What is A short Sale?
“Any sale of real estate that generates proceeds that are less than the amount owed on the property. A real estate short sale occurs when the lender and borrower decide that selling the property and absorbing a moderate loss is preferable to having the borrower default on the loan. It is, therefore, an alternative to foreclosure.”
In simple words you must get rid of your home if you owe $600,000, but the worth of your home is just $500,000 and the bank may approve a “short sale” and allow you to sell your home for a lower amount.
The Short Sale Process
The process of a short sale is not always a happy event, but following the proper procedure can reduce the frustration and stress attached to the short sale. Below given process will guide you step-by-step, but keep in mind that all the lender and banks may have a slightly different process, so use this as a general guideline, but don’t bet your life on this information
Before staring the process of short sale, it is better to consult some attorney in your area or that you can trust. Short sale agent will be leading the short sale process, but he or she may not be able to give the legal opinion. Each case is different and with the legal and tax challenges, it’s important you understand your options and consequences.
Here are the steps of short sale process.
Find and Experienced Short Sale Agent
The selection of short sale agent is critical for the success of short sale process. You should choose and experienced short sale agent to deal with short sale. Short sale is a complicated and time taking process and an unexperienced agent may not be able to bring the success instead he would be making your difficult. To find good short sale agents, make sure you do your research and ask the proper questions to narrow down someone who will understands the caveats of pre-foreclosure and can steer the homeowner clear of potential pitfalls.
Here are a few things to consider:
- How long short sale agent has been doing short sales? (Minimum 3 years’ experience should be a requirement)
- How many short sales he has been involved in? What is success rate?
If they claim 100% success rate, it’s to run for hills. No one has the 100% success rate and it should not be like this because short sale always does not seem to be the best option. This is where “knowledgeable” vs “just earning a commission and advertising how awesome I am” vary greatly.
- What makes him or her the best short sale specialist for me?
You are looking for feedback like accreditations, experienced team in place, can point to additional resources, has worked with your lenders, can point out pitfalls, can negotiate effectively on your behalf, and overall, are upfront and realistic. You can also check the BBB, local Realtor board, and online reviews for complaints and feedback as well.
Find the Short Sale Buyer
Before starting the negotiation process with bank it to make sure that you have a buyer that is willing to wait till the approval of a short sale. The lender will typically want to see that there is an accepted offer on the property. This can be done in a number of ways. A real estate investor may be working with a homeowner directly and offer on the property, at which point Step One and Step Two would be reversed. However, it is more important for the homeowner to list the home with a short sale agent, explaining to potential buyers that this is a short sale, and wait for an offer to be accepted.
Turn in Offer and Paperwork
The homeowner will need to begin dealing with the bank, after the “purchase and sale” agreement has been signed between the seller and buyer. Fortunately, the homeowner normally requires to merely give the bank authorization to deal with the real estate agent directly, so the homeowner won’t need to be involved in every step. The bank requires a significant amount of paper work that must be completed and returned to the bank. To shorten the waiting time, it is important that all necessary requirements are included. This paperwork might include, but are not limited to,
- Cover Letter
- Authorization to Release Information
- Seller’s Hardship Letter
- Seller’s Financial information
- 2 years w2′s
- 2 Months’ pay stubs
- 2 months bank statements
- Supporting Hardship Info – HOA liens, medical/disability statements etc.
- Comparable sales for the property
- Net Sheet
- First mortgage holder may ask for a payoff amount from the 2nd
- Second mortgage holder may ask for a payoff amount from the 1st
- Lender may ask for an Initial Title Report
The most important document is the “Seller’s Hardship Letter” and financial information. The hardship letter is exactly what it sounds like: a letter written from the seller to explain why they are unable to pay the mortgage installments. This letter must be written by the stressed homeowner and:
- apologize for not being able to make the payments
- explain how things changed between when the loan was taken and now
- explain what you’ve done to try and keep up payments
- Other attempted avenues taken (loan modifications, sale, etc.)
- detail what the offer received on the property was and why the bank should accept it
- Be cordial, polite, and detailed.
After submitting the hardship letter, it is time to wait with patience. Some banks will take few days, some reply in a few weeks and some of them may take months to respond. Patience is the key during this stage! During this waiting time, the bank will typically assign one of their employees to be the “negotiator” in the transaction followed by the ordering of the valuation, which is step four
The lender needs to understand what the value of the property before a lender will be willing to negotiate with the new buyer over price. So, the lender will demand an assessment to conclude the price of the property. Normally, this valuation id determined with a Broker’s Price Opinion (BPO). An appraisal is a more detailed judgment whereas a BPO is a semi-formal estimation by a licensed real estate broker of the value of a property.Each lender will have an independent valuation done, and they typically will need to be updated every 90 days
Negotiation with the Bank
It is to understand that if the bank starts a short sale negotiation, it is not negotiating with the distressed seller instead with the buyer. In this situation the seller has nothing to do with a short sale more than signing on the page, but they can reject to close the sale if the Approval letter is not in their best interest. The buyer will need to submit and offer that might be accepted, rejected or changed. The short sale process may take a long time and is not like the traditional sale or properties in the market.
Finally, when you have mutual acceptance between the bank and the buyer, the transaction can move forward.
Close the Sale
Lastly, when the bank has approved the short sale and all the required documents has been signed by all the involved parties, the sale can move on to the Title and Escrow company (or the attorney’s office, if your state closes real estate transactions using attorneys.)The transaction will typically close just like any other transaction. You will wire money or bring a cashier’s check to closing (or have your lender send loan docs), legal title will transfer, and the property will become yours.
Pros and Cons of a Short Sale
For the Lender
Pros- A lender who decides to a short sale is doing so to reduce the monetary setback that a foreclosure can cost them. A short sale also offers the lender a better public image, as they are seen as helping rather than hurting.
Cons–Besides the noticeable damage in the value that the lender will bear, a short sale takes too much time to close and accompanied with a lot of frustration and stress that has no monetary value.
For the Seller
Pros: A seller that selects to sell with a short sale can get rid off from a distressed mortgage, thus tumbling their obligation. The seller also has the more “honorable” method of selling the home rather than being lawfully dispossessed. Moreover, a short sale may appear better on a credit report than a foreclosure and the seller may be able to purchase a home sooner than if they had allowed the home to be foreclosed upon.
Cons: A short sale does reflect negatively on the seller’s credit report, and any money paid to acquire the home (such as a down-payment, closing costs, etc.) will be lost forever. Additionally, there is no guarantee that the bank will accept a short sale, so all the work may be for nothing.
For the Buyer
Pros: A buyer may be able to get a significant price reduction when buying a short sale. Additionally, because of the hassle, there may be less competition for a property listed as a short sale as well.
Cons: Short sales can take many months to complete, with no guarantee that the bank will even approve the sale – thus a buyer may waste a lot of time for no result. Also, a home that is going through a short sale may have significant deferred maintenance and problems.
Tax Consequences of a Short Sale
After a short sale has been completed – there still may be additional charges for the home seller in the way of taxes. You see, the IRS considers any debt forgiven to be income, and thus taxable. In other words – if you borrowed $50,000 and the lender forgave $40,000 of that loan, the IRS may tax you on that $40,000.
Short sales have been a significant player in the real estate world over the past several years and continue to be such, so it’s important for a real estate investor or homeowner to truly understand the short sale concept and process.
We invite you to leave a comment or question below and hopefully we can sort through the issue together!