Real Estate Trends – The Short Sale
The Short Sale is a relatively new phenomenon that we have dealing with over the past two years, The Short Sale t is occurring as borrowers find themselves owing more than their property is worth in today’s market and for many different reasons are attempting to sell their property into a down housing market. In past housing down turns when a property owner attempted to sell and was unable to cover the amount owed with the proceeds of the sale, the property owner made up the difference. In this housing down turn the lenders find themselves in the position of allowing the borrower to sell the property for less than what is owed on the promissory note and not bring a check to closing to make up the difference. A short sale is not a panacea for property owners that find themselves underwater. From the lender’s point of view it is not good business to accept less than what is owed, so lenders will work hard to recover as much money as possible. If the property owner has assets, the lender will want the property owner to use their assets to make up the some or all of the difference. While a Short Sale is not a great option for the lender it is potentially the best alternative available.
Whether a property is lost to the owner through foreclosure, short sale, or through the owner handing over the keys as a deed in lieu of foreclosure, the lender still has the ability to seek a deficiency judgment. The deficiency judgment allows the lender to attempt to recover the difference between what was recovered through the sale of the property and what was owed on the promissory note. I mention the deficiency judgment early in this discussion of the short sale because many are under the impression that once the property is sold the obligation is forgiven. Early on most banks required that the borrower sign another promissory note for the deficiency in order to conclude the short sale transaction. Today this requirement is uncommon. Following the sale of the property the lender still has the right in many states to file for a deficiency judgment.
If the deficiency is forgiven, then from a tax standpoint the amount forgiven can be considered income. When the dept is forgiven the lender will issue a 1099 for the amount of debt relief. The Mortgage Relief act of 2007 allows the taxpayer to exclude this debt relief on their primary residence. The Mortgage Relief act of 2007 is set to expire the end of 2009. So if you need to sell you primary residence for less than you owe, and the lender forgives the debt, you will not also have the burden of needing to pay taxes on the amount of the deficiency. If the property is not your primary residence then the debt relief may be taxed as income. In either case consulting a CPA is a wise step.
To begin the process of a short sale you need to contact your lender and speak to someone in the loss mitigation department. At this stage in the cycle, most lenders have established paper work requirements, and you will need to obtain and complete the required forms. In general the lender’s requirements will include the following:
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A letter of authorization – this authorizes your realtor, or short sale negotiator to speak with the lender about the sale of the property. This is not required if you plan to negotiate with your lender on your own.
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A letter of hardship – this is your statement explaining what has occurred in your life that has placed you in a position that you need to sell your property for a loss. Be truthful, and tell your story.
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A broker’s price opinion – this is where your realtor/broker completes an evaluation of where your property will sell in today’s market. The lender will probably have one or more opinions completed from other brokers in the area, but this provides them a base line.
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A preliminary HUD-1 settlement statement– this will show the estimate of proceeds that the lender can expect when the sale closes.
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Documentation supporting your hardship claim – these are documents like notice of termination, hospital bills, judgments or liens, bankruptcy filings, anything that supports the position that your financial situation changed and you must sell in order to avoid defaulting on your loan and potentially declaring for bankruptcy.
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Form 1003 – the uniform residential loan application form. While you’re not applying for a loan this is a form that lenders are familiar with and will list your debts and your assets. Remember that in order to obtain the loan on your property you applied for credit and were approved; the lender will be looking to see what has changed.
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Copies of your tax returns for the past two years.
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Copies of your bank statements for at least the past 2 months.
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Copies of any brokerage accounts.
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Copies of any retirement accounts.
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A copy of your listing agreement.
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A copy of your sales contract.
While this is a lot of documentation, missing or incomplete documentation can have the result of having your request being ignored. It’s the opinion of many that the paperwork be submitted when you begin to market your home for sale and again once you have an offer to purchase the property. Although most lenders will do little with your request unless it’s accompanied with the offer to purchase, submitting the paperwork will inform the lender that you are serious about negotiating a settlement of your debt. The thought process is to begin the negotiation as early as possible. Some buyers have heard horror stories about short sales and will back out if the process is perceived to be taking too long. This has the effect of taking your property off the market for an extended period of time. Filing the paperwork early and again with the offer can help to expedite the lenders response. Each lender is different, but the reason for much of the delay in making the decision to approve the short sale is that most loss mitigation departments are understaffed. Other issues that complicate successful conclusion of Short Sale negotiations are multiple lean holders, or if the mortgage is owned as a security by outside investors.
Buying a short sale takes patience. The bank will not turn around a decision quickly. Looking for short sales where the owner or their representative has negotiated a ball park sale price will shorten the waiting time, but you can still wait several weeks to hear a response. Making an offer near or at the negotiated sale price will help in having a positive outcome.
It makes sense to do a little bit of homework when looking to make an offer, public records can be searched on the internet today. Taking the time to review recorded liens and mortgage documentation can keep you from making an offer on a property that will take too much time working through the issues. Lenders in a second position can lose everything on a foreclosure, and frequently look to get some amount of remuneration to sign off on the short sale for their cooperation. When facing the prospect of losing everything the lender(s) in secondary position can hold up the short sale indefinitely.
So why do a short sale? As a seller if you can successfully negotiate a short sale of your home while still maintaining your monthly payments, well maybe you can save your credit. While the hit for a short sale will appear on your credit report it’s not as bad as months of late payments prior to the lender filing a notice of foreclosure. If you start working with the lender as early as possible you may also negotiate a payment modification while attempting to sell the property. The lender does not want to foreclose; they don’t want your house. If you maintain the property for sale and find a buyer, a short sale can be a win win for you and the lender. As a buyer a short sale can give you an opportunity to find a property at or below the true market value. The short sale property is often comparable to the typical resale home but at a better price.