You may be one of many local homeowners owning a home or rental property which has declined in market value to such an extent that the current market value is much less than your mortgage debt on the property. You are “under water,” or “upside down.”
The price collapse in the housing market caused by the bursting of the speculative bubble that grew from easy money, loose lending practices, overbuilding, and years of rampant speculation is causing homeowners like you, lenders, and mortgage insurers to suffer billions of dollars in losses.
The lenders themselves, and the “lender / insurer of last resort”—Uncle Sam, are now cutting their losses.
Among other efforts aimed at reducing losses, “Short Sales” are being encouraged.
Perhaps you should cut your losses too!
You may benefit from restructuring your situation by doing a short sale. Frankly, on both individual and national levels, recognition of the negative equity and matching indebtedness to fair market value is part of what’s needed to rationalize the credit and housing markets.
Foreclosure is a disaster for everyone, homeowner and lender alike. There is no sense going to foreclosure when your property could be sold. Even if you are not facing foreclosure, but are holding too much debt relative to the decreased value of a property, it makes sense for you to restructure out of the precarious situation.
You may benefit from taking immediate and sensible action to keep your situation from deteriorating to an unmanageable level. You don’t want that. Your lender does not want that to happen. It is far more costly for all concerned when you’ve reached a point where you are financially unable to meet your obligations.
Most folks think that they cannot sell a property on which they owe more than the property would fetch at sale. That is not true. You can, and perhaps should, sell the property.
The term “Short Sale” is used to describe a sale where the debt owing against a property combined with the costs of its sale exceeds the property’s market value. Upon sale, the lender accepts net proceeds of sale as full and final settlement of the mortgage, and releases its lien. The amount of debt in excess of proceeds from sale is called the “Deficiency.”
Another type of Short Sale is called a “Short Payoff.” In a Short Payoff, the lender accepts proceeds of sale, and releases its lien, but the Homeowner pays some or all of the Deficiency under lenient terms and goes forward with a greatly reduced and modified debt.
When the necessity for doing a Short Sale has been precipitated by a “Hardship,” such as death, job loss, divorce, relocation, medical problems, etc. and you are financially unable to pay the “Deficiency,” your lender generally forgives or “cancels” this remaining debt not satisfied by the sale.
It is a business decision. Your lender looks carefully at your financial position. If your situation has become dire, you are months behind, have little or no money or assets, and no immediate likelihood of a change for the better, the lender has little to gain by asking you to pay the deficiency.
When you do have assets and income, but still need to restructure for simple prudency’s sake—where YOU are making a business decision, the lender is likely to ask you to pay some or all of the deficiency. But, if this is the case, the terms for doing so will be very lenient, and you’ll have a much smaller debt going forward. (You get a write off versus the debt, too—see your Tax Adviser.)
Some homeowners who wish to do Short Sales are very sensitive about their personal credit. They may be Federal Agents, work for Government Contractors, have Security Clearances, or for whatever reason wish to maintain pristine credit.
A Short Payoff has no negative impact on one’s credit file.
An important consideration in a Short Sale is whether your mortgage is "recourse" or "nonrecourse." Most mortgages used to purchase a residence are nonrecourse, secured only by the home.
But mortgages from refinancing a previous mortgage, most second mortgages, and Home Equity Lines (HELOCs) are usually recourse. If a debt is "recourse," you are personally liable for the debt. If the debt is "nonrecourse," the debt is only secured by the property, and you are not personally liable for the balance.
Whether debt is recourse or nonrecourse, the decision a lender makes in pursuing payment is always a business decision based on the circumstances of the case. The lender will allow sale of the house. And the lender will make a decision about how to handle the Deficiency.
Short Sales do close. It takes longer than a normal real estate sale because the lender must examine the borrower’s financial position, assure that the property (its collateral) is being sold at fair market value, and account internally to its Management, its Investors, Mortgage Insurers, and Regulators. Additionally, with the market collapse, the case load handled by the lender’s personnel—its “Loss Mitigators,” is quite large.
In doing a short sale, when the debt is cancelled, the cancelled amount becomes ordinary income to you, but “The Mortgage Forgiveness Debt Relief Act of 2007” keeps you from having to pay taxes if the sale is of your personal residence.
If you’re an investor, you’ll likely not pay taxes if your debts exceed your assets and you are therefore “technically insolvent.” If you’ve realized a loss on the property, you may also be entitled to deduct it under “Code Section 1231.” (We’re Realtors, not Tax Advisers, so see your Tax Professional on these questions.)
Short Sales are precipitated by hardship. “Hardship” is an event or series of events that are generally beyond your control and that resulted in a reduction in your income and/or increase in your expenses. From the lender’s point of view, it is not simply that the property’s market value has declined. Typical hardships are job loss or transfer, decline in income from employment or self-employment because of market changes, medical problems, divorce, death, etc. The lender wants an explanation of what happened. This is referred to as a “Hardship Letter.” It should be a basic narration of the facts. Brevity is the soul of candor and wisdom. The Loss Mitigators reading these files are busy and overloaded, so simplicity and brevity in all matters are critical to your success.
MARKETING:
If you choose to do a Short Sale, we ask that you formally list the property with us here at Keller Williams Realty by signing a listing agreement.
We will price your home based on analysis of recently completed Sales of Comparable Properties in your neighborhood. Pricing will reflect the fact that your property is a “Distress Sale.” It’s being sold “Short” on the mortgage. It is aggressive liquidation at just below true “Fair Market Value” for sale within thirty days. Your property must compete with other distress sales like foreclosures on basis of price, even though it may be in much better condition.
That better condition makes your property very attractive, even though your buyer must wait much longer to close. Buyers want “Move-in Ready” property. It is also better if you move out. Vacant properties are easier to sell. And you can offer “Pre-settlement Occupancy” to your buyer as an added inducement to wait out the longer closing period.
COSTS:
Our exclusive right to sell listing agreement addresses how much the sales commission will be and the standard part states that you will be obligated to pay us a commission in the event we are successful in bringing about the sale of your home.
However, in your situation you will also have a “Short Sale Addendum” that further modifies our agreement.
The Short Sale Addendum is necessitated because the amount owed on the property exceeds the “net” amount that we can reasonably expect to generate after the payment of all closing costs and sales commissions. You won’t receive any money from the sale. You owe more than the property is worth, so you cannot pay commissions.
Any contract offers will be submitted to you for your approval and upon your approval they will be submitted to your lender. Your lender must approve the total transaction, including all sales commissions and other closing costs to be paid. Our commission will be reflected on the final settlement statement as approved by your lender. The Buyer is bringing money to the closing table to buy your property. All costs are paid from those funds. There may be instances when our total commission as approved by your lender is less than originally stated in the listing agreement. In such an instance, we will not hold you responsible for any difference.
“Your lender must approve the total transaction, including all sales commissions and other closing costs to be paid.” Although you are the “Seller,” because of the circumstances surrounding a Short Sale, the lender typically pays all costs. If you’re seriously behind on HOA dues, or Property Taxes and you have the means, the lender will expect you to pay those. All liens against the property must be cleared. If you lack the means, the lender will pay everything. So the “Costs” of doing a Short Sale are minimal. (The costs of NOT doing one might be enormous!)
Keller Williams Realty operates in geographic territory that includes the area in which the property is located and we hold valid state licenses and are members of the local Board of Realtors.
We list the property with 2 local M.L.S. (Multiple Listing Services) insuring that your property has fair exposure to all potential buyers/investors. That listing contains phrases such as “Subject to Potential Short Sale” and “Subject to Third Party (Your Bank) Approval.” Such required phraseology makes it clear that the loan is being settled for less than is owed, and that a longer settlement period is warranted.
Any sales contract / purchase agreement entered into must state that the purchase price is contingent upon lender’s written approval (“Third Party Approval”) of a short sale if there will not be sufficient funds to pay the lien on the secured property in full. This is required by our regulations and local rules.
NEGOTIATION WITH YOUR LENDER:
If your mortgage is in default, collection activities, including foreclosure proceedings will most likely continue until you receive an offer and we submit
your “Short Sale Package” to the lender. We often stop foreclosure by submitting an offer with your package. But, we need time. It’s very difficult at the last moment to stop foreclosure.
