By Rick Sheppard, January 2019
Sometimes bad things happen to good people
There are various reasons why homeowners run into financial problems with their homes. You may be having trouble keeping up with your mortgage payment(s). 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, utility bills, and home repair expenses have gotten to be too much for you. It’s true – sometimes bad things happen to good people. And it may be time to sell your home. And if the property is overleveraged with debt, you’ll need to sell it as a short sale.
There are five common reasons why you may need to sell your home:
- You filed for bankruptcy and it has been dismissed.
- You have an approved bankruptcy plan in place and you are unable to make the required payments.
- You applied for a mortgage loan modification with your lender and it has been denied.
- You have an approved mortgage loan modification in place and you are unable to make the required payments.
- You haven’t been able to find a lender who will refinance your existing mortgage loan.
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 short sales in 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” or “overleveraged”), 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 the 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 with your lender 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 the extensive experience that comes from successfully negotiating numerous short sale transactions. A real estate agent should be willing to provide you with a list of their successfully negotiated and closed short sale transactions. I’ve helped over 80 homeowners sell their home as a short sale and would be happy to provide you with my 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.a
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 that you’re working with a seasoned short sale real estate agent.
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 (seller) 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. But some lenders will pay a “relocation incentive” to the borrower at the title transfer closing – something in the neighborhood of $1500-$5000. The idea is that this money is to be used by the borrower to help with moving expenses and assistance with a rental security deposit. There’s no guarantee here but be sure that whoever is negotiating your short sale includes “relocation incentive” in the short sale package. You definitely won’t get it if you don’t ask for it!
What if the Short Sale doesn’t work?
In today’s complex and chaotic real estate market there can be a number of reasons why a home does not sell and why a short sale doesn’t get approved. Again, there are no guarantees but you’ll increase the likelihood of success if you have a seasoned short sale real estate agent guiding you through the process. And if a short sale doesn’t work? You and your property will likely end up back in foreclosure and eventually on a sheriff sale list.
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. Please check with your accountant or financial advisor regarding this. 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 accountant or financial advisor. Another way to address any tax consequences: you may be considered insolvent.
How can I as the homeowner help?
The lender will require from you financial documents such as recent pay stubs, recent bank statements, last two years tax returns, possibly a financial hardship letter, and various other documents. Also, access to your property will be needed so that an appraisal can be performed.
You may be thinking bankruptcy is an option
Bankruptcy is a reorganization of your debt and attorneys will charge $1500 to $3500 to start the bankruptcy process. But if you’ve attempted a loan modification with your lender and were unable to maintain the payments or you were denied a loan modification then it seems unlikely you’ll be able to maintain the payments in a bankruptcy. And that will put you right back into foreclosure, $1500-$3500 poorer. Bankruptcy may not be the best option if all you want to do is postpone your sheriff sale. I can help you postpone the sale, extending your time in your home, 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 your home sold and the short sale package processed and approved.
Also, 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 in PA. If you’re facing foreclosure you can again have peace of mind when your home is sold as a short sale.
The author, Rick Sheppard, is a licensed real estate broker in Pennsylvania and a 30 year veteran of the real estate trenches. He knows a lot because he’s seen a lot. If you have any questions about this or any real estate related topic, feel free to contact Rick at [email protected] and he’ll do his best to answer your questions.