Let's start off by defining what a short sale IS. A short sale by the most basic definition is when: The net proceeds from the sale of a home are not enough to satisfy the underlying liens (mortgages) on the property AND the seller does not have the means to pay the difference between the net and the amount owed. Take this example, a home is listed for sale for $200,000. They receive a full price offer and after selling expenses NET $182,000. The seller only has one mortgage but the mortgage on the property is $190,000. There is a difference between the net proceeds and the mortgage amount of $8,000. Is this a short sale? ONLY if the seller cannot bring the difference ($8,000) to the closing table. If the seller does not have the money to bring to closing to close the sale, they yes, we are in a short sale situation. Clear? As Mud?
Q: Why would someone sell their home "short"?
A: A number of reasons would cause someone to sell a home "short". The easiest way to explain this is that SOMETHING has changed in their lives that forces the sale of their home and they don't have enough equity in the home to profit after selling expenses. Loss of income, job transfer, mortgage payments increased beyond their affordability, etc.
Q: I'm a seller and I'm thinking of doing a short sale, what should I know?
A: As a seller, there are a number of things to take into consideration before proceeding with a short sale.
- This will not be an easy process. In a normal home sale situation, after we attract a buyer, we can usually count on that sale being completed within 30 - 60 days on average. In a short sale situation, they can drag on as long as 180 days before the bank makes a decision.
- Before obtaining an approval for a short sale, the bank will want a detailed accounting of your life, at a minimum, they will want your last two years tax returns, two months of pay stubs and two months of bank statments. The same doucments you used to get into your mortgage will be needed to get you out. In addition, they may also want a detailed report from you on the condition of your home and a hardship letter from you detailing why you need to proceed with a short sale.
- Be prepared to be late on your mortgage. Unfortunately, many of the banks we deal with won't even entertain the idea of a short sale until you've been at least one month late on your payments.
- Be ready for a "no" answer. Not all short sales are approved.
- Work with someone that is experienced in the short sale process and can advise you on the ins and outs. As Real Estate agents, many of us have "gotten our feet wet" with short sales, but until you've been through the process a half dozen times or more, you really don't understand what's going on.
- Meet with a real estate agent to determine the current market value of your home. Be prepared to be very open about your current financial situation with this person. We'll want to know what liens there are on the home, first, second, third, twelfth mortgages. Outline any deficiencies of the home with the agent, leaky roof, water in the crawl space, etc.
- Your listing agent will then come up with a value for your home that will likely be below current market value for the home. The reason is this, if buyers have a choice of two homes, both at market value, but one is a short sale, if everything else is equal, they'll take the non-short sale home everytime.
- Your listing agent will ask you to gather up all your financial documents and at the time of the listing agreement will also have you sign a letter to your mortgage company(s) authorizing them, or their negotiator to discuss your mortage(s) with the lender
- Your home will be marketed just like any other home, with the one exception that the listing will disclose to agents that the home IS a short sale. Keep in mind that many agents are afraid of short sales and will attempt to avoid showing your home, so your traffic will be down compared to a traditional listing
- An offer is received. Now because the seller won't get any money at closing for selling their home short (In fact it will be a requirement of their lender(s) that they not receive any money) the seller will likely be asked to sign any offer that comes in, regardless of terms, within reason. Try not to be offended at any offer that comes in. The buyer is looking for a screaming deal and they know at this point they're really dealing with the bank and not you. So as hard as it will be, try to take the emotion out of any offer that is received.
- There should be a clause in the offer that details whether or not the seller may accept other offers, whether or not the buyer can walk at any time prior to lender approval without penalty and that all timelines (inspection, financing) begin only when the lender has agreed to the terms of the offer.
- The signed offer is presented to the bank along with all financial documents, hardship letter and property condition report from the seller. This is often referred to as the "Short Sale Package".
- After the lender has confirmed they have received the pacakge, they will order a BPO or Broker's Price Opinion. Basically another real estate agent visits the property on behalf of the lender to determine it's market value.
- Once the lender has reviewed the BPO, they will assign the file to a negotiator. The negotiators job is to review the file in it's entirety and make a decision as to whether or not this short sale should be approved. This phase typically takes at least 30 days. If the home has multiple mortgages, each lender will have their own BPO and their own negotiator.
- Either your real estate agent, or if they've hired a professional short sale negotiation team, that team will be in contact with each of the lenders to determine progress on the file.
- At some point numbers should start flying back and forth. With multiple lenders and multiple mortgages, there is a lot of haggling going on between your agent (or their negotiator) and each of the mortgage holders negotiation teams. The first mortgage holder may offer a small amount of money to the second mortgage holder in exchange for them releasing the lien on the property.
- Finally at some point (up to 6 months, OR MORE) some answer will come back. Either the short sale will be approved with certain conditions or it will be denied. Assuming all parties agree on the conditions of the short sale, you can proceed to closing and your home should close within 30 - 45 days after receiving short sale approval.
Q: What are my options if it's denied?
A: Again, you have a few choices. You can choose to not sell the property. You can let the lender foreclose on the property. Or you can try to attract another buyer. In some cases it may be possible to rent your home for close to what your mortgage payments are.
Q: What are the potential ramifications if it's approved?
A: This will NOT be a comprehensive answer, and you should seek the advice of a real estate attorney to determine the ramifications in your specific situation, but in my experience, here's what I've seen happen:
- You can be relieved of all debt on the property and have no additional liability
- You can be relieved of all of the debt, but potentially have a tax liability for the amount that the bank wrote off as a loss
- You may be relieved of a portion of the debt and asked to carry all or part of the remainder as an unsecured debt
This is a very long blog post, and I'm going to stop it right here. This is by far not a comprehensive description of a short sale, but it is a VERY good overview (IMHO). If you'd like to discuss selling your home short and want someone that is experienced in the process, give me a call. I'm happy to give you any help I can.
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