Navigating A Short Sale

A short sale represents a great opportunity for a homeowner who owes more than their home is worth.  Ideally, it gives them a chance to sell their home without owing the difference to their lender.  As home values continue to decline, short sales have become one of the most viable solutions for millions of underwater homeowners who are facing foreclosure.  Unfortunately, it is very difficult to successfully negotiate a short sale with most lenders today.

A short sale can also benefit the community in which the home is located. Foreclosed homes often stay vacant for many months before they are finally sold. Lenders have a policy of not performing any maintenance or repairs on a foreclosed property. As a result, the home begins to deteriorate and causes the values of surrounding properties to drop. When a short sale is purchased by a buyer or investor, the property is often fixed up and inhabited rather quickly, as these individuals have some real stake in the property. They will not let the property fall apart over time.  Thus, the surrounding homes’ values will not suffer.

A short sale is only for the patient, however. A typical short sale process can take months without any guarantee of even being approved by the lender. It’s not uncommon for a month or two to elapse without an update from your lender. It’s important to recognize that the banks are understaffed and overwhelmed with homeowners seeking assistance with their mortgage payments. Homeowners who have second mortgages on their property will have an especially difficult time negotiating a successful short sale. They usually negotiate each mortgage separately, so it becomes doubly long and difficult to accomplish a short sale. You must also prove to your lender that you are incapable of staying current on your payments or paying off your mortgage in full. Your lender will also demand to see the contract between seller and buyer to ensure they are receiving all of the proceeds from the sale. Another point to consider is whether you will have any tax implications after a short sale. The IRS may consider the debt forgiven as income and tax you accordingly. A good attorney or accountant can assist with this. Between foreclosures, short sales, and loan modifications, the banks are beyond their limits. The best way to ascertain if you will qualify for a short sale is to determine how much you will be “short” on the sale.

Here is a basic way to determine just how “short” you will be on your short sale.

1. Home Value/Worth:  Determine the approximate value of your home.  A good way of doing this is to enlist a real estate agent to perform a Comparative Market Analysis on your property.  A Comparative Market Analysis (CMA) is  an in-depth analysis of a home’s current value by comparing properties in its surrounding area that have been sold, current listings, expired listings, and pending sales. A real estate agent uses a combination of these tools to estimate the value of a home.

2. Cost of Sale: This is where you calculate the approximate cost of a short sale. A property sale can include expenses such as broker fees/commissions, advertising costs, legal fees, and closing costs.

3. Total Value of All Loans: Calculate how much you owe on your property (this can include second mortgages, home equity loans, etc. ).

Next, subtract the total amount owed on the property and the estimated cost of the sale from the expected sale revenue.  The number remaining is how much you will owe after the sale. This number is a good indicator of your chances of having a short sale approved by the bank. An experienced real estate agent can assist with this.

Here is a brief example:

1. Estimated Current Value of Home = $175,000

2. Amount owed on first mortgage: $200,000

3. Amount owed on second mortgage: $50,000

4. Estimated Sale Cost: $5,000

-          Add up values 2,3,and 4 = $255,000

-          Subtract from expected sale revenue (#1)

-          =$80,000. This is the amount you are “short” and will need your lender to forgive.

Anyone can negotiate a short sale on their own, but this could be detrimental to the outcome. Having a professional negotiate a short sale for you can significantly increase your chances of success. With so many fly-by-night companies cropping up, it’s becoming difficult to hire someone you can trust. A law firm is always the best option when seeking to hire someone to negotiate on your behalf. A law firm is familiar with your State and Federal laws, and is also bound by them. Most lawyers will not risk their license and livelihood to make a quick buck off a consumer.  Your lender will also take requests from a law firm much more seriously, and your short sale can move along much more quickly. An important obstacle to avoid during a short sale negotiation is a Promissory Note.  A promissory note is essentially a promise to pay the bank back the difference after a short sale. This is very bad for the homeowner trying to negotiate a short sale, because it leaves them responsible for the balance of their loan. An attorney can assist a homeowner with dealing with a Promissory Note, but there are no guarantees.

Fortunately, lenders are beginning to understand the benefits of a short sale. The Comptroller of the Currency showed that lenders completed three times the amount short sales in the 4th quarter of 2008 than in the first quarter of 2008. Now is the best time to try to negotiate a short sale with your lender. They have begun to realize that in many cases a short sale is a better alternative to foreclosure. After a foreclosed home sits and falls apart over time, it becomes extremely difficult for the lender to sell it at a competitive price. A short sale also gives the homeowner the responsibility of making their home “sale ready” to increase the chances of selling the home for a fair price. This helps the lender recoup more money than they would from attempting to sell a foreclosed property that has fallen apart over time.

If you would like more information or need assistance with a short sale, please contact the CreditLawGroup at (800) 508-0041