Thursday, August 28, 2008

What Is A Short Sale?

A "short sale" is the sale of a house in which the proceeds fall short of what the owner still owes on the mortgage. For owners who can no longer afford to keep mortgage payments current, the short sale is an alternative to bankruptcy or foreclosure proceedings. When lenders agree to a short sale in real estate, it means the lender is accepting less than the total amount due. Not all lenders will accept short sales or discounted payoffs, but, by accepting a short sale, the lender can avoid a lengthy and costly foreclosure, and the owner is able to pay off the loan for less than what he owes.

Before considering a short sale, sellers are always advised to seek sound advice from an attorney and/or CPA. Once the legal and tax consequences of a short sale are understood, it is imperative to contact a real estate professional immediately.  A Realtor who is trained in obtaining short payoffs will be able to lead a seller through the long process of gathering information, submitting the short sale request, listing the home and procuring a bona fide offer to purchase so that the seller can escape the stigma of a foreclosure on his/her credit report.

For The Seller

The short sale process is a very long and lengthy one. It could take anywhere from 14-120 days to complete. If you are a seller in default of your mortgage and you are considering a short sale, the time to speak with a Real Estate professional is on day one. Too often, people wait until the last minute, hoping for a miracle to happen.  It never does.

One reason that the process takes so long is that there is a plethora of materials and documentation to gather, before and during the short sale process.  Some of these items include:

• A signed copy of the listing agreement with your Realtor.
• A signed copy of a sales contract with all addenda and attachments.
• A commitment letter from your Buyer.
• A written hardship letter stating the circumstances for your missed payments and default. 
• Your last two bank statements (checking and savings)
• Your last two paycheck stubs
• A HUD-1 settlement statement (net sheet) indicating the allocation of all sale proceeds.
• Your two most recent state and federal tax returns
• Your most recent summary satements for any 401k, retirement or investment accounts

Once all these items are assembled, your Realtor or agent will then submit them to the lender for review. It is at this point that the waiting begins.  The lender must then perform their own due dilligence, some of which may include:

• Re-assembling the materials you just submitted.
• Sending them down the line to the department head for further review.
• Sending them once more to yet another department head.
• Submitting them to their board.
• More red tape.
• Performing a BPO (Broker Price Opinion) to determine the fair market value of the home.
• Losing all the documents your Realtor submitted.
• Reassembling them again.
• More red tape.

If everything goes well, the lender may approve your short sale and you will be free to complete the sale of your home to a Buyer at a lesser amount than what is owed. It is never this simple, though.  Remember, we are dealing with a person sitting behind a desk in a city far removed from yours.  This person has very little empthay for your situation, and they certainly do not understand your market. Many times, the short sale process is more painful than a thousand papercuts on your tongue. Seriously!  Other times, it can go so smoothly that you wonder what is around the corner, and what have you missed.

Legal and Tax Consequences of a Short Sale

Since I am not an attorney nor a CPA, I can not give legal or tax advice.  However, please understand that there may be serious tax and legal consequences to the Seller in a short sale transaction.  For example, your lender may may you, the seller, responsible for the deficiency (the difference between what is owed and what is actually paid off).  They may make you, the seller, sign a promissory note or a promissory note ammendment at closing.  This will keep you 'on the hook' for the balance.  They may 'ding' your credit as a charge-off.  And they may even send you a 1099 for the forgiven amount at the end of the year. There are certain pros and cons to each situation. In most cases, a short sale, regardless of the consequences, is still a better route than simply letting your home go into foreclosure.

For The Buyer of a Short Sale

By purchasing a property for less than what is owed you may get that deal you were always looking for.  Many homes that are within the pre-foreclosure process are nice homes in nice conditions. Other times, these homes may need a little TLC to make it habitable. Regardless of the condition of the property, to you as a Buyer, the end-result of the short sale is that you own a home, free and clear of all encumbrances of record. It will be no different than if you purchased a home at fair market value from Tom and Susie Homeseller, without the pre-foreclosure stigma.  The only difference is that the process may take a little longer to complete.

For the reasons stated above, make sure that if you are considering purchasing a home in which the seller is attempting to short the payoff amount, you give yourself plenty of time and maintain a contingency plan in case the process takes a turn to the left.

Be aware that the short sale process is not an exact science. If you see a home that is 'listed' as a short sale, the list price you see may or may not be the price at which you can purchase the home.  I know this may sound strange... why can't you purchase a home for the asking price?  Many times, the Realtor does not know at what value the lender will accept by the time the home is initially listed. Remember, the whole reason to short a mortgage is to sell it for less than what is owed.  The only number the Realtor may know at listing time is what is owed. If the full balance owed is more than the home is worth, (which is the real reason for this entire process) then the seller may never obtain an offer.  Therefore, in many instances, the Realtor lists the home at their best 'guestimate' of what the lender may accept. Once an offer is received, whether it is more or less than the list price, the Realtor will submit it to the lender for approval, counter-offer, or flat refusal.

Remember, before bidding on a short sale listing, you need to inquire with the listing agent as to how they arrived at the listed price.  Is it the fair market value of the home? Is it a shorted payoff amount that the lender will accept, or is it an estimate of what the borrower and Realtor hope the lender will accept?

Why Do Short Sales Take So Long?

We get this question all the time!  Sellers want to sell their home quickly so that they don't do any further damage to their credit report. Buyers want to know, simply, if they can buy the home or if they have to look elsewhere. Buyer agents (Realtors representing their buyers) need to understand where in the process they are so that they can counsel their buyer.

Remember, when dealing with lenders, there is red tape, red tape, red tape. A Buyer and their Realtor are dealing with a person sitting behind a desk in some far-away land who has no real interest in the home that is being sold.  All they know is that they are to submit specific information to their boss.  Furthermore, they are being paid an hourly wage to do so.  They simply don't care for expediency.  Especially since our economy and housing sector has taken a turn for the worse, the amount of paperwork that is sitting on these desks are mounting and mounting and mounting. Many times, the initial paperwork that is submitted gets lost in a pile, never to be uncovered again.  So, after weeks of waiting, the process begins again.

In addition, lenders will not do ANYTHING until the complete short sale package (along with all offers and addenda) are received.  Then, they perform their due dilligence to make sure a short sale is warranted.

Moreover, some 'lenders' are simply servicers of loans and thus they have no real authority to accept a short sale amount.  So, just when you think you won the process (because they escalate your offer to the next level), it gets struck down by yet another figurehead. What's more is that your offer can be approved by the servicer, but denied by any private mortgage insurer who has the last say.

Please be patient! We have seen short sales completed within a couple weeks, and we have seen them take as long as 120 days before the lender calls to accept, counter or reject the offer.

For more information on our short sales, please click:

2110 Woodland Avenue, Raleigh (Inside the Beltline!) - SOLD

3521 Wood Duck, Wake Forest - SOLD

8701 Attingham Dr, Raleigh - SOLD

For more information on the short sale process, or if you are considering a short sale purchse, please contact us. We can review the situation and assist you in selling or buying a home.

Call 919-303-6722 or email drew@drewludlow.com