Short Sale or Not to Short Sale

By
Real Estate Agent with Keller Williams Consultants Realty 2003013006

That IS the question.  So What Is A "Short Sale" Anyway?

A short sale is when the bank agrees to take less than what they are owed on a mortgage and forgive some of the debt in order to avoid foreclosure.  The key is "to avoid foreclosure". 

In this 21st Century market, many home owners that purchased their homes anywhere from 2001-2006 have come to find out that their values declined.  VERY disappointing when so many were promised appreciation by super charged sales reps, real estate agents and mortgage lenders.  But the best thing to do if you can ride out this market is NOT TO MOVE - at least for now.  Homes historically are a long term investment.  Inflated appreciation during those years was a way of the market, not the representative.  Pay your mortgage on time and stop bellyaching that your timing was off and you purchased a home in an up market. You made the decisions, signed the papers and own your home - or at least you pay for a mortgage on the home and the bank holds your deed. It is easy to point fingers are whomever sold you the home, but what is done is done.

Another reason for distress for home owners losing value was the "second mortgage" boom.  Home equity lines of credit, consolidation loans that use your home as collatoral - once upon a time these were called "second mortgages" - and they still are.  In order to sell your home, your current home MUST be paid off (at least in Ohio).  This means that you used up your equity. If you did not have that loan to pay off, you would be taking away that money today in a sale. 

When home owners think about making a move, it may come as a big surprise to them that they owe more than they will get on today's market.  And there are expenses to sell as well. About 8-15% generally (or to put it simply 8-15 cents on every dollar).  So with this discovery and the desire to move for whatever the reason, home owners are getting angry. Angry at the bank, lender, appraisers, Realtors, tax man - whoever.  But the only answer now is to look at the whole picture and see if moving on is a good route now.

SO, many are tuning into the web and news to learn about "this short sale thing".  And some are even so angry that they go to extremes to not pay their mortgage, wreck their credit and anticipate foreclosure.  Anger at market conditions is not a reason to consider short sale.  Pay your bills, improve on your home and stay put.  This whole "just walk away" hype (if you've seen it) is childish and irresponsible.  It's as silly as not making your car payment because gas prices are too high or screaming at the clerk at the mini-mart for the same.  As unfortunate as it is, many people are really stretched in their budget now.

It all started somewhere.  And yes, some people were misled to believe their monthly payments would be less than they anticipated by ambitious or misinformed sales people.  Some ambitious lenders qualified home buyers on the start up lower payments available with special loans and not for the payments they would maximize out at a few years later.  Some ambitious lenders provided loans for far more than the homes value with the second mortgage boom.  Some ambitious lenders qualified buyers on what they told them they had for income (fudged the numbers) and did not thoroughly check out the real numbers. At the time, no one thought twice about it, the programs were available, the government insisted that lenders have programs for credit challenged potential homeowners and it was common in the business.  And everyone wants the American Dream, we all want what we want and we want it now - instant gratification.

The Short Sale IS an option for someone truly in hardship.  Whether is was due to one of the above "just plain in over your head" loan reasons, a divorce, job loss, illness - the truth is that when a person gets behind on the mortgage and wants to work it out and save some face and credit the short sale may be the answer.  The process IS NOT an easy one, there is no "instant gratification" answer. A short sale is not the "silver bullet" to easily relieve you from your debt.  As a consumer, the first step to take when you see truly you cannot pay the mortgage is to call your lender. Ask for the loss mitigation or loan work out department.  Please be leary of companies that are charging an up front fee and including the negotiation of your home's short sale in their program to consult or consolidate you out of debt. That is a brand new industry with no regulations - you should consult an attorney to review your rights.

Take out that envelope you have not looked in since you closed on your house and read over your mortgage.  See what sort of penalties that you may be facing and what can happen when you are in default on the mortgage loan.  Banks do not want your house back! Many times they are now refusing deed in lieu of foreclosures. Ultimately, they would like to see you get up to date and some may re work you loan to make it more affordable if you have not moved out of the home.   The foreclosure process for lenders is extremely expensive.  And today, they are overwhelmed with requests - be patient in working to reach the right person and ask for a short sale package.  If you do not get it in a week, call back again - and get on the horn to some of the best Realtors in your area to see if they will consider taking on the short sale with you.

It takes tenacity and team work between you and your agent to get to the right person at the bank who will help you get the job done.  Do you know why you need an agent to help you?  Because not only will you need someone to market and sell your home quickly at a very competitive price, but the agent will have to communicate with your lender(s).  The agent can help you put the package of paperwork together to prove your case on why the bank should take less than you originally agreed to pay. A hardship letter, net proceeds of the sale, prove market conditions through professional analysis, bringing offers the bank will review and accept with their requirements.  A long list and hard work.  Many times with larger banks, it can take 6 weeks or longer just for the completed package (which can be a challenge in and of itself) to be assigned to a negotiator to work out the loan.

And just to note too, the agent is taking a risk that they will get a reduced fee paid to them, or not be approved at all, yet with a lot of extra work.  It takes a dedicated agent that knows the market, has strong communication skills and what they are doing. Not a job for your friend who just got their real estate license or for a part time agent who has never done a short sale.  The bank will be taking a loss, but only if they agree to do it.  The bank takes time to look at offers because they have to weigh how much the short sale would possibly save them rather than having the home go to sheriffs auction* repairs and fees to re-sell. You must be honest with your agent it you know that your home is on the way to sherriff's sale. (And if someone promised to pay you for something they were using of yours, you would be reluctant to take less too, wouldn't you?)  Keep in mind, "the big bad banker, builder or agent" did not force you into this situation. When you call for help, be kind.  You know the old saying "you get more flys with honey".

(*a side note here to buyers on sheriff's sales - generally the bank will start the bid and send reps to buy the homes back to acquire the deed. The homes are not open to look at and inspect to buyers or Realtors, are generally in awful condition from sitting vacant for months or even years and can have liens that must be paid by the buyer - a good deal for investors and handymen with financial resources, but not in "move in condition" to live in right away as a general rule. And if you win the bid, you must have 10% down and a financial plan to pay on auction day)

Something else you should know is that you, the former owner, can be taxed as income on the amount that the bank forgives you.  So as an example, if your $180K mortgaged house sells for $160 and their are selling expenses too, you may end up taxed on as much as $30K or more.  The government is trying to work through some programs that may provide relief for this, but so far, not a definite unlimited yes.  You may owe the IRS when you file your taxes that year - and that is something you most certainly do not want to tangle with.  Be sure at your closing to ask the bank, title rep and a tax professional about this.  Surprises are not good when you are trying to bounce back financially - and I am sure you have had your share of "bad surprises" if you are reading this.

If you have a second mortgage or equity line, this complicates matters more and essentially you and your agent must do the whole process twice.  The second mortgage lender may or may not forgive the loan and you may be left having to finance your debt into an unsecured loan (a signature loan) if you have the credit and resources to do it. If you do not have the resources to do that, the second lien holder can stop the sale by not forgiving the loan. They have to be convinced too on the idea this is a better answer for them than foreclosure. And your credit will suffer, but not like a foreclosure or bankruptcy on your credit history.  With lessons learned, you can be back on track in as little as 2 years as long as you pay your bills on time and watch your spending.

Sounds like a lot of work and trouble, doesn't it? But consider the alternative.  If you are foreclosed on, with the recent tightening of lender requirements, it could be 10 years before you are eligible to buy another home.  Do you know where you will be in 3 years, 5, 7, 10 years?  You can have judgments and other liens against you for years too.  Doesn't it make sense to put yourself to work at something that will get you out of that dark cloud and let you move on with your life sooner?  Isn't it a shame that it is so much harder to get out of it than it was to get in?  Such is life. And I know from working for years with many people that good work ethic and pride does still exist here.  Taking a temporary ego hit beats every time a decade of getting denied for credit and financial worry.

For buyers in this market the short sale can be a great opportunity. HOWEVER, it will take patience on your part as a home buyer for the process to work.  A short sale IS NOT for someone that needs a place to live in 30 to 45 days, it is generally NOT FAST.  Homes that are short saled are sometimes some of the very best buys because they are generally in move in condition and priced below market.  The home owners have loved their homes, are sad to go, but thankful for qualified buyers willing to wait while the details are worked out with their bank.  Buyers agents too must know what to expect, not over promise and bring the buyer's offer with a preapproval from a mortgage lender. The offer cannot be contingent on the sale of a buyers current home. Much of the waiting will be out of control of the seller or their agent.  And sometimes a buyer's agent may have to share in the income loss by sacrificing some of their fee as well.  So it also takes a dedicated, experienced buyers agent and understanding home buyers for this to work.  Short sales are not a playground for ruthless negotiations and demanding time constraints.  The selling bank will really be the one in charge and all parties will have to be willing to let that happen and go with the flow to end with a successful closing.

And one more thing. . .in today's market, when you are a seller, whether you are fortunate to take away some equity, can come up with your own money to clear the debt OR have help from the bank with a short sale package. . .you cannot take personally low offers on your property.  Being offended by low offers is self defeating and will not lead you to meet your goals.  You need to buck up and get over that and counter offer as reasonably as you possibly can.  Especially with short sales, you do not know what the bank will accept and until you get their go ahead after the extensive package and contracts are presented.  Remember, with short sale you are getting assistance and just barely escaping foreclosure if you are fortunate enough to get the transaction completed.  Buyers WILL see short sale as desperation to sell.  You MUST put your personal feelings aside and cooperate as a team member with agents and the buyer to get the job done.  This will include maintaining the property, including the expense of utilities, whether you are living there or not until the sale process is complete.

Hopefully I have shed some light for you on what the process is, is not, and some details on how it works. There is a lot of gray area, no monitored regulations on the banks to promptly respond, and can be surprises for even the most experienced agent. I am no way offering this information as an attorney or member of the legal profession, but from the perspective of a Realtor. Again, you should get the assistance of a good attorney to answer your questions if you feel a short sale is for you.  

This information was put together as a reply to many of the questions that I get daily.  If I can help you within a 30 mile radius of the Marysville, Ohio area, feel free to call me at 937-644-3385 or 614-440-5174 or send an email to me at vicki_owens@hotmail.com  All information is kept confidential and there is no need to feel embarrassed or alone.  This is the state of the real estate market and a natural economic correction.  You are definitely NOT alone, should set the ego and emotions aside, get the bull by the horns and take some action. 

Copyright 12/2008 By Vicki E Owens, ABR, CRS, GRI, Andy & Associates Realtors.  For more information about my services, visit my sites at www.vickihelpsu.com, www.listitagain.com and www.movetomarysville.com Direct: 614-440-5174

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