Short Sales

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Short Sale Overview

Call Joe @ HPE Management for Short Sale help. We help both Sellers and Buyers . Call now (703) 651-9169
Joe Holbrook is a Certfified Distressed Property Expert. (CDPE) www.cdpe.com

Well you bought your home during good times and now times have changed. Your property rentals are down or youve lost your job and cant carry the mortgage.

Worse than that, the markets have changed and you cannot sell for what you've paid. Still you have no choice but to sell or foreclose. There is one possibility besides foreclosure and that's a short sale.

What is a Short Sale?

A short sale in the mortgage world amounts to a lender agreeing to accept a pay off less than the original mortgage. For example, if your mortgage was $200,000 and all your property would bring in todays market was $160,000, a lender may agree to accept the lesser amount to clear the debt. That amounts to a forgiveness of $40,000.

Why Would a Bank Say Yes?

Its a resignation on the part of the lender that this is the best it will get. Banks do not want to foreclose and they do not want to take the property (known as a deed in lieu of foreclosure). They are not in the property management business and foreclosure look bad on the books. It may even affect their ability to borrow if the lenders have too many foreclosures on the books, its not a stretch to wonder whether they have been prudent lenders.

Its not a Get Out of Jail Free Card

There are down sides to this procedure and it may not be the best alternative for you.

  1. If their is a second mortgage on the property, its not likely the second lender will agree. 
  2. The IRS will consider the $ 40,000 of mortgage debt forgiven by the bank as gross income and the tax bite may be prohibitive. You would need to talk to your adviser (just when you can afford it right?) to confirm that the tax implications of a short sale make sense for your situation.
  3. You cant fake this, you must truly be destitute. The seller will need to be in default. That is to have stopped making mortgage payments.
  4. You must clearly have no equity left in the property for the lender to agree to accept less than the full debt owed.
  5. It will be reported to the credit reporting depositories and it will remain on your credit report for 7-10 years. Its a derogatory

What the Buyer Needs to Know

  1. You must have a firm offer before you ask the lender to approve the sale.
  2. You do not have a deal until the lender approves your deal. The agreement with the seller is not the final agreement. The lender must agree to the purchase. It can be wise to create a contingency here requiring the lenders to respond within a specific time frame. This will give you a reason to back out if its dragging on.
  3. The deal can be held up because lenders often will want to re-negotiate the commission structure, even though you have signed a listing agreement with your agent.
  4. You can expect be offered the property at cost This can be very a costly so we think you should have the property inspected by a building inspector, home inspection and a termite report. If you cannot negotiate the inspection component of the sale, cover yourself by knowing what you are buying. Make the deal contingent on your approval of the properties condition.

Why Do Banks Do It

  1. Banks do not want property they want cash flow.
  2. It may cheaper and less time consuming for the bank than a foreclosure process

Why Do Owners Do It

Although its reported to the credit agencies as a derogatory, its less severe than a foreclosure or bankruptcy and may be a bit kinder on your FICO score.

If you are looking for a short sale deal you might start with the lenders a Lis Pendens list. This is where lenders start the foreclosure process.

How Do Short Sales Work?

For a start there is no simple answer because there is little standardization of the process. So, after reading a general discussion on process, you need to go to the lender and ask for their process, their time frames and their forms. It certainly doesnt help when people have urgent need to sell to avoid foreclosure, but thats the hard truth of it. 

Lets assume you know you cannot keep your house. There is simply no choice but to sell or foreclose. Foreclosure is one of those events that ruins credit and any opportunity to purchase again during better times. Now lets assume there is no doubt in your mind that you can get enough in a sale to cover your loan. 

You should approach your lender with your case and hope they will agree that this you may have to foreclose and that the market price today will not cover the loan. You will get less for your house than you owe. 

  1. The lender Agrees: to with your market analysis that the sale price would not cover the mortgage and that you have no way of paying the difference yourself. Then the lender would say that whatever the sale price is they would accept as the full payment of the loan. EG; If a home with a $600,000 loan would only get $450,000 at sale, the lender would agree to forgive the $150,000 difference and you can walk away.
  2. Choose a Real Estate Agent:  find a real estate agent familiar with the short sale process like Joe Holbrook and place the house on the market. OK, fair enough and now things are looking up. You wont get your credit destroyed and you wont owe the difference. 
  3. Hurrah! You get an Offer; Of course its below market and below the loan amount but at least you are out from under and probably feeling relieved. 
  4. Purchase Agreement: A signed purchase agreement is the first step in the sales process. Generally, you cannot pull any money out of a short sale. The only hitch so far is that often refuse to pay a real estate commission, they often want to negotiate with the buyer themselves.
  5. Approach the Lender: with the offer. Its best to have most of this done before the listing process but most lenders will require the following form you as the owner. 
    • Hardship  letter:  You must really be destitute or close. The lender will not forgive any debt otherwise. This letter must show clear proof that you cannot continue to make house payments or pay the loan in full.
    • Financial statements: a list of your assets and liabilities, tax returns, bank statements, proving you could not continue to pay the mortgage
    • Release Letter: Giving the lender the authorization to release information so that the purchaser can negotiate directly with the lender.
    • A copy of the listing agreement: Basically, they want to see proof that the house is really on the market and that there is a bona fide buyer in the wings.
    • Attachments: All other debts related to the home, such as second mortgages, property taxes due or liens attached
  6. The Appraisal: The lender will do this.

Some Final Thoughts

Be sure to have all your paper in order and ready for the lender. They are so backed up and under staffed that this can take up to three months even if everything is perfect.

We have been hearing that even if the bank agrees to the short sale they are sometimes backing away for reasons of their own. The lenders agreement to a short sale is not contractual. Even so, you dont want to lose your buyer waiting for the lender to come to the table.

* The amount forgiven on the short sale is taxable to the IRS, still this is better than foreclosure and the ruination of your credit.

Call Joe @ HPE Management for Short Sale help. We help both Sellers and Buyers . Call now (703) 651-9169