HOW TO SHORT SELL YOUR HOME
What is a Short Sale?
Short Sales are the sale of property where the lender(s) and or creditor(s) have agreed to allow a property to be sold although the loan(s) and or liens(s) and costs of sale are greater than the proceeds. The reason it is called a, “Short” Sale is because the proceeds generated from the sale are short of the amount necessary to pay the costs of sale and satisfy the lender(s) and or creditor(s).
Example:
Mr. & Mrs. St.John own a home that is currently worth $250,000.00.
Mr. & Mrs. St.John owe $300,000.00 on the first loan held by Bank of America.
Mr. & Mrs. St.John also have a second loan (Home Equity Loan) on the home through Wells Fargo of $200,000.00.
The total amount owed on the property is $500,000.00.
The costs of selling the Mr. & Mrs. Smith’s home are 8% or $20,000.00 based on a sales price of $250,000.00.
When Mr. & Mrs. St.John’s home is sold for $250,000.00 the total cost to sell the property including paying off the first and second loan will be $520,000.00. Bank of America and Wells Fargo will then have to take a loss of $270,000.00 and determine how much of the loss each company will accept.
Should You Participate in a Short Sale?
The Decision to participate in a Short Sale is usually difficult and emotionally taxing for the Sellers and their Families. We understand the stress many Sellers are under when they are faced with making this decision. Participating in a Short Sale should not be taken lightly since most Sellers will incur credit damage and others may be held responsible for a, “Deficiency Judgment” depending on their circumstances. Short Sales have tax ramifications, although it is our understanding that these consequences may be minimized or nullified by the Mortgage Forgiveness Debt Relief Act of 2007, H.R.3648. In conclusion if you are considering doing a Short Sale we advise those of you that can afford to do so, to seek counsel from a licensed attorney and a certified public accountant. We also advise you to hire a Realtor® Specializing in Short Sales or a Certified Distressed Property Specialist (CDPE).
We want Sellers and their Families to know that you are not alone and that we are all victims of the current Global Economic Crisis. It is clear that the lending practices of the past and Securitization of Mortgage Loans fueled our Real Estate Bubble and combined to create our current foreclosure crisis. Here is a link to, House of Cards a special program produced by CNBC that defines how this process began and ultimately lead to our current Global Economic Crisis.
We believe that much of the blame lies with Securities Traders, Mortgage Lenders and Securities Rating Agencies that conspired to create mortgage products that allowed consumers to borrow money that many of them did not have the ability to repay. Since everyone was able to qualify for a home, the demand caused prices to soar creating an overinflated housing bubble. Now that the bubble has burst we are faced with the opposite situation. Property values are falling because of a lack of available mortgage products decreasing the number of qualified buyers. The lack of buyers creates a vicious circle that expands losses in home equity and continues to generate a flood of foreclosures.
What about Loan Modifications / Forbearance?
We would like to say that we are seeing mortgage companies making reasonable changes to existing loans based on the borrower’s current circumstances and ability to make the payment. What we actually see happening are so called, “Loan Modifications” where lenders drag borrowers through months of negotiation and ultimately reject or offer borrowers an unreasonable modification to their current payment. These modifications represent either a small interest reduction, somewhat reducing the borrowers monthly payment for a period of time, or “Forbearance” where borrowers are given an opportunity to miss a payment or two and make reduced mortgage payments for a short period and then have the total balance of this reduction added back into the loan extending its term. From our experience most of these scenarios end in default within less than a year. In our opinion the only worthwhile loan modification would be a, “Principal Reduction” where the principle loan balance of the property is reduced to the appraised value of the property or to the borrower’s ability to repay the loan under their existing circumstances. To date we have yet to verify that any lenders are making reasonable modifications.
Qualifying for a Short Sale
We must first state that Short Sales are strictly voluntary and that both the borrower and the lender(s) are under no obligation to participate in a Short Sale. Many factors contribute to whether a Short Sale is approved unfortunately this cannot be determined prior to submission of a complete Short Sale package along with a contract from a qualified Buyer with terms and an amount presumed to be acceptable to the lender.
The key factor that lenders look at in considering a Short Sale is, “Hardship”. The Seller/Borrower must evidence that they do not have the ability to make the payment by virtue of a Hardship, (Death in the family, Divorce, Transfer, Military Deployment, Loss of Employment etc...). In most cases the Seller/Borrower will have to pass the second portion of this test which is to actually not make the payment! This step is usually the hardest since the Seller/Borrower must finally resign themselves to the fact that making the payment is not in their best interest since the Lender is not going to work with them, and that sending another payment to the lender is only going to prolong the problem.
Short Sale lenders have created a package of forms and documents similar to the loan application process that is used to document the Seller’s/ Borrower’s Hardship. The following is a list of the items required:
2 Years Tax Returns, W-2’s, Profit & Loss (Self-Employed), Paystubs for the last 2 months, Bank statements for the past 2 Months, Hardship Letter and or Affidavit, Financial Analysis, Third Party Authorization, Copy of the Contract, Settlement Statement or HUD1, Copy of the Listing Agreement and Comparable Sales Figures.
Short Sale Pricing
In a Short Sale the Seller is not allowed to receive any proceeds from the sale because the lender(s) are accepting a payoff for less than they are owed. The Seller and Listing Realtor® aggressively price the property since the Seller cannot receive any proceeds from the sale, wishes to minimize credit damage and most importantly must prevent foreclosure. Although the property should be priced to sell quickly it should not be priced below what the lender(s) will find acceptable. It is also important to recognize that every payment missed is a blemish on the Seller’s credit, therefore it is imperative for the Short Sale Package to be complete and that the lender(s) requirements be satisfied quickly and efficiently. It is for these reasons and a multitude of other reasons that we advise the Seller work with an Experienced Short Sale or Certified Distressed Property Expert (CDPE) Realtor®.
The Short Sale Approval Process
Once an acceptable contract has been obtained and the package is complete the package will be forwarded to the lender for approval. The Approval Process is time consuming and cumbersome and in order to deal with the vast number of loans that are in default lenders have created Short Sale or Loss Mitigation Departments. These departments attempt to minimize the lender’s losses through negotiation with all parties involved. The lender's first step is to review the incoming package for completeness then move the package into valuation where the properties sales price is reviewed by ordering and reviewing Appraisals or Broker Price Opinions (BPOs).
The lender will now move on to verifying that they have the documentation necessary to get an approval for the short sale from the investor(s). The Federal National Mortgage Association (FNMA), referred to as Fannie Mae and the Federal Home Loan Corporation referred to as Freddie Mac are the largest investors/purchasers of mortgages and therefore Fannie Mae and Freddie Mac set the standard for what documentation is required. There are other loan types that require slightly different documentation these loans and the agencies that define the requirements are the Federal Housing Administration (FHA) and Veterans Association (VA).
Once the documentation required is collected by the lender the entire package is forwarded to an individual called a “Negotiator” because they negotiate on behalf of the lender in order to generate more proceeds from the sale. The negotiator may attempt to extract more money from the transaction by demanding contributions from the Buyer, Seller or Realtors®. The lender(s) now plugs all this data into their formula and determines whether it is better for them to Foreclose or to approve the Short Sale.
In the event that it is more cost effective to accept the Short Sale the lender will generate the, “Approval Letter” or, “Agreement Notice”. This letter will dictate the terms the lender is willing to accept and include a dollar amount that the lender must receive by a specific date and will be sent to the Seller and the Listing Realtor®. All interested parties now review the letter hoping that the existing contract meets the terms of the Approval Letter or Agreement Notice and release the Seller from all liability for any deficiency created by the sale. In the event the contract does not satisfy the terms and conditions of the letter negotiations may continue or the Seller or Buyer may elect to cancel the contract. Once the approval is issued and assuming it meets with everyone’s approval the transaction will continue as a regular sale. All time periods identified within the contract begin upon receipt of an acceptable Approval Letter or Agreement Notice unless otherwise stated. We have seen this process take from as little as two weeks and in excess of eight months. We currently estimate a Short Sale or Pre-foreclosure will take a minimum of 3 months to successfully close from the date of contract acceptance (between Seller & Buyer) on a property with one lender.
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