Short Sale Fast FACTS for Consumers
1. Short Sale could be your solution—but it has some pitfalls
Get informed and Get started
2. Short Sale is an Option Not a RIGHT
You will need to “qualify” for the option to dispose of the house by using a
short sale.
- Was the default ‘trigger’ something beyond your control
- Did the trigger lead to an increase in expenses or a decrease in income?
- Are you still an occupant in the home secured by the loan?
- Have you depleted all of your assets available to make mortgage payments?
- Are you willing to pull together the documents required by the lender/guarantor to determine if they believe you qualify for a workout?
- If there is a co-borrower, are both parties committed to this workout attempt?
3. Finding a competent REALTOR could be difficult
A short sale is a Speciality transaction. You need to find a
REALTOR who:
- Works full-time—yes, even in today’s climate
- Is experienced in short sales (means they closed)
- Is familiar with your area and price point
- Whom you feel comfortable with
- Who is able to demonstrate to you what the value of your home is compared to similar homes in the neighborhood
- Has the ability to effectively market your home
- Is pleased to share with you that they have had specialized training in Short Sales (I mentioned this last, because if they haven’t mentioned by now, it is because they don’t have any—Not a good sign)
4. You can list the home for short sale—BEFORE the lender approves the
short sale—
**As long as you indicate that “all offers are subject to lender approval” This should be included on your listing contract, on the seller disclosure form and within the comments on the MLS sheet
**You can’t ACCEPT and CLOSE without the lender’s approval but you don’t have to wait to get started. Why not start today? Is your house ready? Do you have the documents needed for the hardship package?
5. Might leave you with a
deficiency—which could be used to get a judgment against you
Negotiate to get the lender to agree to “waive their right to a deficiency judgment” as part of the short sale approval letter.
You should NEVER assume that because the lender agreed to the short sale that they have waived their right to pursue you for the shortage.
If it’s not in writing—signed by an authority—you should expect them to pursue you for the shortage.
6. Foreclosure process—will most likely continue, even while you have the house on the market for sale
FHA loans which are subject to HUD regulations—require that the foreclosure process STOP while the home is marketed for short sale
Foreclosure action continues on ALL other loan types
7. Listing Termination—can be mandated by your lender when you are in default
The Lender is not a party to the listing contract and you might logically assume that therefore they had no say so about what does or does not happen with the attempt to sell your home.
Unfortunately, you would be mistaken.
Government guarantors, HUD, VA, USDA, Fannie Mae, Freddie Mac, and Rural Development have the right under Federal regulations to compel you to withdraw the listing IF:
You are cooperating with showing the property as a show of ‘good faith’
Title issues are uncovered which would prevent the transfer to a new buyer
The condition of the property is such that a sale is unlikely
You have failed to comply with request for information to determine your eligibility for a workout. Remember: This is an Option, not a RIGHT.
8. Second Liens can present a challenge—also known as a ‘stumbling block’
Second lien holders seldom initiate foreclosure; they block short sales all the time with their obstinacy. You cannot transfer real estate to a new buyer when there is a second lien holder without their cooperation.
They must either:
a. Release the lien
b. ‘Lift’ the lien and permit the closing
Usually they can be enticed to do one of these things, preferably the first. Many will accept a token payment as a settlement for the obligation if foreclosure is imminent and they stand to get nothing after the lien is wiped out. Other they may agree to an unsecured loan in exchange for
their cooperation.
Your lender may make a contribution toward getting this second released, especially if you have a government backed loan. Their regulations have a stipulated amount set aside for this purpose. Get your facts and get going.
9. Tax Implications—Didn’t Your REALTOR mention that?
When there is a deficiency (difference between what you owe on the house and what the new buyer is willing to pay for it) you are taxed on that amount as though you received it as a gift.
IRS rules require that the lender provide this information directly to IRS for tax purposes.
You should NEVER assume that because the lender agreed to the short sale that they have waived their right
10. Now about signing those papers…….WAIT
I believe strongly that the seller of a property which is upside down would do well to pretend their fingers are broken once they have signed the listing contract and seller disclosure form until Mr. Smitherman, the supervisor at the bank, has:
a. Approved their short sale, with all continguences
b. Given them permission in writing to sign something
As a trainer, I take the position that ‘lender approval’ means getting the lender’s approval before you agree to anything with a potential buyer.
That means do not sign a purchase agreement, no matter what contingency clauses have been included by a so-called sharp REALTOR. Do not sign a counter offer. I said, ‘pretend your fingers are broken until the supervisor at the bank tells you to sign something.
If you sign BEFORE he tells you to, you are agreeing to terms which he has not yet agreed to. You cannot
perform (or deliver the deed to the house) without his agreement. He may:
a. Select a difference ‘potential purchaser’
b. Counter and ask for a lot more money
c. Go ahead and foreclose, then you have nothing to sell.
Don’t get ahead of the bank. “Lender approval required” means the bank gets to decide everything: to whom we will sell, and for what amount, on what terms. Don’t allow yourself to be lulled into thinking it’s okay to make an agreement and then get his approval. That is risky business. Remember, your fingers are broken.
Please share today’s blog with someone you know who is struggling and not sure what steps to take next.
Copyright © 2008, Home Ownership Matters, LLC. All Rights Reserved.
(Please E-mail Heather at homeownershipmatters@gmail.com with any questions, comments or concerns you might have! We appreciate all comments and feedback, so please don't be shy.)
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