If the value of your home has declined below the amount you owe on it…you are said to be “upside down” or “underwater”! Both terms conjure up negative thoughts, and, rightly so. With all the due diligence you put into the purchase, and all the business acumen, actuarial smarts, underwriting/appraising and brokerage experience put into the lender’s decision to accept the home as collateral…it’s a strange thing indeed that the deal went south. But, it did go south. In fact nearly 20 million homeowners in the US are facing this scenario right now. It’s psychologically bad for all of them. It’s financially bad for those who must sell because of a job loss, reduction in pay, divorce, death or other reason. For them, it’s a financial disaster.
A short sale can be an excellent workout solution for homeowners who must sell and owe more on their homes than they are worth. Of course, the lender has to approve such a sale because they have accepted the home as collateral for the debt. How it works, what becomes of the “forgiven” amount, what you tax liabilities are and how to be protected from future deficiency suits are the right questions to ask. In this article I will address the first one…
How Short Sales Work
The short sale is conducted in exactly the same manner as a traditional sale, with one important additional step. When a suitable buyer is found your “application for a short payoff” is submitted, along with the offer, to the lender. The application includes an explanation of the hardship that led you to this situation.
The application also includes a HUD-1Worksheet of the expenses involved in the execution of this purchase contract, and showing the net proceeds that the lender will receive. One of the items on the HUD-1 is the payoff amount of any “junior” lien holders. Typically, these lien holders settle for a small fraction of the amount owed as their claim on the collateral is subordinate to the 1st, or senior mortgage. That, by the way, is why they always charge higher rates – they are more exposed to loss.
The lender will review the application and get their own assessment of the value of the home…either by hiring a local Realtor to provide a Broker Price Opinion (an inexpensive appraisal) or by using the Automated Valuation Model – a computerized estimate of net proceeds if the home goes back to the lender as an REO. It usually takes the lender at least 30 days to approve the deal and could take as long as four months or more. I have had South Bay short sales take up to two full years to resolve and I have had some take as few as 60 days from start to finish.
Short sales have gotten plenty of press in recent years. You may harbor some false notions of just what they are. Let me start by debunking the most common misconceptions.
Myth #1 – My Lender Will Foreclose Rather than Bother with a Short Sale
This is a common error. The reality is that banks do not want to foreclose on your property because the process is lengthy and costly. After all, the lender has to sell the property on the market eventually. Banks lose less through a short sale than a foreclosure.
Myth #2 – You Must Be “Late” on Your Mortgage to Negotiate a Short Sale
Once the case, it is no longer. Lenders are looking for verifiable hardship and monthly cash flow shortfall. Beyond that the deal hinges on determining the current market price and finding a qualified buyer.
Myth #3 – There is Not Enough Time to Negotiate a Short Sale Before the Trustee Sale (Sheriff’s Sales)
This is a myth that probably hurts homeowners the most. Many do not realize that foreclosure is a process, and that there is time to stop a trustee sale right up to the day of the sale. I have convinced trustees to phone the auctioneer to stop the sale the very morning of the auction (not recommended!).
The foreclosing party—in most cases a lender—can delay foreclosure up to the final day of the process. In these trying times, many lenders will delay the foreclosure with as little as a phone call from you explaining that you are trying to sell, and almost all lenders will delay foreclosure with a legitimate short sale purchase contract.
Myth #4 – Listing My Home as a Short Sale is an Embarrassment
It is understandable to have reservations about letting the world know that you owe more on your home than it is worth. However, according to recent estimates, one out of five homeowners in the U.S. is in the same situation.
Estimates are that 40-60% of U.S. home sales in 2009 and 2010 will be short sales or foreclosures, you are not alone.
Myth #5 – Buyers are Not Interested in Short Sales
The opposite is true. Smart buyers and smart agents know that there are great deals to be had in short sales.
Short sales will continue to be an important part of the housing market stabilization. They are better than foreclosure, for all parties involved.
