What you need to know about a short sale?
Your mortgage loan modification was just denied by your lender and you realize that it’s time – you need to sell your home. Maybe you aren’t able to keep up with the mortgage payments. Maybe you can keep up, but it requires you to work 2 jobs and you just can’t maintain that pace anymore. Maybe you can manage to pay the mortgage payment, but the real estate taxes, property insurance and home repair expenses have gotten to be too much for you. Yep, it’s time for a short sale.
So how do you go about selling your home as a short sale? You met with a few real estate agents but they crunched some numbers and told you that your mortgage debt and selling costs total more than your home is worth. You did find one agent who said she might be able to sell your home as a “short sale”, but she emphasized that there are no guarantees. You’ve heard bits and pieces about a short sale on the news, but you really don’t understand what they are. So you do some research…
What is a Short Sale? A Short Sale is a negotiated settlement or short pay and occurs when a lender agrees to accept less than the total amount owed to pay off a loan against real property. If the property is worth less than the amount owed on the loan (sometimes referred to as being “upside down”), then even if the lender forecloses and takes back the property, they will eventually take a loss. A lender can be convinced that they will be better off financially if they take less than what is owed now rather than taking the property back through foreclosure and trying to sell it later.
How long will this process take? The Short Sale negotiation process is generally lengthy and complicated and can take anywhere from 1 month to 3 or more months to get an approval. There can be a variety of steps that the lender will need to take in order to get final approval. Patience from all is very important. It also depends on who’s negotiating your short sale (be sure to read my blog on this).
My property is in foreclosure. Will there be enough time? There’s no way to know for sure. The act of starting a Short Sale will not automatically stop a foreclosure. Many times, though, a lender can be convinced to postpone the foreclosure to allow time to process and negotiate the Short Sale package. There are no guarantees but there is also no harm in attempting to negotiate with a lender. It’s very important to hire a real estate agent who has successfully negotiated numerous short sale transactions. A real estate agent should be willing to provide you with a list of their successfully negotiated short sale transactions. I’ve helped over 70 homeowners sell their home as a short sale and would be happy to provide you with a list.
Can I stay in the property? As the term implies, a Short Sale is a sale of real property and you will need to move out prior to the final settlement. It is important that you make plans as soon as possible to seek new lodging and to have your personal property moved.
How do I know this will work? This is an easy one – the answer is “you don’t”. There is absolutely no guarantee that a Short Sale package will be accepted by a lender. Once you’ve missed a mortgage payment, the lender has the right to initiate foreclosure proceedings if they care to. The key here is that a lender can be convinced that a Short Sale is a better financial decision for them vs. following through with… and incurring the cost of… foreclosure. Again, it’s extremely important you’re working with a seasoned short sale realtor.
Will I get any money from the sale of my property? Another easy one – the answer is “maybe”. A standard lender requirement in accepting a Short Sale is that the borrower (homeowner) may not get any proceeds from the sale of the property. The lender will be taking a loss in a Short Sale and they will not allow a borrower to get any money accordingly. Many lenders are now offering relocation assistance monies or HAFA. To learn more about this please contact me to discuss.
What if the Short Sale doesn’t work? In today’s chaotic real estate market there can be a number of reasons why a home does not sell. I can’t stress this enough – It’s especially important that you have a seasoned short sale real estate agent guiding you through the process. Your realtor should be willing to provide you with a list of the addresses of the homes they have settled as a short sale.
What is a Release? A lender may offer to “release” its security interest against the property in exchange for less than the total owed on the note. This will allow a property to be sold without paying off the obligations of the note. The note is not satisfied, though. Advantages: this allows a property to be sold, thereby avoiding a sheriff sale. Disadvantages: the remaining debt, or deficiency, still exists and the borrower is still liable for this deficiency. At this time, the mortgage debt forgiveness act of 2007 has been extended through 2016. Please check with your accountant for eligibility information. But know this: if you don’t attempt a Short Sale and the property is sold at the sheriff sale, you’ll very likely have a deficiency anyway. A Short Sale keeps more of the control in your hands rather than in the hands of the court system.
What is a Satisfaction? A lender may agree to accept less than what is owed as total satisfaction of the note and release its lien against the property. Advantages: the debt is paid off completely at the time of the sale. Disadvantages: there may be tax consequences that you should discuss with your tax advisor. Again, be sure to check out whether you are eligible for a mortgage debt forgiveness with your accountant. You may also be considered insolvent.
How can I as the homeowner help? The lender will require from you financial documents such as: two months’ pay stubs, two months’ bank statements, last two years tax returns, a hardship letter, and various other documents. Also, access to your property will be needed in order for an appraisal to be performed.
One last thing…
You may be thinking Bankruptcy is an option. Bankruptcy is a reorganization of your debt. If you’ve attempted a loan modification and were unable to maintain the payments or you were denied then you probably won’t be able to maintain the payments on a bankruptcy. If you were unable to maintain payments on your a loan modification or bankruptcy you will end up right back in the foreclosure process exactly where you left off. Attorney’s charge $1500 to $2500 to file bankruptcy. Bankruptcy is not a good option if all you want to do is postpone the sheriff sale. I can help you postpone the sale without costing you anything. More information about bankruptcy can be found here.
If you have questions or need help, just ask me! The intent here is for everyone to work together as a team in getting the Short Sale package processed and approved.
Final note: Do not hesitate to contact an attorney and/or a tax advisor at any time if you have legal and/or tax related questions. And if you have further short sale interest or questions, feel free to contact me – I have extensive short sale experience. If you’re facing foreclosure you can again have peace of mind when you’re home is sold as a short sale.
by Rick Sheppard