What is the short sale process? Many properties today are being sold as “short sales” a term that not even those of us in the real estate industry were familiar with just a couple of years ago. Due to today’s real estate market unfortunately, and as the statistics show, by the spring of 2010 approximately 48% of all residential home mortgages will be underwater or “upside down”! That’s a staggering number. The term “upside down” we all know from the automobile industry but, never imagined that such a term would be associated with residential real estate.
The short sale process is essentially the sale of a property where the balance owed to the lender is more than the final sale price of the contract to purchase. These sales cannot occur without the lender’s consent to accept the short payoff. These transactions are complicated and can take a long time to complete. For this reason, they aren’t favored by sellers or buyers alike but, in some cases, sellers have no other option than to try to short sale their property.
While a short sale is typically a better option than foreclosure and the obvious repercussions that accompany foreclosure, there are specific disadvantages to short sales which sellers should be aware:
- A short sale will still have a negative impact on your credit
- The lender may require a promissory note instead of total loss dismissal and/or declare a Deficiency Judgment against you
- The lender’s decision to declare a Cancellation of Debt may result in tax penalties with the IRS
- Mortgage Laws may prohibit the purchase of future property for a fixed period following the close of the sale.
From a Seller’s Perspective:
What are the benefits to selling my property through the Short Sale Process versus letting it go into foreclosure?
The obvious benefit of course is your credit. If you let your home go into foreclosure, you can figure a minimum wait of at least 4 years before you are able to purchase another property again due to the significant damage a foreclosure can do to your credit report. With a short sale, the hit that your credit takes is relatively quick and usually less damaging. Your credit is hit one time for the short sale and, it’s really not as damaging to your score as you might imagine.
Why is that? Well, for one reason, many times a lender who approves your short sale, as mentioned previously, may very well not forgive the balance owed. For example, for the ease of figuring, let’s say you owe $200K on your property and you are successful in finding a buyer and having a lender approve an offer of $150K on that property. In order to close, you may have to agree to the lender’s “approval terms” which include a prepayment of $50K. Therefore, the short sale may not even appear on your credit, but the judgment or promissory note for $50K could. Many times the promissory notes are at 0% interest and the payments are relatively low and manageable for most sellers.
What most people do not realize with Short Sales is that there is a lender (say for example, Countrywide) and then an investor who backs that mortgage. Some mortgages are backed by private investors while others are government backed as in the case of Fannie Mae and Freddie Mac loans. The investor is who actually determines the timeline and the “approval terms” for the seller, not the lender.
The most successful Short Sales are those involving a private investor. They usually will approve greater shortages in payoffs. For example, Freddie Mac is usually always at an 85% short sale amount – private investors may go much less and have more favorable approval terms—forgiving some or all of the balance owed by the seller.
What all does a short sale package consist of?
The package used in the short sale process consists of the following items:
- Authorization to release information to a third party
- Ratified contract for the purchase
- Short sale addendum
- Mock HUD 1
- Hardship letter
- Personal Financial Statement (signed and dated)
- Last 2 years tax returns
- Last 2 months most recent pay stubs
- Last 2 months most recent bank statements (all pages)
- Buyer pre-qualification letter
- Listing agreement
- Internal comparative market analysis (FMV + Comps) and/or
- Agent’s opinion letter regarding property’s decline in value
- Copy of formal notice(s) from lender, if applicable
Your experienced Short Sale Realtor can assist you compiling some of the items on this list.
The benefits of using an experienced negotiator in the Short Sale Process.
