Short Sales Explained
A short sale can be an excellent solution for homeowners who need to sell, and who owe more on their homes than they are worth. In the past, it was rare for a bank or lender to accept a short sale. Today, however, due to overwhelming market changes, banks and lenders have become much more negotiable when it comes to these transactions. However, hiring an experienced short sale agent is key to your success.
But to be technical, here's a more official definition:
- A homeowner is 'short' when the amount owed on his/her property is higher than current market value. For example:
Loan Amount: $550,000
Market Value of Real Estate: $425,000
- A short sale occurs when a negotiation is entered into with the homeowners mortgage company (or companies) to accept less than the full balance of the loan at closing. A buyer closes on the property, and the property is then 'sold short' of the total value of the mortgage.
- In the above example the property is at a minimum upside down $125,000. In order to get the bank to take an offer at $425,000 you need a short sale expert who specializes in negotiations with banks and marketing short sale properties to the real estate community.
For homeowners to qualify for a short sale, they must fall into any or all of the following circumstances:
- Financial Hardship – There is a situation causing you to have trouble affording your mortgage.
- Monthly Income Shortfall – In other words: "You have more month than money." A lender will want to see that you cannot afford, or soon will not be able to afford your mortgage.
- Insolvency – The lender will want to see that you do not have significant liquid assets that would allow you to pay down your mortgage.
What are the consequences of doing a short sale?
#1 Mortgage Forgiveness/canceled debt
Ask your CPA how HR 3648 "The Mortgage Forgiveness Debt Relief Act" benefits primary residences and whether special IRS section 108(a)(1)(b) " Insolvency Exemption" can be applied to you investment properties. Also ask about,California SB401, which was enacted into Law April 12, 2010, No more State Tax on Forgiven or Canceled Debt. Distressed homeowners no longer have to pay California state income tax on debt forgiven in a short sale.
#2 Deficiency Judgments
You will also want to talk with your CPA about how purchase money loans (non-recourse loan) and non purchase money loans (recourse loan) enabling the lender to pursue a deficiency judgment. http://banking.about.com/od/loans/a/recourse loan.htm
#3 Completing a successful short sale will mean that you will not have a foreclosure reported on your credit. This will also mean that on all future loan applications where it asks if you have had a property foreclosed upon you will be able to answer no. Answering yes will affect your interest rates. This is one of the most important reasons to do a short sale. Foreclosure stays on your credit report for approximately 7 years.
Why shouldn't I just let the home go to foreclosure?
Your credit! Foreclosure is one of the biggest damages to your credit that can be done. You may have to disclose the fact that you had a foreclosure every time you try and purchase a new property in the future no matter how long it has been since you had the foreclosure. Also it could cause a huge problem if you need security clearance for your job. For more information visit.
How long does it take?
#1 Different Lenders take various amounts of time. It also depends how many liens you have on the property. It take any where from 30 to 180 business days to give an official approval of an offer once it is received. This process can be improved by communication with the bank by your representation. Open and consistent communication is what improves the process.
#2 Ensuring that the required paperwork by the bank is correctly filled out increases acceptance by over 45%. Some banks will destroy any application that is even off by one item. Our team ensures that your paperwork is correctly filled out the first time so you have the greatest chance at acceptance.
How long do I have until I have to move out?
The bank is required to let you know when they have filed the notice of default with the county recorders office for the county you are in. The majority of banks do this after you have become 90 days late on your mortgage or 3 consecutive mortgage payments. They usually send a notice in the mail and sometimes post it on your front door. From this time the earliest a sale date can be set is 90 days from that date. When the bank approves a short sale, they typically require a 30 day escrow. Once escrow is open you will have 30 days to move out. The banks want you to stay in the home and maintain it during this process however it is not a requirement.
What happens if it doesn't work?
#1 If your property does not sell as a short sale it may end up being foreclosed upon by the bank. Your cooperation along with a skilled short sale negotiating team are key factors in making sure a successful short sale takes place.
#2 It is of the utmost importance to get the bank an offer along with the proper short sale package to review as soon as possible. It is for this reason that you need to have a real estate team who specializes in short sales present to the bank on your behalf and in your best interest.
What kind of information will the bank ask for?
Each bank has their own separate set of forms that they can ask to be filled out. In fact if you have two loans the amount of information can be different between both lien holders.
The types of information you will need to provide is as follows:
1. Signed hardship letter (why you need to do a short sale, I can provide examples)
2. Copies of last 2 months paychecks for all owners of the property (If you are married and only one spouse is on the liens they will still want to see both)
3. Copies of P & L statements if you are self employed
4. Complete financial worksheet (Each bank has their own standard forms, basically they want to see all money going in & out of the household)
5. Copy of 2 recent years Tax Returns
6. Copy of 2 recent months Bank Statements
7. Copy of Investment Account Statements
8. Identification of liens on property (your mortgage statements from all lien holders)
9. If applicable a copy of your HOA statements
Our team will guide you through all of the requirements regardless of which bank and which form that is required. We will have to provide the following:
1. Signed listing agreement
2. Signed by all parties a purchase agreement
3. Estimated Net sheet provided by an escrow office (also called a HUD)
What is a hardship letter?
A hardship letter is a statement of how you and/or your family got behind on your payments or why you feel you should have a short sale approved. to have a short sale approved you must proud insolvency and they want a letter in writing from you explaining your hardship.
What if I have declared bankruptcy?
#1. Bankruptcy can delay a sale of your home at a trust sale. Your bankruptcy attorney may have additional advice for you and I always advise you speak with a bankruptcy attorney to see if that is a better option for you. Our team is proficient in communicating with your legal representation with you choose that route.
#2. If you have declared bankruptcy please let John or I know and give us your attorney's information so we may be in contact with them as soon as possible. For further questions regarding bankruptcy please consult with a proper bankruptcy attorney.
Is it better or worse if I have two loans?
Having more than one lien holder is one of the hardest short sales that can be done. Some homeowners have three and four lien holders on the porperty. If you are not current on your HOA
(if applicable) they can place a lien on the property as well. If it is the two loans both with the same lien holder it can be easier if they are seperate note holders. This scenerio is where you will definitely benefit from having a skilled negociation team handling your short sale for you.
What do I do about people offering to help if I just sign the deed over to them?
Do not sign over the deed and beware of Investor Option Contracts. Unfortunately there are many individuals out there who take advantage of home owner's in a time of need that are not looking out for your best interest but simply only care about being able to profit from your situation. Our recommendation is that you make sure to have a real estate professional look at anything prior to signing any offer from one of these individuals.
How do I choose someone to represent me on a short sale?
The Real Estate professionals that you hire should have the the expertise and training necessary in order to complete a short sale transaction. Choose one a team with the CDPE designation. They should have a proven success tract record. Don't be shy to ask for references of previous clients that they have been successful in negociating the short sale with the seller's best interest at heart.
The Real Estate team should be able to tell you up front if they can help you and what they are going to be doing for you. This should all be done with no up front fees and no cost to you.
Is communication important and do I still have to keep communicating with the bank?
Communication is key, but when you hire the right real estate agents they will handle all the communication with the lien holders for you. The number one reason for foreclosure is a lack of communication. We get authorization to speak to the lender on your behalf. Dealing with unwanted phone callsis stressful. We take care of the communication and make sure you stay informed of what is happening on a weekly basis. If you have any questions in between our updates you are always welcomed to call.
Why would a bank agree to a short sale, wouldn't they just want to foreclose on my home?
The bank doesnt want to own your home. The foreclosure process is a very expensive process for the bank to carry out. There are legal fees, property fees, court fees, and additional staff required by the bank to handle foreclosures for a bank. Their goal is to prevent properties from going into foreclosure.
Can't I just do this all myself?
You could, but when your roofing needs to be replaced, you consult a roofing expert. When there's a problem with your computer, you consult a technician who understands the issues of your particular model. Similarly, in this current economic crisis, millions of homeowners facing financial hardship and possible foreclosure action are requesting the help of agents with the Certified Distressed Property Expert® (CDPE) designation. A CDPE is a real estate professional with specific understanding of the complex issues that confront homeowners in distress. Through comprehensive training and market experience, CDPEs are able to provide real solutions for homeowners facing hardships in today's market.
This seems simple enough, but it is a complicated process that takes the expertise of experienced professionals. My partner and I hold the CDPE® Designation and are ready to identify all possible options and, when possible, assist in the quick execution of a short sale transaction.
If you have questions or feel you may qualify for a short sale, please contact me for a free consultation. Laura 661 857-0620 or John 661 857-0618
Understanding your options now could mean all the difference in the world.
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