SHORT SALES
What is a short sale? A short sale is the sale of
a house in which the sales price is less than what the owner
still owes on the mortgage. If you can no longer make your
mortgage payments and your home is worth less than what you owe
on it, a short sale is, in many instances, a good alternative to
a foreclosure. Remember, though, all short sales must
be approved by the loss mitigation department of the lender.
This process can be long and arduous. It is critical that
you retain the services of an agent who is
not only a good negotiator, but also has the experience and
expertise necessary to work effectively with the lender.
One missed document can cost weeks or even months of delay.
In today's market many lenders will agree to a short sale as an
alternative to hiring an attorney and incurring the court
costs and associated expenses of a foreclosure action. The
foreclosure action takes many months. Once the lender
acquires title to the property the lender will then incur the
costs of maintaining the property, insuring the property,
property taxes and the necessary costs to sell the
property. The lender will then be able to sell
the property for market value. Statistics show that a lender
owned property sells for less than a comparable
property. Lenders do not want to acquire potentially
unsalable property in a declining market and typically will
cooperate with you in a short sale. This results in a
win-win situation for all parties. The lender's loss is
minimized, the seller gets out of the mortgage and the buyer
gets the home usually at a reduced price.
What will the lender require of you to agree to a short
sale? Understand that the lender will not agree
to a short sale for frivolous reasons. You must have
incurred some type of "hardship" in order to qualify.
Examples of hardships are illness, death of co-borrower, divorce
or legal separation and loss of income. You must be able
to justify the hardship. Each individual situation is
different. Please contact me to discuss other situations
that may qualify as a hardship.
Each lender has a "Short Sale Package" which your
agent can request on your behalf. I always order this for
my clients at the same time I list their property.
The lender will require proof that the property has been listed
with a licensed real estate broker prior to considering a short
sale. You will also need to price your property in line
with the recent comparables. Over or under pricing the
property will only complicate the issue. In addition,
there is specific language that should be added to your listing
agreement to make sure you are protected. The lender needs to be
assured that you are doing everything to the best of your
ability to get the house sold. Again, an agent who has
experience with handling all the intricacies of short sales
is crucial. There is certain documentation that the lender
will require. This documentation may include bank
statements, tax returns, pay stubs and a financial statement.
I can assist you with compiling these documents. It is
also recommended at this time to order a title search.
Once an offer to purchase the property is received, the offer,
the short sale package that has already been compiled and a
HUD-1 is forwarded to the lender. The lender will review
the documentation and the offer and then order a Broker's Price
Opinion (BPO)from an independent broker. The BPO with
supporting documentation is reviewed and the lender makes a
determination whether to accept the offer or make a
counter-offer. You must stay in constant communication
with the lender or this process will take months. Lenders
are not efficient at processing short sales. Each lender
has a slightly different way of processing their files.
Most lenders from the time they receive the offer to the time
they accept or counter the offer will take three to four weeks.
Again the time frame for this is directly related to the
tenacity and competence of your agent. If the offer is
accepted the sale proceeds much like any other transaction.
Keep in mind, though, that the lender reserves the right to deny
the sale. No part of the sale proceeds may be paid to the
property owner and the buyer and seller must not be realted.
What if you are the buyer? Patience,
patience and more patience. Be sure you and your
agent do your homework. Remember that the transaction
is not personal to the lender so the more documentation you
provide the lender with the greater the chances of a successful
transaction. Lenders are not trying to lose any more money
than is absolutely necessary. The offer to purchase should
include a pre-qualification letter from a lender or a proof of
funds if your offer is a cash transaction. I have found it
helpful to include a summary of any repairs the property may
need together with a synopsis of the neighborhood including
recent sales, actively listed properties and the
number of foreclosures or available short sales in the
neighborhood. This information is very useful as many of
the lenders are not in the State of Florida and our real estate
market is changing daily. You should find an aggressive
agent and make a commitment to work exclusively with that agent.
You want an agent working for you that is searching the
market for you daily to find you the best opportunity.
With a good agent buyers and sellers can succeed in a short sale
transaction.
What happens after the closing? Most
lenders are forgiving the deficiency balance (the portion of the
mortgage not covered in the sale of the property). When
the lender forgives the balance, the lender will typically issue
a 1099-C form stating the amount of the canceled debt.
There was legislation passed in December, 2007, the Mortgage
Forgiveness Debt Relief Act of 2007, that eliminates the
income tax liability on mortgage debt forgiveness on primary
residences for people in financial hardships and lowers the
amount of a gain made through the sale of most non-primary
residences that are not subject to income tax. I can
provide you with a copy of this legislation, however, please
consult with an attorney or a certified public accountant to
determine your specific tax consequences. In some
instances the lender may require the seller to sign an unsecured
promissory note for the deficiency balance as a condition of
agreeing to the short sale, or may attempt to collect the
dificiency balance from the seller after the property has
closed.
Why should I consider a short sale if I am going to lose
the property anyway? I have had many anxious
sellers ask this question. My answer is always the same -
because of the long term impact on your credit score. If
you are unable to pay your mortgage payments and have attempted
to work out a modification of your loan with your lender (I can
assist you with this) but have been unable to, then a short
sale will not damage your credit score as much as a foreclosure.
You should be able to recover from the short sale in two years,
however, a foreclosure will usually take at least four years and
once a lender reviews your credit report and sees the
foreclosure you will undoubtedly pay a higher interest rate.
A short sale is also more favorable on your credit report than a
deed in lieu of foreclosure.
FORECLOSURES
Below is a sample timeline of what you can expect in a
foreclosure:
Day 1
You miss the payment due on the first day of the month.
Day 16 - 30
A late charge is assessed on the missed payment. The
lender attempts to contact you to find out why you missed the
payment.
Day 45 - 60
You receive a letter from the lender advising you have violated
the terms of the mortgage.
Day 90 - 105
Your loan is referred to the foreclosure department. You
may receive a demand from the lender's foreclosure department or
you may be served with a foreclosure action.
Day 150 - 415
The house is foreclosed on and a sale of the property on the
courthouse steps is scheduled.
|
|