As a South Florida Listing Broker, I am often asked questions by Sellers considering listing their home as a short sale, so I thought that I would post a short Q&A with very basic answers. By no means is this an all inclusive, but I believe it’s a good starting point. Below find Green Realty's answers to the most frequently asked short sale questions.
Q. What is a short sale?
A. In a short sale the seller’s lender(s) agrees to accept less than what is owed on the loan for the property, and therefore it is contingent on the lender(s)’s agreement called a Third Party Approval.
Q. How do I know if I qualify for a short sale?
A. The three basic requirements to qualify for a short sale: Hardship, Monthly Shortfall and Insolvency:
1. Hardship examples: Divorce, death, disease, disability, job loss, reductions of hours/salary, forced relocation, etc.
2. Monthly shortfall: Monthly income is less than monthly obligations.
3. Insolvency: Seller cannot have assets that can be liquidated or used to cure the debt or monthly short fall.
Q. I have a little bit of money still left in my account. Will I qualify for a short sale if I have a hardship and a monthly short fall?
A. Yes. You don’t have to be completely broke to qualify for a short sale, but if there is a good amount of money on the distressed homeowner’s possession, the mortgage holder is likely to ask for some (or all) of the amount in exchange of releasing the mortgage and the note.
Q. I have no hardship, but need to sell. Will I qualify for a short sale?
A. Yes, you can try. However, take into consideration that the lender will see that you have the means to keep the home, so they are very likely to ask for a financial contribution to approve the short sale. You can argue that it’s better for you to short sell than allow the home to go into foreclosure. In my experience, having just one loan or short selling an owner occupied home is easier to do, and with less financial consequences; a 2nd mortgage or an investment property may complicates the situation.
Q. How long does a short sale take?
A. There is no standard short sale process used by lenders, and each lender has their own method and timeline to process a short sale. After the lender receives a complete short sale packet with an offer to purchase the home, the lender usually requires anywhere from 30 to 120 days to process the short sale. The sale must close within 30 days from the date the lenders issue the demand letter (aka approval letter).
Q. Is the seller’s lender involved in the offer/contract on a short sale?
A. No. The Contract is between the buyer and the seller. The seller still owns the home, so the seller is the only person who can accept an offer (execute). The lender isn’t part of the offer discussions, isn’t in a position to negotiate the terms of the contract (down payment amount, number of days for inspection, closing day, etc.). The seller's lender approval to let seller sells the home for less than what is owed is a contingency that must be met in order for the sale to go through. The seller's lender only verifies that the seller is a candidate for a short sale, and accept, counter, or reject an offer, terms of the approval in exchange for releasing the mortgage and the note of the home. No offers are sent to the lender, just executed contracts that have been accepted by the seller.
Q. Should the seller sign multiple offers and submit multiple offers to the lender?
A. No. It is very common for my listings to receive multiple offers. When that happens, I ask the buyers to sign a multiple offer disclosure divulging that there is more than one offer being presented to the SELLER. The disclosure provides the buyer with deadline to submit their best and highest offer. On the deadline date, I present all offers to the seller, and the seller chooses the best and highest offer. The seller then executes the offer, and that contract is then sent the seller's lender for approval. The remaining offers can remain as a back up offer if the buyer chooses so. I’m aware that some agents do submit multiple contracts to the lender to see which one they would choose. I would never advise my seller to do so, as a home cannot be sold to more than one purchaser. Submitting multiple offers to the lender leave the seller open to a lot of liability if another buyer chooses to enforce their contract.
Q. How do lenders view multiple offers submitted on a short sale?
A. As mentioned above, there is not one set of rules that all lenders follow. However, it is my opinion that asking a lender to take a huge loss while submitting multiple contracts (which shows enormous interest on the home) is contradictory in fact. I have had this conversation with many loss mitigators, some supervisors, and loss mitigation department directors, and I can share that many, MANY loss mitigators will NOT work on multiple offers. To quote one mitigator I spoke to, "I am not a Realtor nor am I the owner of the home, and I should not be doing their jobs". He followed that sentence with, "If I receive more than one offer, I do not know which offer to work on, and I have to close the file". It makes no sense, in my opinion, to waste time while opening up the Seller to liability. The most effective strategy is to send the best and highest offer to the lender for approval.
Q. Will my lender require me to sign a note making me responsible for the remainder of the loan?
A. It is my experience that if there is only on loan on the home, the sellers have not been asked for a note. If the seller has a second mortgage on the property, it is likely that the lender holding the junior note (loan) is going to ask for a contribution from the seller. As the number of short sale listings rise rapidly, the second mortgage holders are getting tougher to deal with. The seconds are requiring as much as 10% of the loan amount at closing, and sometimes are asking for a lump sum or an unsecured note for the difference of what the first lien holder is giving them and what they’re asking for. If the lenders see that the seller can contribute to their loss financially, they may ask for a contribution. This is honestly changes case by case, lender by lender.
Q. Can the note be negotiated or waived?
A. Yes. This is determined on a case by case basis and not guaranteed. The note may be waived without any financial contribution from the seller, or the lender may ask for cash at closing to waive the note, or a promissory note (usually 0% interest), or a combination of cash at closing and a promissory note. This truly is depends on your investor and your financial circumstances.
Q. Are there tax consequences between the amount that is owed and what the house sold for or are the sellers forgiven?
A. On primary residence, the seller will receive a 1099C (C = Cancellation of Debt). Congress passed a law on December 2007 that will absolve that 1099C amount (up to 2 Million Dollars) on the short sale seller of a primary residence. The seller does not have to pay income taxes on the difference between the acquisition costs of the home and the short sale amount This law expires at the end of 2012. Please visit this link for more information: http://www.irs.gov/individuals/article/0,,id=179414,00.html I strongly recommend that my sellers consult with a CPA or a Tax Attorney to examine their particular situation, as I am not a tax expert.
As a final note, there are programs aimed at helping distressed homeowners close as a short sale instead of letting the home foreclose. The government has something called the HAFA program, FHA has their own program, and many lenders now have proprietary programs to help homeowners. They all have different requirements and timelines, and can be discussed further with your Agent.
If your or anyone you need need help, please do not hesitate to call me.
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