Short Sale 101
Frequently Asked Questions:
What is a Short Sale?
In the world of Real Estate, a short sale refers to the sale of real property for an amount less than the amount owed on the property. In the short sale scenario, the bank agrees to accept less than the full balance due on the debt, and usually ‘forgives’ all or a large portion of the difference.
Would I qualify for a mortgage modification to save my home?
The Treasury Department is offering a free online calculator that helps borrowers estimate whether or not they qualify for the Home Affordable Modification Program ( HAMP). The calculator is available at checkmynpv.com.
In the two years since its launch, HAMP has helped more than 270,000 borrowers receive permanent loan modification, and lowered their monthly mortgage payments. That number falls far short, however, of the millions of homeowners at risk of foreclosure — which is bad for homeowners and bad for the housing market. The current glut of foreclosures — stalled by paperwork delays and poised to hit the market is already far more than can absorbed by first-time homebuyers.
How will the Short Sale affect my credit?
Short Sales are still a relatively new concept. Banks have the option of submitting the short sale to the credit bureau as "Paid in Full" or "Settled for less than full balance". As far as your credit score is concerned, there is no evidence whatsoever to support that a short sale will lower your credit score. Some have the idea that this is like a bankruptcy or a foreclosure. That's far from the truth! In a short sale, the lender is simply allowing you to pay less than you owe! Think of it like like this... In a foreclosure, many homeowners walk away from their home and 'hand over' the keys to the bank and make it their problem. In a short sale, you're working with the bank to minimize their losses.
If you are currently behind on your mortgage or facing foreclosure, the short sale will actually help your credit! How? Because once you are approved for the short sale, all collection activity will STOP and you will avoid foreclosure!
Who benefits from the Short Sale?
Short sales are a win-win situation. Lenders, Mortgagees and Realtors all benefit from the successful short sale. Mortgagors get the majority of their money back, Mortgagees get the relief they need and are able to sell their property and avoid foreclosure, and Realtors can facilitate the transaction and receive compensation (commission) from the sale of the property.
Why would banks forgive the difference?
To mitigate their losses, banks often accept a settlement of less than what is owed on the property. When faced with the option of getting the property ‘back’ through foreclosure, a short sale often makes a much wiser business decision for the bank.
This sounds too good to be true!?
Not really. Things that are ‘too good to be true’ usually don’t make good economic sense. The short sale makes good common and financial sense for the banks who grant them. The fact of the matter is, Mortgage companies and banks are NOT in the real estate business. They are in the LENDING business. The last thing they want is that property back.
Can FHA, Conventional or VA loans be a short sale?
Yes! I have successfully negotiated short sales for each of these loan types.
Why does my property have negative equity?
Here are a few common reasons:
1. Person bought at the height of the market and the market has now declined or paid more than the property was worth
2. The area has become less desirable for any number of reasons, so property values have declined.
3. Person purchased the home with little or no money down and wants to sell within a few years of purchase… and the property value has not increased during that time. Therefore, costs associated with selling the property may create a balance due at closing,
4. Person refinanced the home (with a high appraisal value) and now has little or no equity.
5. Person bought in a brand new subdivision or recently developed area that has not been fully developed or has not appreciated (or has depreciated) in value
6. The market is soft because there is too much builder (new home) inventory or too many existing homes on the market (buyer’s market)
What is Negative Equity?
Also known as being "upside down" negative equity is the difference between the value of an asset and the outstanding portion of the loan taken out to pay for the asset, when the latter exceeds the former. For example, if your car is worth $10,000 and you owe $15,000 on it, you would have a negative equity of $5,000. Negative equity can result from a decline in the value of an asset after it is purchased.
Some areas decline in value. In other areas, prices may remain flat so that the properties in that area do not appreciate. If a seller wants to sell within 2-3 years of purchasing their property, they may be in a situation where they have negative equity.
What if I owe what my home is worth?
Even if you owe exactly what your home is worth, you may still need to do a short sale in order to pay for the costs of the sale (realtor fees, title policy, attorney fees, conveyance taxes and other seller closing costs).
Why not just let my lender foreclose?
NO! What is the first thing banks do when they foreclose on a property? Hand it over to a real estate agent to get rid of it quick! The foreclosure process is a legal process. It involves attorneys and it costs MONEY. Once they get the property back via foreclosure they must often sell it for MUCH LESS than market value and pay Realtor commissions and all customary closing costs and then they reserve the right to come after you for the difference. Doesn’t it make more sense for them to take at or a little below fair market value before foreclosing?
And, even when they do sell it through foreclosure... this does NOT remove your obligation to repay the remaining balance! It is not wiped away- and in many instances forces families into personal bankruptcy to protect them from any deficiencies sought after by the banks.
What if I'm not behind on my payments?
Short sales work – even if you’ve never missed a payment! Yes, I know… short sales have gotten a stigma of being only available for folks who are in foreclosure. But I have successfully negotiated dozens of short sales for folks who have never missed a mortgage payment! They just happen to be in a negative equity position and need the short sale in order to sell their home.
How long does it take?
Short sale approval from the bank can take 60 days or longer from the time an offer is made. You can anticipate on average 1 month for an offer, 2 months for approval and a fourth month to close as a rule of thumb. All short sales are different and timeframes can vary.
What if my home is already in foreclosure?
Your foreclosure sale will usually be suspended during the short sale process. That's why it's imperative that you contact us right away!!!
Will my lender send me a 1099 on the debt forgiven?
In 2007 the U.S. Congress passed the Mortgage Debt Forgiveness Relief Act and it is in effect until 2012. As a result of that act, borrowers no longer pay taxes on the debt forgiven on their primary residence. So if the property is your primary residence, then no, you should not receive a 1099 for the debt forgiven or have to pay any taxes on the forgive debt.
For investment property, the lender does have the right to report to the IRS the amount they have ‘forgiven’ in a Short Sale transaction, the amount of the resulting tax will be far less than the debt forgiven. For example, your 1099 gets offset by any improvements or other qualified costs. We had one client who received a 1099 for $30,000 forgiven which resulted in additional taxes of $1,300 for that year. Also, if the property is in foreclosure, the foreclosure would have a much more devastating affect on you than the fractional increase resulting from the 1099..... For more information click here: Debt Relief Act
How much will the short sale cost me?
There are no up front fees to you to start a short sale. My fees are paid for by the bank and in addition, if decide to work with an attorney from my team, their fees are covered by the bank once your short sale closes. During negotiations with the bank, there may be certain fees that they will not agree to pay- for example a late utility bill or a tax payment that is not in default. You should anticipate to bring $500 - $800 to closing to cover miscelaneous costs.
What kind of marketing will you do on my property?
We have been selling short sales for several years and have found price alone is what accounts for 90% of activity generated by short sales. We're typically not going to ask recommend improvements or stage the house. This is a distressed property sale and we want to get your home sold without any additional money spent out of your pocket.
On our regular listings, we do employ an extensive marketing plan, however we have found that traditional marketing mediums (flyers, virtual tours, open houses, showing feedback surveys, etc) are not effective at generating offers on short sale listings.
We typically review the pricing and make adjustments every week or so until an offer is generated. In addition to pricing, we employ a strong internet marketing presence. We have teamed up with REALTOR.com, voicepad.com and ListHub.com to market your property to hundreds of web sites.
If there are very few calls or lookers, then we will adjust the price until we get an offer. We typically generate an offer within 30 days, unless the property is very unique.
Should I just do a loan modification instead of a Short Sale?
If you desire to keep your home and can afford to make the monthly payments, then YES you should keep it! In order to qualify for a loan modification, you will need to demonstrate to the bank that you are generating more income than your current monthly expenses.
If this is the case, then you will need to call your lender and let them know you want to do a loan modification, and see if they will qualify you for their loan mod program. If you aren’t approved, we can then move forward with a short sale. We can’t work the short sale at the same time you are working with your bank on a loan mod.
Can I lease out my house while we’re waiting on the short sale?
We don’t recommend that you lease your home while waiting on the short sale to be finalized. Lenders will not be sympathetic to sellers who are collecting rent payments and not making their mortgage payment. Also, homes with tenants are subject to legal rules (tenant rights) and much more difficult to show and to sell. In addition, having a tenant in your home will disqualify you from other financial benefits from the government including HAFA, which can be used to assist you with your moving expenses.
How will you decide on the list price of my home?
Initially we will set the price based on an extensive market anlaysis. Once we have an offer we will submit that to the bank. Once we convince the bank to agree to do a short sale on your home, they will hire their own independent appraiser who will come out and view your home, and set a valuation, based on its condition.
In order to get the process going quickly, we will need to send you our short sale package and get all of the necessary information back from you first, before your home goes live and on the market.
Who will let me know what I need to do to the home to get it ready for sale?
We won’t be recommending that you do anything to the home that will cost you money. The truth is, since you won’t be netting anything from the sale, the last thing you probably want to do is spend more money on a home you no longer can afford. For that reason, we will be selling your home as-is. Our only suggestion is to clear out as much clutter as you can. Other than that you’re OK. The lender will price your home according to its condition.
