When a property sells and the bank official’s agree to accept less than what they are owed.
Who qualifies for a Short Sale?
Anyone who has;
1. Experienced a hard ship that they can prove.
2. Owes more on there home than it is worth.
Do I have to prove hardship?
Yes! You must send a hardship letter with your package explaining to your lender how your circumstances have changed that will required them to work with you in approving your short sale. It must be convincing and make sense, but it can be almost anything. Some examples of hardship include;
- Adjustment in mortgage payments
- Loss of job
- Reduction in pay
- Spouse is no longer working
- Job transfer
- Medical hardship
- Other financial losses that affect your ability to make payments
- Injury or Illness
- Divorce or separation
- Failed business
- Decrease in home value combined with another hardship
This list is, obviously, not inclusive because there are a million different things people will go through in their lives that will cause a financial hardship. The point is there is a reason you have stopped making your mortgage payment and want to sell your house. What is it? That needs to be explained in a way that will show the bank that it is in their best interest to work with you. See sample hardship letter at the end of this book.
How long does a short sale take?
This can be a complicated question and depends on a few things. Let me ask some questions. Is the homeowner delinquent and how delinquent? How many mortgages are on the property and who are the lien holders? What are the loan balances and how much is the property worth? What will the BPO(broker price opinion) show the property is worth? Will the homeowner provide all the information to the bank in a timely manner? Who is negotiating the file for the homeowner? Was a complete package submitted the first time with a bona fide offer? Are there any back taxes, judgments or mechanics liens that have encumbered the property?
That being said, more than half the time, short sales can be approved (when I am involved) in 45-90 days, (the buyer closing 14 to 30 days later). Some can easily take as long as six months, depending on how many issues they have. Some people want the sale to take as long as possible so they can live in the house for free. If this the case for you, make sure you tell your Realtor™ who specializes in short sales your intentions so he or she will know how to handle the file. Let me caution, however, that banks will only allow the process to continue for so long before they will ultimately foreclose. In the end that may be more costly than a few free months in the house.
Will I have to pay the bank back the difference?
That depends, yes, no and maybe. Tell me who is negotiating your short sale and I will tell you if you will have to pay back the loss. This is critical! Generally, you should not have to pay back the difference to the bank if you have negotiated correctly. You may not have realized what was hanging in the balance when you chose to work with the bank yourself or hire a friend who is a part-time real estate agent but doesn’t specialize in short sales. If the bank does not agree to release your debt and, in turn, you do not agree to short sale the house, it will cost the bank significantly more time, money and management to sell the home. In this scenario, if the homeowner were to file for bankruptcy, the lender would still end up recovering nothing (consult your attorney). In the end, it is in lender’s best interest to reach some sort of agreement. That remains true whether the home is owner occupied as a primary residence or non-owner occupied (investment). If the bank does not believe you have experienced a hardship or if officials think they can recover losses from you directly then you need to rethink the negotiations that you have presented to them. There are some assets for example 401K accounts that can be protected in your negotiations. It is important to also know that with some of the loans that have PMI insurance the lender will be reimbursed for their loss because of the insurance you have been paying for. In this case you will need additional approvals from the PMI Company. Right now PMI companies are very difficult to short without them asking for a promissory note. I don’t know anyone who would guarantee to get people 100 percent off the hook every time and in every situation But, most of the time, if you know what you are doing you can have each loan satisfied depending on your lender. Remember, most agents are struggling to get a mere 10 percent of their short sales even approved. With my system, I’m reaching more than 96 percent of short sales approved, with very few that have recourse.
Promissory Note Disclaimer – Occasionally, the bank or investor will ask the homeowner to sign a promissory note. A promissory note is a document that the home owner would sign agreeing to repay the banks loss. This depends mostly on which bank you are dealing with and how big the loss is. You can negotiate your way around them with most banks and even negotiate them down to about 10 percent of the balance owed, repaid with 0-percent interest. A very small number of other banks will require that the full amount is repaid. Their point of view is that if the hardship is not a permanent hardship, at some point the borrower will be able to repay the money. The problem with this thinking is that if they place to high of a burden on the homeowner, the homeowner will just file bankruptcy and the bank will recover nothing. The only thing they accomplish is causing further hardship on the homeowner. This is why in the event that the bank officials do ask for a promissory note, it can usually be negotiated to a minimal amount. If the Realtor™ you are working with specializes in this area they should have an idea of what your bank will do. Currently are smaller loan amounts under 400K are easier to have all leans released without recourse. Some of the larger loans 400K and up are initially asking for promissory notes that have to be negotiated. Results are not guaranteed.
There are several contingencies that we have in place in our turn key short sale system to avoid the seller having to sign a promissory note, including having the buyer pay it at closing. Call for details.
Will I have to pay taxes on the difference?
This is a common question and as tax laws are changing all the time so you should confirm the following information with a certified public accountant. When the bank takes a takes a loss on a property, they deduct their loss for a tax benefit. To do this, they will document their loss and issue the property owner where the loss was incurred a form 1099-C in the full amount of the loss. The homeowner would then have to pay income tax on that amount. At this point, most people are panicking and swearing at their real estate agent for not telling them this or asking them to consult a CPA. There is good news, though. The government passed the Mortgage Forgiveness Debt Relief Act of 2007 that states that for short sales, foreclosures or loan restructurings for a primary residence, there will be no tax due on debt forgiven in calendar years 2007 to 2012. You still have to file a form 982 with your taxes showing the loss, but you will have to pay $0 in taxes. You can also read more up-to-date info about the “Mortgage Forgiveness Debt Relief Act of 2007” on the IRS’s Web site, www.irs.gov, or just Google it. Remember, this act only covers your personal residence. You should consult your CPA with your specific situation regarding other solutions such as insolvency or bankruptcy, and for all other types of property such as non-owner etc.. There are other solutions as well for non-owner occ. property that your CPA who specializes in real estate will be able to help you with. Every situation is different. Some of it will depend on you cost basis. Call for details or I may write a blog post about how to handle this in the near future.
How much does a short sale cost?
My short sale services are paid for by the lender and cost you nothing at all! The best part about that is that loan servisers & lenders prefer to work with someone who specializes in this process so it makes it a win-win situation for all parties involved. The only way my fee gets paid is if the short sale gets approved and sells, so you can be sure that I am working hard to ensure that every deal closes.
What is a BPO? And what price do you want it to reflect?
BPO stands for Broker Price Opinion. There are a few types banks can order, but most often the banks will order a drive-by exterior or an interior BPO that requires an interior inspection with pictures. Bankers basically have a list of Realtors™, brokers and appraisers that they will call and pay anywhere from $45 to $100 to inspect their collateral and give them an opinion about what it is worth. Sometimes they may even order two or three on the same house. If you are the seller, it is absolutely critical to the sale of you home that the BPO come back as LOW as possible. This is extremely hard for most homeowners to understand, so I am going to repeat it in capitals. YOU WANT YOUR BPO TO COME IN AS LOW AS POSSIBLE!! This may seem odd at first, but if the data that the bank receives about your home gives them an unrealistically high value you will have a very hard time getting you short sale approved. The BPO needs to reflect the true value of your home in an “as is” condition in today’s market, not last year or 6 months ago. There will be zero warranties with a short sale property and that needs to be reflected in the “as is” value. It’s an extremely subjective process giving an opinion of what a home will actually sell for on a 30-, 60- or 90-day time frame. Your Realtor needs to help in every way he knows how to influence the BPO agent to send the correct value. The BPO agent or appraiser will have instructions regarding this, but giving the BPO agent a “marketing update” or even your own appraisal, BPO or even just the right “COMPS” will be worth its weight in gold!
Will I have to pay any money at closing?
No. That is the point of a short sale.
But what if I really want to stay In my home?
Staying in the home is important for many people. This can be accomplished if 1. The home owner still has a documented income and can be approved for a loan modification. Or 2. The home sells as a short sale to an investor who in turn leases the property back to the seller. There are only some situations where that can be accomplished.
In my opinion most of the time the homeowner needs to back out some of the emotion and view the transaction for more of a business point of view. In my experience home owners who do this are able to make better financial decisions regarding their house.
Which is right for me, a loan modification or a short sale?
See the up and coming blog post “Loan modification VS Short Sale”
What if I have an FHA or VA loan? Or PMI with my loan?
FHA, VA and loans with PMI will require one additional approval and some extra paperwork. You would think that having PMI would be a good thing but the principle mortgage insurance companies are harder to get clean approvals with that any bank. Alot of it will depend on who the principle insurance company is. Any time there is PMI on a loan you most liklely expect them to “ask” for a note.
Do I have to be delinquent to do a short sale?
NO! It is sometimes easier to negotiate when you are delinquent, but you do not have to be. There are maybe a few loan services that now require it. Even then, the case needs to be presented to the bank in a way that makes them realize that it is in their best interest to accept the short sale now or face a greater future loss. Some banks do prioritize their files by delinquency and auction dates, but other files still can be approved. Contact a real estate broker who specializes in short sales as soon as you are experiencing hardship.
What paperwork will I need to submit for the Short Sale?
The paperwork that is submitted to the bank is a critical part of your approved short sale. Please do everything you can to get paperwork to your Realtor as soon as they are requested to avoid delays. Some bank’s representatives will require that your short sale package be submitted on their paperwork, but most will accept standardized paperwork as long as it has all the information they need, organized in the way they want. If your paperwork is not submitted complete with an accurate HUD-1(settlement statement), your file will sit on a desk and go absolutely nowhere!
Here is a basic checklist of the items you will need to send:
- Cover sheet with contact information
- Authorization form
- Hardship letter
- Last 2 months bank statements
- Last 2 years tax returns
- Last 2 years W-2 or 1099s if not included with taxes
- Standardized financial worksheet
- Any 401K or retirement account statements
- A copy of most recent mortgage statement
- A copy of any correspondence the bank has had with you
- A letter from state agency if you are receiving unemployment or disability
- Contractor bids for home repairs if needed
If you do not have any of these items, you must include in your hardship letter why you do not have them to avoid potential delays.
If you send an incomplete package, you will never get past the hourly gate keeper (with no authority) who goes through dozens of files everyday and makes sure all the paperwork is in place before assigning it to someone a level above them. If you are working with a Realtor™, he or she will also have a list of items he will need to send, including:
- An offer from a bona-fide buyer with all required addendums (“as is”, short sale etc…)
- Copy of a HUD-1 showing payoffs the way the bank wants (a few tricks here)
- Comparables supporting the value of the offer
- Contractor bids if necessary
- A few secrets I don’t put out there for other agents to read. =)
You need to do the banker’s job for her and make her life easy. Document every detail and make the file look PERFECT.
How do I personally handle my short sale files?
Every homeowner who I work with gets my full attention to every detail through the entire process. With one meeting, I can cover options for your specific situation and help you make the decision that is best for you, having your best interest in mind! On the first day I meet with you, I can provide a buyer for your home and save you months of time waiting on the bank. I will set realistic expectations up front about the process and time frame so you can begin moving on with your life. I will make sure that all the paperwork submitted to your lender is complete and exactly the way the bank needs to see it. I will communicate regularly with all parties, keeping everyone informed of the status of the sale. I will negotiate with the bank regularly to meet the objectives of the seller. I can make the sale as public or private as you would like. With any issues that may arise, you can rest easy knowing that you have hired the very best to handle and resolve problems for you. You will have years of specialized experience at your disposal. Also, I will not take more clients than the amount of time I have to commit to each person individually, so you are ensured a smooth and complete process. Feel free to call or e-mail to set an appointment for a consultation.
Why you should hire me?
This is a time when you need someone who you can trust. You need someone who will be honest with you and give you the options you need, someone who will help you make the best decision for you. As a broker with six years of experience with real estate, short sales, investments and mortgage loans, I can provide the specialized information and service you need. When a problem arises, you can rest easy knowing that is being handled correctly and quickly. My goal is to help make the process as easy on you as possible and meet all your expectations. If the information provided in this book or website seems overwhelming, please call or e-mail for a free consultation