Short Sale Frequently Asked Questions

What is a Short Sale?
In Real Estate terms, a short sale refers to the sale of real property (home, townhome, condo, multi-family home, etc.) for an amount less than the current amount owed on the property. In the short sale scenario, the bank (or sometimes multiple banks) agrees to accept less than the full balance due on the debt, and usually ‘forgives’ all or a significant portion of the difference.

How will the Short Sale affect my credit?
Short Sales are not new, but for the general public it is a relatively new “mainstream” concept. Banks have the option of submitting the short sale to the credit bureau as "Paid in Full" or "Settled for less than full balance". As far as your credit score is concerned, the banks are not consistent in how they report them – so the honest answer is “it depends”, but it is not the same as foreclosure or bankruptcy. In a short sale you are proactively trying to resolve the issue. Some have the idea that this is like a bankruptcy or a foreclosure. That's far from the truth! In a short sale, the lender is simply allowing you to pay less than you owe!

If you are currently behind on your mortgage or facing foreclosure, the short sale will actually help your credit! How? Because once you are approved for the short sale, all collection activity will STOP and you will avoid foreclosure! 

Who benefits from the Short Sale?
S
hort sales are a win-win situation. Lenders, Mortgagees, Realtors, and Community all benefit from the successful short sale. Mortgagors get the majority of their money back while avoiding the paperwork & attorney/title fees associated with filing for foreclosures, Mortgagees get the relief they need and are able to sell their property and avoid foreclosure, Realtors can facilitate the transaction and receive compensation (commission) from the sale, and the Community has a home that typically sells for a higher value than a foreclosure, thereby helping to curb the impact & stabilize property values.

Why would banks forgive the difference?
To mitigate their losses, banks often accept a settlement of less than what is owed on the property. When faced with the option of getting the property ‘back’ through foreclosure, a short sale often makes a much wiser business decision for the bank.  In some situations they forgive a large portion of the difference & then ask the seller to sign a promissory note for a small portion of the remainder (very often at 0% interest)….let’s be honest going from a burden of thousands of dollars a month to potentially to only a fraction of that is a huge relief.

This sounds too good to be true!?
Short Sales are logical & are a dignified solution to avoid foreclosure. The short sale makes good common and financial sense for the banks who grant them.  Mortgage companies and banks are NOT in the real estate business. They are in the LENDING business. The last thing they want is that property back.  Having property on their books is a deficit, non-performing “assets” of their portfolio and costs them an incredible amount of money to maintain and manage.

Can FHA, Conventional or VA loans receive a short sale?
Yes! Each has been successfully negotiated in short sales – it’s just a matter of knowing the proper steps for each of these loan types & we have the systems in place to properly address these loans for the sellers we assist.

Why does my property have negative equity?
Here are a few common reasons:

  1. Person bought at the height of the market and the market has now declined or paid more than the property was worth. (It’s similar to the stock market in that regard)
  2. The area has become less desirable for any number of reasons, so property values have declined. (i.e. – vacant homes, foreclosures, reduced commercial development/business)
  3. Person purchased the home with little or no money down and wants to sell within a few years of purchase… and the property value has not increased during that time. Therefore, costs associated with selling the property may create a balance due at closing.
  4. Person refinanced the home (with a high appraisal value) and now has little or no equity.
  5. Person bought in a brand new subdivision or recently developed area that has not been fully developed or has not appreciated (or has depreciated) in value.
  6. The market is soft because there is too much builder (new home) inventory or too many existing homes on the market (buyer’s market)

What is Negative Equity? 
Also known as being "upside down" or “inverted” - negative equity is the difference between the value of an asset and the outstanding portion of the loan taken out to pay for the asset, when the loan exceeds the current market value. For example, if your car is worth $15,000 and you owe $25,000 on it, you would have a negative equity of $10,000.  Negative equity can result from a decline in the value of an asset after it is purchased.

Some areas decline in value (very common in most areas around Atlanta following the housing boom). In other areas, prices may remain flat so that the properties in that area do not appreciate. If a seller wants to sell within a few years of purchasing their property, they may be in a situation where they have negative equity.

Why not just let my lender foreclose?
NO! What is the first thing banks do when they foreclose on a property? Hand it over to a real estate agent to get rid of it quick! The foreclosure process is a legal process. It involves attorneys and it costs MONEY. Once they get the property back via foreclosure they must often sell it for MUCH LESS than market value and pay Realtor commissions and all customary closing costs. Doesn’t it make more sense for them to take at or a little below fair market value before foreclosing?

And, even when they do sell it through foreclosure... this does NOT remove your obligation to repay the remaining balance! It is not wiped away!!! You still OWE THE BANK and your credit is significantly impacted by having a foreclosure on your records.

What if I'm not behind on my payments?
Short sales work – even if you’ve never missed a payment! 
Yes, I know… short sales have gotten a stigma of being only available for folks who are in foreclosure. But I have successfully negotiated short sales for folks who have never missed a mortgage payment! They just happen to be in a negative equity position and need the short sale in order to sell their home.

How long does it take? 
Short sale approval can take 60 days or longer. The fastest approval I’ve ever had happened in less than 30 days, but many take a few months. 

What if my home is already in foreclosure? 
Your foreclosure sale will usually be suspended during the short sale process. That's why it's imperative that you contact us right away!!! We routinely get foreclosure dates extended once we begin the short sale process & submit a complete package to the bank for consideration.

Will my lender send me a 1099 on the debt forgiven?

In 2007 the U.S. Congress passed the Mortgage Debt Forgiveness Relief Act and it is in effect until 2012. As a result of that act, borrowers no longer pay taxes on the debt forgiven on their primary residence. So if the property is your primary residence, then no, you should not receive a 1099 for the debt forgiven or have to pay any taxes on the forgiven debt.
 

For investment property, the lender does have the right to report to the IRS the amount they have ‘forgiven’ in a Short Sale transaction, the amount of the resulting tax will be far less than the debt forgiven. For example, we had one client who did get a 1099 for $60,000 forgiven. This resulted in additional taxes of $2,500 for that year. The resulting tax is far superior to paying the difference of the debt. Also, if the property is in foreclosure, the foreclosure would have a much more devastating impact on you than the amount of the 1099.

For more information go herehttp://www.irs.gov/individuals/article/0,,id=179414,00.html

How much will the short sale cost me?
The real estate commission will be paid by your lender. Short Sales are very labor intensive transactions. We do not charge an upfront fee as some realtors have chosen to do. Once we begin working on your short sale file, if the buyer defaults on the purchase & the earnest money is awarded to the seller’s side for buyer’s failure to perform – we ask for a 50/50 split of the Earnest Money as an administrative recouping cost for the countless hours spent in processing and negotiating with the bank & buyers on behalf of our sellers. 


What kind of marketing will you do on my property?

We had 100% success rate in 2009 & 2010 with our short sale listing.

On our regular listings, we do employ an extensive marketing plan, however we have found that traditional marketing mediums (flyers, virtual tours, open houses, showing feedback surveys, etc) are not effective at generating offers on short sale listings.

What generates success on our short sale listings is over 90% dependent on the property’s PRICE. We typically review the pricing and make adjustments every week or so until an offer is generated.

In addition to pricing, we employ a strong internet marketing presence. We have teamed up with REALTOR.com and ListHub.com to market your property on over 200 web sites.

If there are very few calls or lookers, then we will need to make price improvements until we get an offer. We typically generate offers within 30-60 days.

Do you think I should just do a loan modification instead of a Short Sale?

 

If you desire to keep your home and can afford to make the monthly payments, then YES you should keep it! In order to qualify for a loan modification, you will need to demonstrate to the bank that you are generating more income than your current monthly expenses.

 

Is this the case? If so, you will need to call your lender and let them know you want to do a loan modification, and see if they will qualify you for their loan mod program. If you aren’t approved, we can then move forward with a short sale. We can’t work the short sale at the same time you are working with your bank on a loan mod.

 

Remember that a loan modification is similar to refinancing….so there may very well be thousands of dollars involved in conducting the loan modification & it doesn’t forgive the loan balance, it may actually increase the amount owed as you go through the process and the property may remain in a negative equity position

 

Can I lease out my house while we’re waiting on the short sale?

 

We don’t recommend that you lease your home while waiting on the short sale to be finalized. Lenders will not be sympathetic to sellers who are collecting rent payments and not making their mortgage payment. Also, homes with tenants are subject to legal rules (tenant rights) and much more difficult to show and to sell.

 

How will you decide on the list price of my home?

Initially we will set the price based on our extensive market anlaysis. Once we have an offer we will submit that to the bank. Once we convince the bank to agree to do a short sale on your home, they will hire their own independent appraiser who will come out and view your home, and set a valuation, based on its condition.

In order to get the process going quickly, we will need to send you our short sale package and get all of the necessary information we need back from you first, before one of our team members goes out to put up the sign and lockbox.

Who will let me know what I need to do to the home to get it ready for sale?

We won’t be recommending that you do anything to the home that will cost you money. The truth is, since you won’t be netting anything from the sale, the last thing you probably want to do is spend more money on a home you no longer can afford. For that reason, we will be selling your home as-is. Our only suggestion is to clear out as much clutter as you can. Other than that you’re OK. The lender will price your home according to its condition.