Understanding Short Sales from a Seller's Perspective

ADDvantage Real Estate Services offers the knowledge and tools to lead sellers through the short sale maze. To request a phone conference with an ADDvantage Short Sale Specialist, email us or call 727-942-2929.

Below is a detailed description of the short sale process.

Today's real estate market prices are being driven down by short sales, pre-foreclosures, bank owned properties, and seller owned “fire-sales”.

Short sales have become more prevalent due to the sharply declining real estate prices. In many cases where homes have been purchased between years 2004-2006, market prices have dropped below what is owed on the property.

When mortgagors can no longer afford their loan payments or need to sell for relocation purposes, some are turning to a short sale option as a solution to avoid a possible foreclosure situation. Lenders, including FHA and VA servicers- provided they can comply with the insurers' or guarantors' guidelines-will often consider a short sale.

To initiate a short sale, the seller contacts the lender and requests a short sale package. In doing so, the seller is asking the lender's permission to sell the home for less than what's owed on it.

Any shortfall or deficiency is absorbed by the lender. If the seller is successful finding a buyer at a price that the lender will accept, then the seller avoids foreclosure and takes the less painful credit option…the short sale.

Your credit score will suffer in a short sale but less than if a foreclosure occurred.

The Renting Option

Investors have purchased multiple properties in Florida, often attempting to flip condos in hot spots such as Miami, South Beach, Orlando, Jacksonville, Naples, and Fort Myers. Because of the dramatic turn of fundamentals in the market, many investors find themselves unable to sell properties and often consider renting.

There are several issues with renting.

The short fall between the rental income and the owner's expenses often results in additional financial pressures down the road.

Short selling a property that is tenant occupied brings additional concerns such as:

Tenants can be ornery. They can affect a seller's ability to show the property when Realtors® request showings. They will often not allow a lock box. They may smoke inside or damage the property which may turn off potential buyers. They may default on the lease and not make rent payments forcing the seller into additional costs to evict the tenant.

The term of the lease may present additional issues. For example, the buyer wants occupancy immediately following closing but the lease period ends in 7 months. This may require a possible lump sum payoff to the tenant as incentive to terminate the lease early and vacate.

Leasing complicates a short sale. Realizing that a short sale is the best option before deciding to lease may prevent a tenuous lease situation.

Real Estate Short Sales - Considerations

For owners who can no longer afford to keep mortgage payments current, there are alternatives to bankruptcy or losing a home to foreclosure proceedings. One of those options is called a "short sale."

A property can be marketed as short sale with or without support of the primary lender. When lenders agree to market a property as a short sale, it means the lender agrees to “entertain” offers or has agreed in advance to a “lender approved listing price”. Many short sale offers are not acceptable to the lender. The lender may accept, reject, or counter an offer. Not all sellers or all properties qualify for short sales.

The IRS may consider debt forgiveness as income (see IRS update Feb 4, 2007) and there are no guarantees that a lender who accepts a short sale will not legally pursue a borrower for the difference between the amount owed and the amount paid. Each lender has different policies with regard to deficiencies.

The following will be expected by the lender:

• Initiate a Call the Lender and Don't Delay
  Find the department responsible for handling short sales and you will be assigned a contact person. You do not want to talk to anyone but a supervisor that can assign you to the right person capable of making a decision.
• Submit Letter of Authorization
  Lenders will require written authorization before disclosing your personal information to any third party. Let them know that you are working with a Realtor®, the title company, closing agent or lawyer. Opening the line of communications, often called the “pipeline”, clears the way for the lender to talk directly with all parties to the transaction. Your letter should include:
  • Short sale property address
  • Loan number or file number
  • Your name as they have it
  • The date the letter giving such authority was written
  • Your Realtor's® name and contact information
  • Any secondary mortgage holders such as lines of credit
  • Copies of mortgage statements so there is no confusion about loan numbers attached to each lender
• Preliminary Net Sheet or Preliminary HUD 1
  This is an estimated closing settlement statement that reflects the anticipated sales price and all costs associated with closing such as: first mortgage, second mortgage, lines of credit, liens, outstanding payments, late fees, association dues in arrears, special assessments, real estate commissions, and closing costs. Your closing agent or lawyer should be able to prepare a HUD for you.
• Hardship Letter
  Tell your story and don't hold back the real life details. Detail all the events leading up to your current financial bind. Make a plea to the lender to accept less than full payment by allowing them to feel your pain. Lenders benefit from avoiding a foreclosure on their books and will understand your hardships. Beware; lenders are not empathetic to situations involving fraud.
• Proof of Income and Assets
  Be truthful about your financial situation and disclose all assets. Lenders will want to know if you have savings accounts, money market accounts, trusts, securities, CD's, cash, and all real estate holdings. Any and all tangible assets need to be disclosed. Lenders need assurance that the debtor cannot pay back any of the debt that it is being forgiven.
• Copies of Bank Statements
  The lender may scrutinize your bank statements and request explanations for any unaccountable deposits, sizable cash withdrawals, or unusual check activity. Explain to the lender, in advance, any transactions that might raise a concern.
• Comparative Market Analysis
  The sharp downturn in real estate values and the current difficult economic may be the cause of your difficulty in selling your home for a value sufficient to pay off the lender. Your real estate agent will help justify current value for the lender through a CMA (comparative market analysis) and a BPO (Broker's Price Opinion).
  
  CMA includes:
  • “Actives” on the market
  • Pending sales
  • “Solds” from the past six months
• Purchase Agreement & Listing Agreement
  Seller needs to make all parties aware that the contract is not binding upon the Seller unless and until the lender has given its approval and that there would be no commission due and or owing from the Seller to a Selling broker based on a contract signed by the Seller which is not accepted by the lender.
  A short sale listing agreement differs greatly from a traditional listing agreement. In a short sale listing agreement, there must be a cancellation clause in the event you cannot complete a short sale arrangement with the primary or secondary lender. An example of such would be:
  “Seller may cancel this agreement prior to the ending date of the listing period without advance notice to broker, and without payment of a commission or other consideration, if the property is conveyed by the mortgage insurer or the mortgage holder.” (See below for sample Short Sale Listing Agreement Addendum.)
  In addition, the agreement should be subject to the lien holder's approval of the short sale.

The IRS will be advised that a short sale has occurred. There may be additional tax liability for the seller. In addition, some loan servicers may place a deficiency judgment against the seller for any short fall or unpaid balance. It is important to check with your CPA or tax advisor as to this possibility when pursuing a short sale.

The impact on the seller's credit is lessened by a short sale. The loan will reflect as satisfied, but not completely paid off. A foreclosure is far more damaging to one's credit. Coordinating and successfully achieving a short sale can be time consuming and difficult. Having the knowledge to do so will be a valuable asset for any seller. You can count on ADDvantage to efficiently lead you through the process.

Other Factors that Influence the Short Sale Process

The seller will need to provide the lender with financial information to prove that the seller does not have the ability or the assets to bring funds to the closing table. This typically includes of recent pay stubs, federal income tax returns, a financial hardship letter, a preliminary HUD statement, a copy of the listing agreement and sales contract. Occasionally they will start the process before the contract stage. In addition, some lenders may require to copy of the appraisal. Lenders are looking to verify and prove that the hard value of the property.

When there is a second mortgage on the property, the process becomes a little more difficult. The first lien holder has the ability to wipe out the second mortgage debt in the foreclosure, and therefore may be reluctant to give up a portion of their payoff so that the second mortgage lien holder can also receive funds. Often, the primary lien holder offers a $1,000-$5,000 settlement to any secondary lien holders.

There are motivating factors for mortgage servicers and lenders to participate in a short sale. A foreclosed home will reflect negatively on their history, and their standing with FNMA and others. Given the choice, lenders often would rather work out a short sale, taking less on the payoff and avoiding the negative effects of a foreclosure. As well, foreclosure proceedings can be costly in legal fees, lost marketing time, and unknowns.

According to HUD, short sales account for approximately 50% of all pre-foreclosure arrangements with conventional loans. Parties involved in the approval process may be FNMA, Freddie Mac, and PMI.

FHA insured mortgages have additional basic guidelines. They include:

• Payments must be at least 2 months behind
• Property must be owner occupied
• The reason for the default must be unavoidable, involuntary, or beyond the homeowner's control
• The house must appraise for at least 70% of the unpaid principal balance
• The contract price must be at least 95% of HUD's appraised value
• The net amount to the lender after all closing expenses must be at least 87% of HUD's appraised value
• There may be a pre-foreclosure sale incentive of $1,000.00

VA guaranteed mortgages do not have to set guidelines. A review will be conducted to determine which situation will be more advantageous to the lender, the short sale or foreclosure.

It could take as much as sixty days for a short sale request to be processed. When reviewing offers, be sure to allow for about 75 days as time for acceptance. Offers can be withdrawn by a buyer at any time.

Forms for Short Sale