What is a short sale?

This term has been widely misused in main stream america . I could go into a long dissertation but hesitate to do so since it would just create more confusion. For this discussion all Short Sale discussions will pertain to lenders holding a note and mortgage on real property.

In its simplest form a Short Sale occurs when a lender sees that its position on an asset, (home loan) is about to go into default or already is in default due to non payment of the debt by the home owner. When this happens the lender then has two options. One, to foreclose on the property and in today’s market take a substantial loss. Or two, to allow the sale of the home for less than the amount owed on the note and minimize their losses.

Why would a lender do a Short Sale?

Lenders and banks are in the business of loaning money for a prescribed return on their investment. When the investment become a nonperformance asset through defaulted payments on the part of the “Debtor” also known as the home owner, the lending institution must liquidate the property in an effort to recover as much of their investment dollars as possible. The method of liquidation known a foreclosure causes the lender to go through a lengthy legal process to gain ownership of the defaulted property so it may be sold on the open market, thus reclaiming some of its capitol investment. Lenders don’t want to use this method of recovery for a couple of reasons.

• It’s costly and time consuming
• Lenders are not in the business of maintaining properties
• The number of loans written off to foreclosure decreases the lenders ability to loan more money to future homeowners.

A short sale on the other hand allows the lender to:

How does a homeowner know if they qualify for a short sale?

As the rate of defaulted loans continues to climb, the rules of the game are ever changing. When a homeowner decides to pursue a short sale for the liquidation of their property, a few hard and steadfast guidelines are present. One cannot hope to get a short sale of their property just because they decide to stop making their payments. Short Sales are designed to help people facing true hardships, whether due to poor judgments with their finances or the cause of some unforeseen hardship like: loss of income due to death, divorce, loss of job, etc. The following is a list of basic requirements for your lender to consider a short sale.

• Payment is delinquent. In the past lenders wouldn't even consider a short sale on a note that is current. Times are changing and some lenders are being pro active and allowing short sales on properties that are current, but exhibit proof that the loan will become delinquent very soon.

• The value of the home is such that when the property is sold for fair market value, all the costs associated with the sale such as; closing cost, Realtor commissions, and full payoff of the note cannot be realized.

Example: Your home is valued at $300,000, you owe $300,000. By the time you sell the property for $300,000 the costs for closing and Realtor commissions will total somewhere around $30,000. In this scenario the lender would only receive the remaining $270,000 (not enough to cover the $300,000 balance owed)

• A hardship must have occurred. The lender wants to see what changed in the homeowner’s life that warrants the potential short sale. Homeowners wanting to quit making payments for other reasons won’t qualify.

Why would a homeowner pursue a short sale vs. foreclosure?

The simple answer is credit rating and the ability to limit future judgments. Lets look at some of the differences in short sale vs. foreclosure from a homeowner’s perspective.

Foreclosure:

• Court Settlement can be high
• Credit Ruined
• Big Attorney Fees
• No peace of mind
• Hard to buy again with in 10 years
• Deficiency could result in civil lawsuit

Short Sale:

• Negotiate the settlement
• Credit bruised
• No attorney fees
• Seller has piece of mind
• You can buy again with in 2 years
• Liens negotiated
• Sellers can stay in the house longer
• Zero money comes from the sellers pocket

As this illustration shows, doing a short sale keeps the homeowner in control and allows the process to be finalized without wondering what might pop up in the future. Another way to look at this is from the position of, what is there to lose in pursuing a short sale? The answer is nothing. If the sale cannot be obtained, the property will go to foreclosure. At least you have the peace of mind knowing you did everything possible to help the situation, rather than just sticking your head in the sand.

Will I have to open my life up for everyone to see?

The answer is you will be required to open up your life to a select few in order to get the short sale done. The lender requires proof that you the homeowner NEED a short sale. They will want to see the following:

• Hardship letter
• Financial sheet showing all income and out going payments
• Last two months bank statements
• Last months pay stubs
• Last two years tax returns or W-2s

The person helping you with the sale of the property and the lender are the only ones to see the data you provide. In an effort to get a buyer for your property in a timely manner, your home may be listed and marketed as a short sale. Obviously this lets the whole world know you are in financial straights and may seem embarrassing BUT, hardships happen to everyday good hard working people. Letting your ego get in the way of accomplishing the short sale is ill advised. Especially in today’s economy, the mortgage debacle has caused a lot of people to be in this situation, so trying to hide it will only make things worse. Time is also of the essence because the foreclosure timeline marches on while the short sale is being pursued.

How much time before the lender forecloses and I have to move?

This is the single most asked question by homeowners. In the state of Florida the foreclosure process has to go through the judicial process. This inherently draws out the process over a period of months on average. When you understand what order things must take place, you can then determine how much time you have to accomplish your short sale prior to a foreclosure.

First: Nothing legal can begin until you are 90 days delinquent with payments. Once you’ve reached 90 days delinquent the lender can then issue a notice of default (NOD) this is a letter sent to your home letting you know the lender is calling their loan due and you have 30 days to pay it in full. Don’t freak out, the lender doesn’t expect you to pay your loan off within the 30 days. It’s just what has to happen before the next step can be taken. Once you’ve gone past the 30 days of the date of the letter, the lender will send the file to their attorney to begin the paperwork for foreclosure. From that action you will be served a “Notice of Lis Pendens” it will be delivered to your door by a process server. Typically it’s a normal regular dressed person in a regular vehicle…..Not the Sheriff!

Now that you have the Lis Pendens (Latin for suit pending) the process will slowly crawl along for a minimum of 3 to 4 months. That’s if the lender is moving quickly, and right now and for the next few years I don’t see them moving too quickly. The next phase of the process is what’s called the Summary/Final judgment. This is the legal filing with the clerk that states when your hearing date is for the judge to determine when the property will be sold at auction. The judge usually set the auction sale date out about 30 days after the hearing date. Once the property goes to auction you the homeowner has 30 days to vacate the property.

If you add up all the processes, the fastest a lender can finalize the foreclosure is about 8 months once your first payment is missed.

Implications for the seller/homeowner

When the short sale is finalized there are two main concerns on the part of the homeowner. One is the amount of debt that was forgiven…what happens to it? Example: you owe $200,000 and you get the short sale done for $150,000, there is now a $50,000 deficiency. In the past, the lender issued the homeowner a 1099, meaning the homeowner would be taxed on the $50,000 as if it were income. In January the President signed into law the Mortgage Cancelation Debt Relief Act which negates any taxes owed on forgiven debt. http://www.irs.gov/individuals/article/0,,id=179414,00.html

This bill only applies to your primary residence, not second homes and investment properties. The next concern is the remaining deficiency could be sought after by the lender in the form of a deficiency judgment. While the lender has the legal right to go after that money, many factors play a role in determining whether or not the lender pursues it. One is, if it’s made part of the agreed upon short sale that any deficiencies will be waived then you are in the clear. In the event the lender won’t agree to put it in writing that they waive their rights, most lenders won’t pursue the deficiency judgments because the homeowner is insolvent anyway and the short sale wouldn’t have been authorized in the first place.

How does the homeowner know who to trust when choosing someone to help them?

This can be a difficult task and should not be taken lightly. Most of the time a homeowner contacts a Realtor to sell their home and then finds out a short sale is the only viable option. When you the homeowner decide to go forward with the short sale process you should ask some very direct questions of the Realtor you’re about to work with. Since the process is difficult and has your life hanging in the balance, you have to be confident the person chosen to help you is on top of their game. Ask how many successful short sales the Realtor has completed. Successful being the key word. If they have done at least 5 successful short sales for clients then they are minimally qualified. Ask if they have outside experts at their disposal to get additional advise should they get stuck. Have they had formal training and how much? The biggest advantage for the homeowner is, do you feel confident with the answers given and you should have a clear understanding of the process and it’s potential advantages and pitfalls.

Deed in Lieu VS. Foreclosure

So your buddy’s best friend tells you to just do a deed in lieu rather than a short sale. A deed in lieu of foreclosure is where the homeowner give the deed back to the lender and walks away. No foreclosure right? Not exactly, when a deed in lieu is done your credit report will state; “Deed in Lieu.” In a creditors eyes, it’s no different than a foreclosure, you’ve walked away. Another misconception is that it’s something you can just decide to do. It’s not, the lender has to agree to it. A few reasons they won’t agree is, there’s no equity in the home for the lender to recoup all of their costs. They would rather have you sell it and do a short sale. If there’s more than one mortgage encumbering the property the lender will not accept a deed in lieu. As you can see the deed in lieu really has no real benefits even if the lender does allow it.