If you are thinking of doing a short sale there is no need to work with a fee hungry attorney as long as you find a competent real estate agent.
Working on Las Vegas short sales the 40 most common questions I get from clients are those below. At the end of the top 40 I have provided my answers.
The questions that I don't get asked enough are "how many short sales have you done?" and "how many of your short sales were successful?". Short sales are really just an administrative process and the key is to select an agent who is familair with the processes of the different banks.
- When is a short sale a good idea?
- Are short sales difficult?
- What is a short sale?
- Why do banks accept short sales?
- What are the main benefits of a short sale?
- What financial obligations survive a short sale?
- What can go wrong with a short sale?
- Why are there so many foreclosures and short sales?
- What are the basic steps involved in a short sale?
- Is it possible to secure have a foreclosure and get a new loan in the same year?
- What are the technicalities of a short sale?
- How do you do a short sale on a property with multiple mortgages?
- How do I get Second and Third mortgages released in a short sale?
- What is a Deficiency Judgment?
- What is a PNS?
- Who pays the closing costs in a short sale?
- What are the characteristics of a good short sale agent?
- How do you work with a bank on a short sale?
- On a short sale what do I need to prepare for the bank?
- How do I do a short sale on an FHA loan?
- Is a loan modification a viable alternative to a short sale?
- What is a cram down?
- Should I use a loan modification officer?
- What does the short sale package contain?
- What is a lender's net sheet?
- Are there any special features in a short sale purchase agreement?
- What should I attach to the hardship letter?
- Do I need to have missed loan payments to secure short sale approval from my lender?
- Can I really get paid to do a short sale?
- Can I sell personal property along with the home?
- Are there any tax implications to a short sale?
- Why do you need to let the lender know the estimated repairs in a short sale?
- Will a bank allow a short sale to go through at below market pricing?
- What is the short sale timeline?
- What alternatives are there to a short sale?
- What is an alt-A mortgage?
- What is an authorization letter?
- What is a broker price opinion?
- What is a deficiency judgment?
- What is equity of redemption?
1 When is a short sale a good idea?
When you are under water, unable to keep up with your mortgage payments, and facing foreclosure, a short sale may be the best way to release yourself of onerous financial obligations without a severe impact on your credit.
2 Are short sales difficult?
The only thing that makes short sales difficult is when you are unfamiliar with what is involved. If you work with an agent who has experience of navigating bank demands and processes, from authorization letters to net sheets, then you will find that a short sale can be just as easy as a traditional fair market sale.
A short sale is a balancing act where you need to set the price at a level which will attract buyers, but also be accepted by the lender.
3 What is a short sale?
A short sale, or short payoff, is when you sell your home for less than the balance owed on the mortgage. Let's say you bought a home for $300,000 four years ago, and it is now worth $150,000. You are under water, and in a situation defined as negative equity. If you can secure the bank's approval to sell the home for $150,000, plus transaction costs, then you can proceed with a short sale which may release you from your financial obligation to repay the loan balance.
4 Why do banks accept short sales?
Banks are often willing to write off large portions of debt under a short sale as this is a more cost effective alternative than a foreclosure. Banks are also attracted to the fact that a short sale is quicker than a foreclosure, and can require less administration.
5 What are the main benefits of a short sale?
A short sale allows you to stop a foreclosure, and avoid the negative financial and emotional impact that it can have on your life. A foreclosure has a far more serious impact on your credit than a short sale. Although a foreclosure is not as bad as a bankruptcy, one serious issues is that any future lenders will see it on your record, and for them a foreclosure is a flag as red as the blood of Pamplona bull skewed in the ring. Foreclosures usually come off a record after seven years, but there are examples of people who have had it come up on reports twenty years after the event.
6. What financial obligations survive a short sale?
The lender may request ongoing payments and have the borrower sign a promissory note defining a fixed amount of debt and payment schedule. It is also possible that and debt forgiven will be considered income by the Internal Revenue Service, and taxed as such. It is important to verify the taxation legislation at the time you execute your short sale.
7. What can go wrong with a short sale?
With a short sale you are racing against a foreclosure. Sometimes it is not possible to secure a buyer and bank approval before you are foreclosed. Sometimes the loss mitigation committee is unaware of what the short sale department is working on and a foreclosure will go ahead at a lower price than a short sale offer. The best way to mitigate against this is to start the process early and have an agent that markets your property effectively.
8. Why are there so many foreclosures and short sales?
The initial wave of foreclosures was driven by defaults on subprime mortgages - loans made to borrowers who should never have qualified for them in the first place. This was followed by Option ARM and alt-A (no-doc loans) defaulting, and then finally other mortgagors who faced financial hardship as a result of unemployment started defaulting.
9. What are the basic steps involved in a short sale?
1. You need to complete a PNS, which is a Preliminary Net Sheet. The PNS demonstrates how far under water you are and verifies that you are a viable candidate for a short sale.
2. The next step is to find an agent who is familiar with short sales, and has excellent marketing skills so that you quickly secure a qualified buyer.
3. As with a traditional sale you will take steps to get the property sale ready (cleaning etc.) as you want to secure the highest offer possible to maximize its chances of acceptance from the bank.
4. Issue an Authorization Letter giving your real estate agent permission to contact the lender on your behalf
5. Submit the short sale package to the bank which includes a hardship letter and details of your financial situation
10. Is it possible to secure have a foreclosure and get a new loan in the same year?
This can be achieved if a borrower buys a second home while he is current on his underwater first home, and then walks away from the first home after the second is purchased. This is unethical, and leaves you with the impaired credit that results from foreclosure.
11. What are the technicalities of a short sale?
A borrower hypothecates his property when taking out a loan, which means he puts it up as collateral during the loan period. The short sale sells the property to a third party and usually sees the shortage on the balance you the borrower owes written off. In effect the bank releases the collateral and obligation that it was backed by in return for receiving its current value.
12. How do you do a short sale on a property with multiple mortgages?
Mortgages are recorded on properties in order. The first mortgage to be recorded is known as "the first", the second is "the second", the third is "the third". When you do a short sale with multiple mortgages each of them has to be dealt with. Whereas a foreclosure by a First automatically wipes out the Second and Third, they are not automatically wiped out by a short sale so caution is required. Unless you get permission for them to be released they will remain recorded.
13. How do I get Second and Third mortgages released in a short sale?
Second and Third mortgage holders will often release a lien in response to a simple, polite letter explaining the situation. Since they have no possibility of recovery in a foreclosure (assuming the loan is underwater in an amount greater than the first mortgage) they will usually agree.
A request can be sweetened by the offer of a small cash payment of $1,000 or less. If you think this is necessary then you should but this in the short sale package presented to the first mortgage holder in an attempt to secure agreement that they will make the pay-off.
In the event that the Second demands cash, but the First refuses to pay it, then you may be able to agree a Promissory Note where you will make the payment over time.
One thing to watch out for is a tax lien. Where a lien holder is a state body it usually supersedes the first mortgage. The First typically pays these off in advance of a short sale or foreclosure.
14. What is a Deficiency Judgment?
In a foreclosure where the lender does not receive enough cash to cover the balance was loaned they may have the right to secure a judgment against the borrower for the deficiency. Given that most defaulting borrowers have poor finances across the board, most lenders do not bother pursuing deficiency judgments.
Where a short sale agrees to wipe out a deficiency judgment a lender may use the threat of foreclosure and a deficiency judgment as a negotiating tactic to secure a cash payment or promissory note.
15. What is a PNS?
The PNS is a Preliminary Net Sheet which shows how much you will net if you sell your home at the current market rate. If you are under water this will be a negative number and you are likely a candidate for a short sale.
16. Who pays the closing costs in a short sale?
A short sale is the same as a traditional sale in that you will need to open escrow, have title insurance and pay off any liens or outstanding balances such as HOA dues. And agents have to be paid. All of these costs need to be defined in the short sale package you send to the bank as you want them to pay for it. The buyer will likely only be willing to pay the same costs as it would in a traditional sale.
17. What are the characteristics of a good short sale agent?
In a short sale the lender pays the listing agent and buyer's agent so there is no cost saving by selling the property yourself (unless you are less than 5% underwater, as this is the total fees split between listing and buyer agent). You should select a local agent who knows how to set an accurate market price and quickly attract buyers.
The agent should be experienced and have a good ratio of success. They should also be ethical and uphold their obligation to present offers as they come in, they are not to wait for one offer to be rejected if another has been presented in the meantime. Some terrible agents present a lower offer if it is their buyer rather than a higher offer from a buyer represented by another broker because they want to get both the listing and buyer agent commissions. If you have an agent that breaches fiduciary obligation then it could well lead to a failed short sale, and result in foreclosure.
18. How do you work with a bank on a short sale?
Banks have loss mitigation committees which clearly define the procedures and forms required for a short sale. Your agent will be familiar with these and ensure that a complete application is made.
19. On a short sale what do I need to prepare for the bank?
The first thing you need before approaching the bank is a qualified buyer. Most banks have an Authorization Letter template that they will require you submit so that your agent can talk to them on your behalf. This will be just one part of the short sale package that you submit.
20. How do I do a short sale on an FHA loan?
If you have a Federal Housing Administration (FHA) loan then you need to work with the U.S. Department of Housing and Urban Development (NYSE:HUD), which has a pre-foreclosure sales program that has to be dealt with as the first step. The FHA process demands that you get an FHA appraisal, limits the amount it will contribute to buyer's closing costs, and limits the amount that can be spent on junior liens.
21 Is a loan modification a viable alternative to a short sale?
Bank loan modification committees are prepared to extend loans, delay payments, forgive past payments, provide money management counseling , reduce interest rates, but only rarely are they prepared to reduce principal balance. The reason is the fear that all borrowers would then line up for reductions. For this reason a short sale is the most viable way to reduce your loan amount, even where the delinquent borrower would be more than willing to take on a loan at the reduced capital value.
22 What is a cram down?
A cram down is where a lender is forced to write down a portion of a loan balance, usually by a bankruptcy judge. This right was taken away from judges in 1993, but legislation is changing.
23 Should I use a loan modification officer?
Never work for someone that offers to modify your loan in return for an up front fee. It is very difficult to secure a reduction in a loan balance, and most of these consulting companies will simply take you money and fail to deliver.
24 What does the short sale package contain?
1. Authorization letter allowing agent to act on your behalf
2. Proposed terms
3. Estimated HUD-1, or some other estimate of the lender's net position
4. Repairs required prior to sale
5. Hardship letter with addendums such as outstanding invoices
6. Seller's financial condition evidenced by W-2s/1040s from prior two years and bank statements for the last 90 days
7. Broker Price Opinion supporting the sales price
8. All outstanding liens and mortgages
9. Buyer's offer
25 What is a lender's net sheet?
A lender's net sheet is a document that shows a lender what it will receive as a result of a short sale, and it is usually presented side-by-side next to what it would receive if it proceeded with a foreclosure. A HUD-1 can be presented instead of a net sheet. A HUD-1 is a document prescribed by HUD under then Real Estate Settlement Procedures Act which itemizes all charges imposed upon a borrower and seller for a real estate transaction. It gives each party a complete list of their incoming and outgoing funds.
26 Are there any special features in a short sale purchase agreement?
You need to ensure there is a clause stating the agreement is contingent on lender acceptance, and the seller has no liability or penalties in the event it is not accepted. As a seller you want to make it clear that all brokerage fees, and other costs such as repairs, are to be paid by the lender or buyer and that the seller has no obligation in this regard.
27 What should I attach to the hardship letter?
If you have other judgments or liens against you these should be included along with all outstanding bills such as medical bills. If you have unemployment or disability benefits these should be included.
28 Do I need to have missed loan payments to secure short sale approval from my lender?
If you have not missed any mortgage payments then it will be difficult to support a claim of hardship. The lender will make a decision based on whether they would be better keeping you as a borrower and possibly having to foreclose, or better allowing the short sale. Foreclosures are usually more expensive for lenders, but if you have not missed a payment then they will not consider a foreclosure likely in the short term, and thus your short sale will probably be denied.
It would not make sense just to support a short sale. If you have other assets and good credit you would not be able to provide the financial hardship data to support the short sale.
29 Can I really get paid to do a short sale?
Lenders recognize that a short sale is to their benefit and in certain circumstances it makes sense for them to pay an incentive to their owners to do a short sale. Chase bank has sent letters to owners offering them as much as $30,000. Other programs offering incentives include HAFA, Bank of America Cooperative Short Sale Program, TAP, and short sale incentives offered by such banks as Citi, Wachovia, and Litton Loan Servicing.
30 Can I sell personal property along with the home?
You can sell your personal property separately through a bill of sale, however, as this is not disclosed on the HUD-1 it may be fraud. Because the seller is in control of which offer to present to the lender there is a clear conflict if they are also selling personal property that does not benefit the bank. In competitive markets buyers may be asked to overpay for personal property to have their offer presented to the bank - this is not ethical and depending on the circumstances may be outright illegal. You should present the offer that is most likely to be accepted by the bank, irrespective of personal property issues.
31 Are there any tax implications to a short sale?
Tax laws are constantly revised, but generally speaking the IRS considers forgiven debt as taxable income, and if your lender issues a 1099-C tracing this then it will be easily identified by the IRS. Even when your lender does not report the debt forgiveness it can be tracked.
IRS Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, allows you to record insolvency at the time the debt was forgiven, which may release the obligation to pay tax on it.
In 2007 the Mortgage Forgiveness Debt Relief Act was passed to allow up to $2m of debt to be forgiven on a tax payer's primary residence. If a borrower refinanced the debt then forgiveness is limited to the principal balance of the original loan at the time of the refinancing.
32 Why do you need to let the lender know the estimated repairs in a short sale?
When banks approve a short sale they want to know what their net return will be at the sales price. The best way to do this is to reduce the price by the estimated cost of known repairs and explain this differential to the bank at the time the request for offer approval is made. Another path is to price the home fully, but let the bank know what you estimate may be reduced following a home inspection by the buyer.
33 Will a bank allow a short sale to go through at below market pricing?
The lender will commission its own Broker Price Opinion (NYSE:BPO), and will want the sale to go through at this level. If the BPO comes out at below your offer then the first step should be to commission another one and explain to the lender why you think its report is flawed.
The best way to push through a short sale offer at below market pricing is to justify this through deferred maintenance and repairs. Banks are most receptive to reductions based on safety issues, identification of mold, roof and structural issues, and habitability issues.
34 What is the short sale timeline?
In a short sale you are in a race against a foreclosure, so you need to define what stage of the foreclosure process you are at, and how many days you have to execute a short sale. The process is different in judicial and non-judicial foreclosure states, and different within each state.
35 What alternatives are there to a short sale?
Besides the unpalatable alternatives of a foreclosure there are some other options, such as a deed in lieu. Under a deed in lieu the borrower relinquishes his interest in the property in return for the lender releasing the borrower from further payment obligations. This is not as good for the lender as a short sale as they end up with a property that they must dispose of, but it is better for the lender than a foreclosure as it is quicker. One thing that the borrower must be aware of is that a deed in lieu will show up on a credit report, and is considered almost as bad as a foreclosure in the eyes of a future lender.
If you do decide to go through with a deed in lieu then you need to evidence sufficient hardship to convince the lender that its alterative is foreclosure. Additionally, you will need to make sure and junior liens, such as Second and Third mortgages, are released.
36 What is an alt-A mortgage?
A mortgages are those that have strict underwriting criteria, such as credit ratings in excess of 700. Alt-A mortgages are those that do not meet this A criteria. They may have low LTVs, be issued on poor quality properties, or be underwritten using no-doc, or stated income loans.
37 What is an authorization letter?
This is a letter that the borrower sends to his lender giving the lender permission to disclose the borrower's financial details to third parties such as real estate agents, loan servicing companies and attorneys. The letter should be sent to a named individual at the lender.
38 What is a broker price opinion?
This is a document provided by a broker that gives his opinion, based on market data, on the value of a property.
39 What is a deficiency judgment?
A deficiency judgment is a court judgment that states that the former owner is responsible for the deficiency, or shortfall, between the price that a foreclosed property sold for at auction and the amount of the outstanding loan.
40 What is equity of redemption?
When a borrower is in default they have the right to make up the loan and interest in arrears - this is the equity of redemption. In some states the period under which a borrower can make up the balance extends to after the foreclosure auction.