ARE YOU IN THE RUNNING FOR A SHORT SALE ? © 2013 by Wayne D. Lewis, Sr.

How do you know if you are in the running for a Short Sale –Short history on a Short Sale. Between 2008 and 2009, between the outgoing President, George W. Bush[1] and the incoming President, Barack Obama[2], an economic crisis unfolded.  It involved banks, insurance companies and the Wall Street.  Without going into the specifics, what I recall of the catastrophe that ensued was that banks were “too big too fail”[3] and that the federal government had to step in and save large corporations from shutting down.  Subsequently, people lost jobs, businesses lost customers, homes lost value, and foreclosures were on the rise. 

Solutions to Economic Downturn of 2008-09[4]

Among the many solutions made on the national level to offset the losses to homeowners were loan modifications[5] and short sales (one or the other, not both).  Loan Modifications permitted homeowners to stay in their homes while paying a reduced amount on their mortgage, but for an additional time period (40 year mortgage instead of 30 year mortgages). Short Sales permitted homeowners to sell their homes to interested buyers at market value, even where that value was below the amount owed on the property. 

But a short sale does not happen without jumping through some hoops for the lender or the holder of the mortgage. Generically, a Short Sale is a combination of factors for a home owner. Many of those factors are spelled out in the 2007 Mortgage Forgiveness Debt Relief Act[6]  

Those factors include, but are not limited to the following:

A.    The value of the property being less than what is owed to the bank/lender;

B.     The owner(s) may have suffered a loss of a portion or all of their income since the purchase of their home (2007 or later), where the source of that income was critical to maintaining the monthly note on the home (for example, a marital impact such as the passing of a spouse, or partner; or the loss of a job by one or both persons on the mortgage; decrease in value of the subject and surrounding properties, and/or other factors that may play a role in helping a borrower to qualify for a Short Sale.

C.     There is no fee to pay for a short sale;

D.    Homeowners, as well as investors, may qualify for a short sale;

E.     Takes longer to process than an ordinary sale (4-6 months);

F.      The Seller will have to sign off on a 3^rd Party Authorization[7] for their agent to speak directly to their lender and negotiate the sale of their property;

G.    Buyers will need to meet qualifications as well (a selection or requirements, not inclusive of all requirements):

a.       Cash buyers

                                                                          i.      Provide proof of funds[8];

                                                                        ii.      Affidavit stipulating not related to seller;

                                                                      iii.      Affidavit stipulating that property will not be flipped within 60 to 90 days;

                                                                      iv.      Appraisal- Mortgage holder subject to counter offer based on appraisal

b.      Buyers who are financing

                                                                          i.      Letter of Pre-approval[9]

                                                                        ii.      Same as ii and iii above

                                                                      iii.      Appraisal-Mortgage-holder subject to counter offer based on appraisal

                                                                      iv.      May have to extend sale two or more times before closing

H.    No cost to homeowners

I.       Investor-owned properties may qualify for a Short Sale as well. Consult your bank and Realtor® for details.

J.       All terms and conditions are subject to final bank approval;

Benefits

To the seller of a Short Sale property, there is a possibility of a small stipend for selling the property.  No promises, but some short sales, depending on whether the seller lives in the property at the time, could result in as little as $1000 to as much as $3000 relocation assistance [10].  Also, check with your financial advisor, but it is possible that you can minimize the impact on your credit by choosing to do a Short Sale rather than facing a foreclosure.

To a potential buyer of a short sale, it is very possible to purchase a great home, at market value.  The value maybe lower than the amount owed, but it still can be a great purchase that with the right amount of restoration, may actually increase the value of the home.  As a buyer, you should not have any problems financing, even if a renovation or construction loan may have to be obtained.

For an investor who has several homes, even though a loss is possible, it gives the investor an opportunity to sell various investment properties albeit at a loss, the ability to regroup is minimally compromised and pretty soon, as an investor, new properties can be purchased (check with your financial advisor or lender).  There is a possibility of redeeming some repair costs, but minimally so, but no actual repairs are committed to by the lender.

Your circumstances may vary.

Disadvantages

For the seller, it means bearing their souls.  Everything that you would want to share again in the purchase of a home, is now needed, and then some. Additionally, because of the time that it takes to process a short sale (normally 4 to 6 months), much of the information may need to be re-submitted on several occasions.  When an offer is made by a potential buyer, the lender does not jump on it as quickly.  In some cases, it make take 30 to 45 days to respond to an offer.  Even a response on an offer maybe a counter-offer.  What we may also see is that an accepted counter offer may be subsequently countered after an appraisal, in some cases.  In other cases, a offer maybe subject to an appraisal. 

When the seller finally gets an answer as to move forward, it can only be hoped that the buyers haven’t packed up and move on to something else.  But if not, good luck, and proceed to closing.

If an SBA loan[11] or other extenuating circumstances are included, the dynamics change as to whether the seller will have their loan fully extinguished.  Consult with your lender or Realtor for further clarification.

For the buyer, being countered 30-45 days later is somewhat frustrating.  The counter offer is often made “verbally” to the agent.  Unlike under ordinary circumstances when a counter offer is in writing, the agent is sometimes forced to tell the buyer that their offer, made in writing, has been countered, and must be re-written/amended to the countered price, or that the buyers can hold fast to their original offer.  Banks do continue to entertain any and all offers even after the original offer.  Banks may go with an entirely different offer, not even made through the agent on the property.  Last, but not least, banks can continue to move towards a foreclosure on the property, even while in negotiations.  The deposit is often refundable (that is a good thing and should be stipulated in the offer), but any monies spent (which is strongly prohibited until a final acceptance is made) is lost.  Note too, that even with an accepted offer, inspections, appraisals made by the buyer’s, and/or financial fees are not refundable, or redeemable.

Conclusion-Short Sales are a phenomena of the Economic downturn of 2008-09.  As far as we know, we have until January 1, 2014[12] for sellers to take advantage of this one-time benefit (if you see it that way).  For the most part, at a relatively inexpensive option, this opportunity will give sellers an opportunity to virtually walk away from their past due mortgage, providing there aren’t other loans products that may prohibit the selling of the property (please consult your tax adviser or the IRS regarding any deficiency judgement[13]).  There are disadvantages and advantages to a short sale as with anything.  It is important for the seller and buyer, to be aware of the various nuances that are associated with going into a short sale.  Various banks post their guidelines on line.  So if you are not sure of what your bank’s or lender’s guidelines are, check out their websites and search for “Short Sales” in their search window.

All of the circumstances that you could face in conducting a short sale could not be outlined here.  There are just so many facets to going through a short sale for a 4 to 6 month minimum period.  Please consult with your lender immediately if you believe that you may qualify for a short sale.  While a Realtor® can assist you, it will be your lender or the holder of your mortgage who will advise you as to whether you can or should go for a Short Sale.  Understand however, that if you are behind on your mortgage, the holder of your mortgage is still going forward with other proceedings up to and including, foreclosure. 

Disclaimer:  No information provided here should be considered as legal advice, please consult with your respective attorneys or related professionals for advice concerning your finances, etc.  All information provided here is deemed to be from reliable sources, but not guaranteed. This blog is not attempt to solicit the business of any brokerage or agent.

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[1] George W. Bush- http://www.whitehouse.gov/about/presidents/georgewbush

[2] Barack Obama- http://www.whitehouse.gov/administration/president-obama/

[3] “To Big To Fail”- http://useconomy.about.com/od/businesses/p/Too-Big-to-Fail.htm

[4] Economic downturn of 2008- http://theeconomicrecession.blogspot.com/2009/01/financial-crisis-of-2008-2009.html

[5] Loan Modification- http://www.makinghomeaffordable.gov/pages/default.aspx

[6] The 2007 Mortgage Forgiveness Debt Relief Act-  http://en.wikipedia.org/wiki/Mortgage_Forgiveness_Debt_Relief_Act_of_2007

[7] 3^rd Party Authorization- http://homebuying.about.com/od/shortsale/f/Must-A-Short-Sale-Seller-Sign-A-Third-Party-Authorization.htm

[8] Proof of Funds Letter- http://www.wikihow.com/Write-a-Proof-of-Funds-Letter

[9] Letter of Pre-Approval- http://www.realtor.com/Basics/Buy/Looking/PreApp.asp

[10] Short Sale Relocation Assistance- http://www.homeownership.org/realtor/  

[11] SBA Loan- http://voices.yahoo.com/sba-loan-default-yes-short-sale-even-5376821.html

[12] Short Sale Ends- http://en.wikipedia.org/wiki/Mortgage_Forgiveness_Debt_Relief_Act_of_2007

[13] Deficiency Judgment- http://www.shortsaleexpeditor.com/sellers/deficiency-judgments-and-short-sales/