Short Sale

Unfortunately, short sales are a reality for home owners who owe more than their property is worth.

Why did it happen? They owe on their mortgage and home equity loans more than their home’s market value is. If you are considering selling your home and find yourself in an Upside Down situation, you are welcome to the world of short sales.

Home prices, home-equity credit lines, 100-percent financing that sucked out equity, and spiking interest rates on adjustable mortgages are converging to create a regrettable, but expanding, niche in the real estate practice - the short sale.

To help you gain a better understanding of short sales and what it takes, we took a look at some of the most common questions on this topic that you likely will face today. Armed with this information, you can decide whether short sale is an avenue for you to resolve your problem.

What is a short sale?

A short sale occurs when the net proceeds from the sale of a home are not enough to cover the sellers’ mortgage obligations and closing costs, such as property taxes, transfer taxes, and the real estate practitioner’s commission. You are unwilling or unable to cover the difference.

Some — although by no means all — short sellers may also be in default on their mortgage loans and be headed for foreclosure. However, home owners who bought at the top of the market or who took out large amounts of equity with a refinance and who now need to sell because of divorce or job transfer may also find themselves upside down, owing more than the home is currently worth when closing costs are factored in.

Tip: Losing your home can be very emotional and most people don’t want to face up to the reality until foreclosure sets in. You have keep yourself focused on getting forms and paperwork completed.

Other sellers simply don’t understand that if they have assets, such as stocks or a high-salaried job, a lender is not going to let them just walk away from a short sale without signing a note to repay what they owe.

How do I know it’s short?

A CMA (Comparable Market Analysis) will be your first indicator, but you also need to ask yourself what is your outstanding debt and calculate the cost associated with a sale — from transfer taxes to commission. This will give you an estimate of the net proceeds that will be realized, often called the net sheet. This information can then be used to calculate the final, negative result at closing. If you they can afford it, you should also consider getting a home inspection to determine what repairs are needed on a home and how this might affect its value.

Tip: Sign a brief letter to give all mortgage holders the permission to speak with your agent. Otherwise, privacy laws will prevent them from talking to anybody about your loans.

Who do I and the agent need to talk to about the problem?

If there are a first and second mortgage or a home equity line of credit, you may have to talk to more than one lender to get approval for a short sale. In addition, you may also need approval from the entity that holds the pool of loans if the mortgage has been securitized.

The presence of two lenders makes a short sale more complicated since it’s often the lender holding the second, or junior, mortgage that has to absorb most of the loss.

Most experts suggest that we let the lender involved know as soon as possible of the potential short sale. Others say we should wait until you have an offer because without a viable purchase offer, your deal won’t be considered by Mortgage Company and you’ll get no action until then.

Tip: Finding the decision maker at the lender’s operation is often one of the biggest initial challenges in short sales.

What information will the bank need to decide whether to accept a short sale?

The sellers’ submission package should include W-2 forms from employers (or a letter explaining the seller is unemployed), bank statements, two years of tax returns, and other financial documents outlining income and debt obligations. The bank will also need comps or a broker’s price opinion showing an estimate of value.

In addition, the sellers should submit a “hardship letter,” explaining the circumstances that make it impossible for them to pay the full amount of the loan. The seller needs to be able to show true financial hardship. Someone with the assets or the income to pay is unlikely to be considered.

Tip: In preparing the package, be careful about discrepancies between the your income and the income used to obtain the loan. A big gap may indicate mortgage fraud, unless employment circumstances have drastically changed.

What are the options besides a short sale?

Thanks to programs such as those proposed by Fannie Mae and Freddie Mac to assist subprime borrowers, many lenders are more willing to offer loan modification options. This option can extend the term of the loan, add on delinquent payments to the loan principal, and/or reduce the interest rate to make the loan more manageable for the home owner.

Another option is a repayment plan that requires home owners to increase their monthly payments until the loan is current. It may be possible to refinance an adjustable rate loan with a Federal Housing Authority or conventional fixed loan. Note that lenders will not postpone a foreclosure just because a property is listed, although they may postpone if you have a reasonable offer in the works.

How should I price a short sale property?

In general, most short sale experts say to price the property at or near fair market value, although a few will begin with the total payoff amount owned by the seller. How frequently prices are dropped will depend in part on whether the property is in pre-foreclosure. Most banks have a formula for what percentage under market value they will accept, say interviewees. Figures cited vary from 8 percent under to almost 20 percent under.

Tip: Most lenders will want to get a broker’s price opinion or even an appraisal to see what the property is worth before you and seller set a list price. One way to help ensure that the bank’s estimate of value is realistic is to offer comps of recent sales — both traditional and REO.

How long does it take to complete a short sale?

Although response times vary from lender to lender, it can take two weeks or as long as 60 days to receive an approval of a short sale from a lender. That’s why it’s critical that buyers and their representative understand and accept that time frame before they make an offer.

Properties with securitized loans (which are the majority these days) may require a longer time to get an approval of a short sale because of the possible need for approval from the entity holding the pool of securities.

Tip: Keep in mind that the purchase contract on a short-sale property is a legally binding agreement once the earnest money has been deposited. Without the right language in the contract, the seller may face a legal problem for failing to execute the contract if the short sale is not approved.

What can the agent and I do to make a short sale more attractive to a lender?

Getting a lender to approve a short sale is primarily a question of economics. We have to provide hard numbers to show that the amount of money a bank will realize on the short sale is better than the amount it may recoup from foreclosing on the property and selling the property as an REO (Real Estate Owned).

Tip: A buyer that is willing to close in 30 days and who can make a substantial down payment may make the deal more attractive than a buyer who wants 95 percent financing. All buyers should be pre-approved for a mortgage before submitting the offer.

What are my options if a short sale is rejected by the lender?

There are a variety of reasons a bank will reject a short sale — from too low a price to too many short sale files on the desk. Banks don’t want to take properties back in foreclosure, so they are going to do everything they can to make it work. You also need to prepare yourself in advance for the possibility of foreclosure if a short sale fails.

Tip: A short sale might be rejected if the loan is less than a year old. In such cases, the servicer that’s bought the loan can often require the original lender to buy it back.

What financial or credit liabilities will I have as a result of a short sale?

Many lenders ask sellers to sign a promissory note for all or part of the difference between the proceeds of the short sale and the debt obligation as a condition to a short sale.

Tip: Having a portion of a loan forgiven may have an adverse affect on your credit. Therefore, try and sign a lease on an apartment before credit is further damaged.

What tax liabilities will I have as a result of a short sale?

One often overlooked aspect of short sales is that a seller must count any amount forgiven by the lender as income and pay taxes on that income, even if no actual money was received. The IRS requires lenders to submit a Form 1099 stating the forgiven amount. Sellers who meet the Internal Revenue Service definition of insolvency (either in bankruptcy or with debts exceeding assets) will not have to pay taxes on the forgiven amount.

Tip: The U.S. House of Representatives has introduced the Mortgage Cancellation Tax Relief Act (H.R. 1876), which would eliminate taxes on any debt forgiven on a principal residence through either short sale or foreclosure. The NATIONAL ASSOCIATION OF REALTORS® has been working to support this bill.

Is short sale for me?

With many more adjustable rate mortgages ready to reset to higher loan amounts in the next couple of years, short sales represent a growing sector of the market. However, because short sales are complicated, you need to be represented by an experienced agent which is a problem solver and have the right knowledge, patience, and persistence.


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