Understanding Short Sales

Whether you’re in the market for a new home or considering selling your existing home, chances are you’ve heard of a short sale. Short sales are becoming increasingly common in parts of the country where home values have dropped substantially. Short sales can benefit those sellers facing the prospect of a foreclosure.Understanding how Short Sales work is essential.

What’s a Short Sale Anyway?

In a short sale, a seller facing the threat of foreclosure enters into an agreement with their mortgage lender to accept a price for the property that’s less than the amount they actually owe on it. The seller makes no profit on the sale but avoids many of the problems that would come from a foreclosure.

Possible Advantages

With a short sale, sellers avoid having to go through a lengthy foreclosure process and prevent the impact of a foreclosure on their credit score. In a short sale, the seller and the lender work together to determine the details of the agreement, but typically sellers who complete a short sale also avoid owing the balance of the loan. ( Better get that one in writing)

The biggest advantage to buyers is clearly the prospect of moving into a new property at a great discount. Moreover, buyers may find that short sales have an additional benefit over foreclosures too, since unlike a foreclosure, there’s not much of a risk that the buyer will need to take action to remove the seller from the property.

Of course, mortgage lenders can benefit as well. With a short sale, lenders don’t have to worry about getting involved in a long foreclosure process. More than anything else, lenders want their money back, and they generally want to steer clear of taking responsibility for selling a home. So, a short sale can actually be good for them.

Potential Pitfalls

Sellers considering a short sale must understand a few important things. First, not all lenders will offer to relieve the seller of the responsibility of paying off the balance of the loan. So, sellers should get a solid commitment from lenders that states this is part of the deal. Also, though the seller is avoiding a foreclosure, even a short sale may affect their credit score to some extent. So, sellers should discuss this issue with their lender to figure out how the process will be reported to the credit agencies.

Most importantly, not all sellers even qualify for entering into a short sale. For example, few lenders will enter into a short sale agreement with sellers who have not yet missed multiple payments. So, if you’re a seller thinking about a short sale, you’ll want to talk to your lender about the options available.

Buyers need to be wary too, since getting a deal on a short sale is not as easy as it may sound. In fact, there are some extra steps that buyers need to take when entering into a short sale, which can require doing some additional homework and assembling the right paperwork.

Of course, if you’re a buyer considering entering into a short sale, it would be wise to consult a real estate professional who can answer your questions and help you navigate the process. This way, you can be better prepared to pull together all the appropriate information you need to complete the transaction and move into your new home. Below are some important steps you should take if you are looking into buying a short sale

 1. Identify The Short Sale

 Locate preforeclosures in your area. You can use an online database, search courthouse listings, legal ads or by using an experienced real estate agent as a buyer's agent. First, try to determine how much is owed on the house in relation to its approximate value. If it seems high, it's a good candidate because it indicates the seller might have trouble selling it for enough to satisfy the loan. Pass on those in which the owner has a lot of equity in the home -- the lender likely will prefer to foreclose and resell closer to the market price.

2. View the property
Gauge its condition and come up with a rough estimate of how much it's going to take to repair or renovate. If it needs work, many "normal" buyers won't consider it, which is good for you.

3. Do your research
What is the property worth? What's the profit potential? If you're an investor or even a homeowner planning to live in the home a short time you'll want to profit from the deal.

4. Find all liens and mortgages
Ask the seller or his agent what liens are on the property, and which lender is the primary lien holder.

5. Figure out the financing
This is critical. You have to know how you're going to pay for the property. If you're a good credit risk, the existing lender may be willing to give you a loan. Since they already have a lot of your information in the short-sale paperwork, they may be able to expedite the loan application process. It's important to understand that in a short sale you have to have the ability to move quickly. Once an agreement is worked out, it is common the lender will require closing in as few as 20 days. This is too late to start shopping for a mortgage.

6. Contact the lender
You or your agent should speak with the loss mitigation department (or perhaps the resource recovery department) rather than the collection or customer service department, which is only interested in recouping past due loan payments. Finding the decision maker can be one of the biggest initial challenges. You will first need to have the homeowner complete and sign (notarization is usually required) an authorization letter, which gives the lender permission to discuss the mortgage situation with you.

7. Complete the lender's short sale application, if they have one
Many lenders have an application specifically for a short sale request.

8. Assemble the proposal
The proposal generally consists of a package of materials including the application and authorization letter plus:

• The purchase and sale contract -- signed by you and the seller -- to buy the property for a specified price. The lender is not going to entertain tentative offers. You're not going to get the chance to ask the bank, "Would you take X number of dollars?" In most cases this also means posting a sizable amount of money to demonstrate your desire and ability to go through with the transaction if it is accepted. If you can't make a sizable down payment, the lender would have no reason to believe you can do any better than the last owner. It's also very important to the buyer that the contract be contingent upon all lenders approving the short sale in writing.
• A hardship letter. It's important to remember a lender will not even discuss a short sale until the homeowner has fallen behind on payments -- usually 90 days. The lender must be convinced taking a smaller loss now is better than a bigger loss later. To make that case, start with a letter written by the seller giving an overview of the seller's desperate situation. The lender must recognize the seller's inability to pay the loan -- immediately and in the foreseeable future -- and that the situation is irreversible. The seller should supply as much evidence and documentation as possible, such as divorce papers, evidence of job loss, delinquent accounts, utility shutoff notices, car repossession paperwork, last two years tax returns, recent pay stubs and recent bank statements. If the lender thinks the seller has money or assets stashed away, it will never go along with a short sale.
• A statement of the property's value. This can be an appraisal or a broker's price opinion. The lower the estimate of the property's current market value, the better it will be for you. You want to show the lender that the seller would not be able to get enough for the home via a normal sale to satisfy the loan. Compile a list of all the negatives and problems of the home that negatively affect the value and make it undesirable to the average buyer and tougher for the lender to resell. The longer a lender must hold onto a property, the more expensive it becomes. If the lender realizes the property will bring them nothing but headaches, it will be more likely to OK a short sale. "Many short sales are turned down because the lender doesn't think the offer is high enough."There are ethical and legitimate ways to get a low valuation and if you show this to the lender to start with your offer won't look so low."The offer can be 85 percent in areas that are slow but not terribly distressed and as low as 50 percent in really distressed areas."
• Detail the costs and liabilities. You want to show the lender it would be much better off letting you take the property off its hands. If you can convince the lender the home is a money pit, all the better. Take photos of any damages and get estimates of the repair costs. Remember: A short sale is always an as-is sale. The lender is not going to pay for or otherwise be responsible for any repairs. But,  if the lender forecloses, there's a good chance it will be forced to make repairs just to get the house resold. That's one of the liabilities the lender may face.
• A settlement statement. This statement outlines the purchase price, the closing costs and any other costs or fees involved in the transfer of the property. Often referred to as a net sheet.

9. Negotiate
It's not uncommon for the lender to reject your offer or to come back with a counteroffer. As with any real estate transaction, you should figure out beforehand what your absolute highest limit is, and don't be afraid to walk away if the lender won't meet your figure.

10. Seal the deal

Once you've reached an agreement that all three parties (you, the seller and the lender) are OK with, get everything in writing and officially recorded. Make sure all parties involved  understand all of the terms of the deal. Next comes the closing and the property is yours.

Here are just a few more important details to add:
 

1. The entire process gets far more complicated and uncertain of success if there is more than one lender involved. Second or junior lenders often are the ones absorbing most of the loss. If there is a second mortgage or a home equity line of credit, you'll need approval from all. In addition, you may find your mortgage loan was sold to another entity in a process called "securitization," and therefore you also need approval from that company.
   
   Be sure to do a title search, and verify the lien position of the lender you plan to contact. Only pursue short sales with the primary lien holder. Making a deal with a junior lien holder is a waste of time.
2. The Mortgage Forgiveness Debt Relief Act of 2007 gave short sellers a big tax break by changing the way the forgiven amount was viewed for tax purposes. Prior to passage of the act, that amount was considered as income for the borrower and was subject to tax. However, the new law removed that tax liability.
3. Time is of the essence. While you negotiate with the lender, the clock keeps ticking. Do everything you can to get the lender to move quickly. Many short sales fall apart because the lender moves too slowly and fails to complete the deal before the property goes to auction.
4. Some buyers have successfully negotiated with the lender to minimize the damage to the seller's credit rating. The lender has no obligation to agree to this, but if you can convince them not to report this action as a black mark on the seller's record (and put this in writing as part of the deal), it will give the seller a big head start in rebuilding their financial lives.

So in Short, It is possible to have a successful Short Sale you just better be ready to work for it!

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