Short Sales ? A Sellers Primer by Joseph C. Alfe

by 05 Dec 2008
As a property owner, you may be unpleasantly surprised at the current market value of your property if you need to sell in today?s market. If you can, wait out the current downswing to sell. Many homeowners, however, are forced to sell now due to financial hardship, divorce, or relocation. For them, the prospect of owing more than what they owe is a nightmare with little light at the end of the tunnel. If you find yourself in this situation, there are several options available to you. In this article, I will concentrate on the short sale, what it is, and how it affects you. Underwater-Now What? It really does not matter why you need to consider a short sale. You may have a financial hardship such as a job loss, upward adjusting mortgage, a bad tenant in an investment property, or a divorce that forces you to sell your home in this down market. The truth of the matter is that the lenders really don?t care. They are only interested in two things: How much do you owe, and for how much can you sell? That?s it. If you are a homeowner facing foreclosure due to non payment, or you are not delinquent but need to sell at a loss, there are several options that you must consider: Options 1. Deed in Lieu ? This option involves the seller calling the bank and saying ?I?m done, here are the keys?? The bank may or may not even accept this option, and they will require paperwork to be filled out, and procedures to be followed. 2. Forbearance ? This one?s my favorite. This little gem means that if you are behind $5,000 in interest, the lender will give the borrower a payment plan to pay back the delinquency. On top of their regular mortgage payment. So, if our seller is struggling to make the payment, and the bank tells them to add $500 extra to it to satisfy the forbearance-what makes them think they can pay that? I think it?s a scam by the lenders to suck as much money from the homeowner as they can before they foreclose. I have had clients who have told me that they have cleaned out their 401K?s to pay a forbearance, only to be threatened with foreclosure again down the road. Oh, and they will have to fill out paperwork, there are procedures. 3. Bankruptcy ? I am not attorney, and I will not give out legal advice, but bankruptcy may not protect the home. In fact, it may guarantee that you will lose it. Again, the lender will want paperwork?see a pattern? The paperwork is the same, whether it is for a short sale, a deed, or forbearance. 4. Short Sale - Simply put, a short sale is when a lender decides to accept a payoff that is less than what is owed to them on the mortgage. A lender might choose this option if they believe that the property may go into foreclosure due to seller hardship. A lender cannot make someone pay the mortgage, and a foreclosure will end up costing a lender far more money in the long run, so it?s up to you to convince the bank to accept this option. There is an old saying ? The first loss is the cheapest, and it is certainly true in this case. So I have a Short Sale ? Now What? Find a realtor who has experience closing short sales. This is not the time to let Cousin Larry try his first one. Short sales are complex and require a great amount of attention. Interview agents to determine who you should let represent you. Ask if they have short sale experience, what is their short sale closing ratio, and what if any, cost will be to you? If the answer is anything other than No cost, find another agent. A short sale should never cost the seller anything. The agent will start by performing a market analysis of your property. Here is where many short sales go wrong. Do not try to make the property value higher that it really is. Tell the agent to price the property at a value that will attract an offer immediately-regardless of what you owe. Contact the lender and ask for their ?Home Retention? or ?Loss Mitigation? departments. Tell him or her that you are considering a short sale, and to send you the paperwork. This will consist of an application, a personal financial statement, and you will need to provide your current bank statements, tax returns, pay stubs, and a hardship letter. This letter is simply an explanation of why you need to sell, or why you can no longer afford the mortgage. Make it short and sweet; no need to write a country western song. Submit this document package to the lender and hope you get an offer. Once you do, submit this to the lender and follow up constantly. Some lenders take 30 days or more to even respond to acknowledge that they have received the package. Keep at it. Once the offer is approved, you will receive a release of lien. This is a document that states what the lender will accept as a net payoff. Remember, the selling price is not the end number. You must account for any seller closing costs, real estate taxes, liens, and commissions. These costs must come from the sales proceeds, so the lender will net less than the selling price. The release will also say whether the seller will be released with or without prejudice. A release with prejudice means that the lender will reserve the right to attempt collection of the deficiency balance. A release without prejudice means that the lender releases all liability of the seller. If the approval is subject to prejudice, and you are trying to protect your credit, offer the lender a ?Promissory Note? for some of the deficiency amount. For example, if the lender loss is $40,000, offer to pay them back via a promissory note for $10,000. You can negotiate favorable terms. I have gotten promissory notes as low as 0 percent interest over a ten year term. A lender acceptance of a note will prevent a negative credit hit, and will usually placate a lender enough to accept an offer. Once you receive the release, you are ready to close. Forward this release to your title company or attorney and you will be able to schedule a close. Short Sale FAQ?s What is a Short Sale? A short sale occurs when a lender accepts less than what is owed on the mortgage to end the foreclosure process. Will the Bank Come After Me for The difference? Unless you have great credit, are not delinquent, or have significant assets, most banks will not. A lender usually releases liability of the mortgagee in writing. Why Do I Have To Provide Personal Information? All lenders require a complete short sale package, including tax returns, bank statements, pay stubs, etc, to show that there is a genuine hardship or the need to sell. I Heard the IRS will 1099 me for the Amount Of Debt Forgiven. The Mortgage Relief Debt Act of 2008 does not permit lenders to issue a 1099 to a borrower for a deficiency balance on a primary residence. Will A Short Sale Destroy My Credit? Yes and no. The short sale may not show up on your credit. In fact, most mortgage trade lines report ?Mortgage Paid? after a short sale. Any late payment history will still appear, as will any Notice of Default filings. What won?t report is an actual foreclosure. A promissory note may prevent the lender from reporting the mortgage as a loss. In today?s credit market, a foreclosure may prevent you from obtaining a mortgage for at least 5 years, longer than a bankruptcy. How Long Will This Take? This is totally up to the lender. Some lenders take as little as two weeks, some over six months. The only way to know is to start the process. The key is making sure that your short sale package is complete, and that you follow up daily with the lender. Why Should I accept Such a Low Offer On My Property? What difference does it make? To sell quickly, you must list the property at or below current market value, not for what you wish you could sell, or what you think the property should be worth. Do I have To Pay an Agent? Only if you have hired one. If there is an agent involved, and the proceeds from the sale will cover the fees and costs. There should be no money coming from the seller on a short sale. Will This Cost Me Anything? Most states do not allow agents or third party negotiators to charge the seller for a short sale. Will I Get Any Money From The Sale? Not usually. Most lenders will not allow a borrower to receive any money. If the lender thinks you are getting paid from the sale, they will immediately kill the deal. Joseph C. Alfe is President of Investors Capital Group Inc., a professional Loss Mitigation Company Alfe can be reached at Working with Realtors, attorneys, and investors as a short sale outsource agency. Let us deal with the lenders so you can work your side of the deal without distraction. We Teach Short Sale Strategy. For more Short Sale Information, please visit my blog at



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