Real Estate Short Sales Part 1
This is part 1 of a 2 part series covering short sales.
What is a short sale?
Short sales can be a tricky puzzle when we don't have a good understaning of the big picture. Understanding where all the pieces fit and the time involved can cause plenty of confusion and frustration for everyone involved. Add to that a lender who operates behind a veil with no rhyme or reason as to what they want or need to get the short sale done and the path quickly takes a bad turn.
As with any serious undertaking someone pursuing a short sale should become familiar with that big picture so that they can get out from under that debt that prevents them from moving forward. In this post I hope to explain some of the puzzle pieces of a short sale and how they fit into the big picture for a seller.
The first thing to understanding short sales is to define what exactly a short sale is. In non-technical terms a short sale is a sale where a particular house is being sold for less than what is owed for it. An example being someone with a house they paid $200,000.00 for, but they owe $175,000.00 to the mortgage company. Due to market conditions or lack of upkeep on the house the home owner is only able to sell it on the open market for $150,000.00. Under normal circumstances that shortfall of $25,000.00 is the responsibility of the home owner to pay back to the lender. The $25,000.00 is also immediately due upon sale, there is no financing or payment plan to pay it off over time. Once the house is sold, language in the mortgage document requires that the lender be paid back in full whatever the outstanding balance is and whether or not the home owner had extra money to cover it.
Where the home owner knows they will be unable to pay everything that they owe back because of job loss, medical emergency, death, divorce or other situations they can ask their lender to approve their house for a short sale. If the lender agrees to the short sale then they are accepting that the house will not be able to be sold for more than what is owed and that they may also not be able to collect what is owed above the sale price.
Why would a lender do that? A big reason is that a short sale is often a shorter and cheaper process than is a foreclosure. Foreclosures can drag on for a long time all the while the lender may not be getting any payments towards the debt. Through that reasoning by allowing the home owner to sell the house short the bank gets at least some of their money back and will not be stuck with a house it does not want.
How to start the short sale proces:
Prior to talking to a mortgage counselor or your lender to get the short sale process underway it is best to get a competitive market analysis (CMA) from a local realtor familiar with your area. Many Realtors should be willing to provide a free CMA for you. Best bet is to find a Realtor who has experience with short sales as there are many pitfalls along that way that an experienced agent can help you avoid. The CMA is simply for your own knowledge and confirmation of what your house may sell for, the bank is going to do their own analysis or appraisal to confirm the market value of your home. But until you get a market value and see for yourself you don't know for sure if you are underwater or not. That CMA will help you better determine if the short sale path is for you.
One of the primary requirements of a short sale is to get the lender or lenders to agree to the short sale before putting it on the market. If the lenders don't agree then there can be no short sale. Also if there is more than one mortgage on the house then all lenders who will be forced to take less than what they are owed will be required to sign off on the short sale. So if one lender agrees but the other one does not, a short sale usually cannot go through. Now I say "usually" because laws vary state to state and sometimes bankruptcy courts can "cram down" a short sale onto all of the lenders. By cram down I mean all lenders are forced to agree to the short sale regardless of their opinion. Therefore it is best to consult with mortgage counselors, Realtors, and/or attorneys who actively work short sales in the state where your home will be subject to the short sale to get the best guidance.
You will have to prove to your lender that you are suffering from financial hardship by providing documents such as mortgage statements, bank account statements, credit card statements, and more. Ask your lender what documents do they need from you in order to show your hardship. Oftentimes prepaing a hardship letter detailing the situation you face (unemployment, divorce, medical emergency, etc.) can be helpful too.
The actual short sale:
It may take some time for you lender(s) to approve your short sale but if they have agreed to allow you to short sell your house then the next step is to get your house listed with a realtor who is knowledgeable about the short sale process. Often times you may need to get some authorization forms from your lender for your attorney or realtor so that they can deal/talk directly with the lender(s) if need be.
If you get an offer on your short sale don't expect the lender to be quick in approving it. I have heard of some lenders taking 6 months or more to approve the buyers offer. Although once approved then it is time to do things FAST as usually a lenders approval letter only gives you between 30-60 days to get everything done and closed on the property.
The short seller should allow the buyer to inspect the house prior to the offer being inspected if the buyer requests an inspection. A buyer working with an unexperienced realtor may put in the purchase offer a post acceptance inspection clause. Post acceptance inspection makes no sense as there is nothing to negotiate if there are issues found with the house. The lender having accepted the offer is not going to go back and renegotiate based on any issues in the house. Pre-acceptance or pre-offer inspection request is ok since the buyer can get an idea of what they are getting into and decide to not make an offer or to withdraw their offer if the house has too many problems.
The short sale is a long and stressful process. Having your paperwork in order prior to starting the process is critical. Also having the right people in your corner (realtors, mortgage counselors, attorneys) can help smooth some of the bumps in the road. If you are in need of short sale assistance in the Cincinnati and Northern Kentucky areas feel free to contact me. For other areas I may be able to help put you in touch with experts to help you along your way. In part 2 of my short sale post I will discuss some government programs that are available as well as some tips on how to avoid scams.