Short Sale 101
A short sale is the same as a normal real estate sale, except that the Seller does not have enough money to pay off their bank/lender. If the bank is not paid back in full, the bank has the right to take the property back through foreclosure. To avoid foreclosure, a Seller may ask their bank to accept less than the amount owed in exchange for releasing the property to the new Buyer.
Short Sale – Sellers Perspective – Credit
The first thing any Seller asks is “what will happen to my credit?”. If you browse various news sources, the estimates are that your credit will fall between 100 – 160 points for missed payments and your credit report will reflect a settled debt. This is much like a settled credit card would look on your credit. This matters when other creditors consider loaning you money in the future, like credit cards or car loans. Sources indicate that your credit may be dinged for 7 years however with 1 of 5 mortgages underwater it is more commonplace and one would think that good income and otherwise good credit history would prevail to a sensible lender. Fannie Mae allows people to apply for a new mortgage as soon as 2 years after they have completed a short sale.
Short Sale – Sellers Perspective – The Cost
To properly evaluate the short sale option, let’s cover the downsides first. When you sell a home and pay the bank less than owed, the balance is call the deficiency. For example, if you sell your home for $125,000 and owe the bank $200,000, the deficiency will be $75,000. If the bank agrees to approve a shortsale, they will not always relieve you of the deficiency. That said, there are certain conditions that would qualify your for full relief that can be determined up front. We will evaluate your situation for free. Our strategy is to prequalify you for relief first. Also, experience pays off as specific banks have a track record of responsing favorably to short sale requests. If a full release is not granted, you may continue to attempt to negotiate the deficiency after closing.
The next cost implications are the “payoff” demands from the bank. The bank may evaluate your situation and ask that you bring money at closing, in the form of cash or by signing a promissory note. A promissory note is essentially a partial payment plan for a portion of the deficiency. This is most common when there are additional liens behind the first mortgage.
Another consideration is the tax implications. If a bank releases you of a $75,000 deficiency, the IRS may treat that as $75,000 of taxable income to you. Fortunately there are a number of exceptions to this per the The Mortgage Debt Relief Act of 2007, which include qualified sales of a primary residence. This special relief will only be available through 2012 unless extended by law. Even rental properties may have a limited tax consequence. If you do not read tax code for a living (we don’t), you would be wise to discuss the tax implications with your accountant before making a decision to short sale. Again, there a number of solutions depending on your circumstances. We are not accountants and cannot not advise on tax matters.
Short Sale – Sellers Perspective – The Benefits
A successful short sale will offer you closure on your existing mortgage and avoid foreclosure so you can plan and control your future. There is not magic trick to make the mortgage go away, the market is not coming back to the peak and lawyers do not have a special statute they can look to and get you out for free. A successful shortsale is the least painful exit strategy with the quickest recovery option available. A short sale shows a good faith effort on your part to settle your debt in an honorable way and with a reduction in credit and good credit history on other obligations, you could be house shopping again in two years at much more affordable pricing.
One could argue that a credit score is the most important thing you’ve got. I would argue that building savings, and keeping your future income will do more for your future than your credit. It was the excessive availability of credit that created the housing bubble in the first place.
Short Sale – Lenders Perspective
Lenders are faced with a multitude of considerations that often leave us speculating at their logic. With respect to an individual transaction, they need to determine if the cost to shortsell versus the cost to hire attorneys and foreclosure on the property. For a bank to own a home is a losing proposition as there are costs and risks associated with owning an empty home. The bank is also interested to determine if the Seller is unable to pay the mortgage or simply walking away out of convenience. As part of the short sale process, the bank will request copies of paystubs, bank statements, and tax returns. Additionally, they will want to know that there is a “hardship” consideration making the Seller unable to pay. We have many examples if you are unsure if you qualify for a hardship.
Short Sale – The Process
The first step is to be prequalified by one of our short sale negotiators and determine your goals. You may qualify for an incentive program that will pay you cash at closing. Some clients want to get it over with quickly while others like to wait. Either has its benefits and we can do it both ways. We prefer to get the job done and have a proven process that will get you an offer, guaranteed, in less than 30 days. The offer will be delivered to your bank with your personal financials. The next signal from the bank is usually when they order a Brokers Price Opinion (“BPO”). The BPO is when a third party will determine what the property is worth on the banks behalf. Now that the bank has all the information they need, they will offer counter the terms of the contract to generate higher revenue to them. Once all the parties agree on the terms, the bank will take the offer for final approval internally, which is followed by a short sale approval letter which stipulates the terms of the approval. Thereafter the parties will proceed towards closing.
