What a question to ask. Of course they are, right?
You may want to consider the following questions before making the final decision.
- Does the seller owe more on their home than the current market will bring?
- Is there a pre-payment penalty on one or both of the payoffs that will add a substantial amount to the bottom line?
- Does the seller have a valid hardship for why they cannot make their monthly mortgage payments?
If the answers are yes, then you most likely have a good candidate for a short sale. Look further into the situation and you may find the following:
- There are two loans on the property. Is the 2nd a HELOC?
If the 2nd is a HELOC keep in mind that these are the toughest kind of loans to negotiate a short sale with. Most of the time the lender will want the seller to sign a note to payback the difference owed. Don't fall into this trap! Keep negotiating, getting the lender to release the loan without that note can happen and usually does.
When you are dealing with two loans on the property you will need to look at the value of the home and determine what amount a potential buyer will bring. Remember you don't work for free so be sure to include the commissions and closing costs when estimating. Check with your escrow officer or title company to get their fees correct as well. Take into consideration whether there is an HOA and the possiblity of Liens and/or Judgments on the property. Most lenders will allow $1,000 to be paid towards these items so you may need to negotiate with the Lien and Judgement holders.
What is the benefit to my seller in doing a short sale?
- The home is sold and the lender is paid off.
- There is no out of pocket cost to the seller since the lender absorbs the costs of the sale into their discounted payoff.
- The sellers credit score is protected from a foreclosure (a foreclosure would stay with them for 10 years).
- The seller can move forward without having to worry about their house or mortgage(s).
- Many sellers that participate in a short sale are able to purchase another home within a year. The majority will purchase a new home within two years with no major complications.
How do I approach my seller with the possibility of a short sale?
- Sympathetically, keep in mind how you would feel in this situation. Let them know they are not the only one in this situation. Try and make them feel better about it, remind them of the benefits.
- Show them that they owe more on the home than the home is worth.
- Show them the other homes in their area that have been on the market for x number of days and haven't sold due to the higher price being asked.
- Let them know the lender may be willing to accept less that what is currently owed.
- Let them know a short sale affects their credit much less that a Foreclosure or Deed in Lieu.
The Lender will report a short sale to their credit as "loan paid not as agreed". The most damaging part will be the amount of 30, 60, and 90 day lates they have accumulated due to missed payments prior to paying the loan off. A foreclosure will affect the sellers credit for 10 years. A Deed in Lieu has much less of an effect on their credit than a foreclosure but will still not show as a "paid" on their credit.
Once your client has agreed to the short sale get the listing and get it on the MLS as soon as possible. Be sure to check with your broker for any contingencies or addendums they may require you to include in your listing agreement or purchase contract.