listing agreement, letter of authorization from the seller)
- In the interim, and until the Lender formally accepts an offer, other offers may be received and accepted as back up offers. Seller doesn't have to submit all offers and can choose which one(s) to forward to Lender.
LENDER
- Lender makes FINAL decision, and can override Seller's decision
- Waiting for the Lender's final approval can take up to 45 days or longer.
- The Lender reviews short sale package and may require other documentation to complete the sale
- Lender will appoint a Loan Negotiator to the file
- Loan Negotiator advises Realtor that Lender will get a BPO (Broker's Price Opinion) which is similar to a drive-by appraisal by a broker/realtor assigned to the case by the Lender
- Negotiator may accept, reject or counter the offer based on the BPO
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