How To Do a Short Sale

Why Would a Lender Accept a Short Sale?

A short sale in real estate is not always a pleasant transaction.

There are many ways to lose a home but signing away ownership in a manner that destroys credit, embarrasses the family and strips an owner of dignity is one of the hardest. For owners who can no longer afford to keep mortgage payments current, there are alternatives to bankruptcy or foreclosure proceedings. One of those options is called a "short sale."

When lenders agree to do a short sale in real estate, it means the lender is accepting less than the total amount due. Not all lenders will accept short sales or discounted payoffs, especially if it would make more financial sense to foreclose; moreover, not all sellers nor all properties qualify for short sales.

If you are considering buying a short sale, there could be drawbacks. For your protection, I suggest that all borrowers:

·         Obtain legal advice from a competent real estate lawyer

·         Call an accountant to discuss short sale tax ramifications

As a real estate agent, I am not licensed as a lawyer nor a CPA and cannot advise on those consequences. Except for certain conditions pursuant to the Mortgage Forgiveness Debt Relief Act of 2007, be aware the I.R.S. could consider debt forgiveness as income, and there is no guarantee that a lender who accepts a short sale will not legally pursue a borrower for the difference between the amount owed and the amount paid. In some states, this amount is known as a deficiency. A lawyer can determine whether your loan qualifies for a deficiency judgment or claim.

Although all lenders have varying requirements and may demand that a borrower submit a wide array of documentation, the following steps will give you a pretty good idea of what to expect.

·         Call the Lender
You may need to make a half dozen phone calls before you find the person responsible for handling short sales. You do not want to talk to the "real estate short sale" or "work out" department, you want the supervisor's name, the name of the individual capable of making a decision.

·         Submit Letter of Authorization
Lenders typically do not want to disclose any of your personal information without written authorization to do so. If you are working with a real estate agent, closing agent, title company or lawyer, you will receive better cooperation if you write a letter to the lender giving the lender permission to talk with those specific interested parties about your loan. The letter should include the following:

·         Property Address

·         Loan Reference Number

·         Your Name

·         The Date

·         Your Agent's Name & Contact Information

·         Preliminary Net Sheet
This is an estimated closing statement that shows the sales price you expect to receive and all the costs of sale, unpaid loan balances, outstanding payments due and late fees, including real estate commissions, if any. Your closing agent or lawyer should be able to prepare this for you, if you do not know how to calculate any of these fees. If the bottom line shows cash to the seller, you will probably not need a short sale.

·         Hardship Letter
The sadder, the better. This statement of facts describes how you got into this financial bind and makes a plea to the lender to accept less than full payment. Lenders are not inhumane and can understand if you lost your job, were hospitalized or a truck ran over your entire family, but lenders are not particularly empathetic to situations involving dishonesty or criminal behavior.

·         Proof of Income and Assets
It is best to be truthful and honest about your financial situation and disclose assets. Lenders will want to know if you have savings accounts, money market accounts, stocks or bonds, negotiable instruments, cash or other real estate or anything of tangible value. Lenders are not in the charity business and often require assurance that the debtor cannot pay back any of the debt that it is forgiving.

·         Copies of Bank Statements
If your bank statements reflect unaccountable deposits, large cash withdrawals or an unusual number of checks, it's probably a good idea to explain each of those line items to the lender. In addition, the lender might want you to account for each and every deposit so it can determine whether deposits will continue.

·         Comparative Market Analysis
Sometimes markets decline and property values fall. If this is part of the reason that you cannot sell your home for enough to pay off the lender, this fact should be substantiated for the lender through a comparative market analysis (CMA). Your real estate agent can prepare a CMA for you, which will show prices of similar homes:

·         Active on the market

·         Pending sales

·         Solds from the past six months.

·         Purchase Agreement & Listing Agreement
When you reach an agreement to sell with a prospective purchaser, the lender will want a copy of the offer, along with a copy of your listing agreement. Be prepared for the lender to renegotiate commissions and to refuse to pay for certain items such as home protection plans or termite inspections.

Now, if everything goes well, the lender will approve your short sale. As part of the negotiation, you might ask that the lender not to report adverse credit to the credit reporting agencies, but realize that the lender is under no obligation to accommodate this request.

Real Estate and Divorce

While it isn't a fun topic, it does come up, it does happen, there are questions, and no one seems to want to ask. Unless you've been through it, most people don't understand it and it does or can be complicated.

Real estate a couple owns can be a real stumbling block to divorce. Property problems won't keep people together, and they might even drive people apart who have in­compatible investment philosophies.

Splitting up the equity can be particularly difficult when there isn't cash available to one marital partner or the other. There are options. Let's start with the simplest and common case of the couple that only owns their home.

1. "Sell the house" is the first advice that friends and attorneys usually give. A sale has the advantage of helping the couple make a clean break. When the transaction closes there are only cash proceeds to divide. A 50-50 split is common.

2. "Keep the house." The husband or wife may prefer to continue to live there, at least until after the divorce is final. When one party wants to stay and there is an outstanding balance on the loan, the best solution is for the home to be refinanced in their name to be the responsible party. Oklahoma is a 50-50 state, meaning equity would be split equally.

In these cases the first step is to determine the equity in the home. What would be the proceeds of an outright sale, after all costs and the mortgage balance are paid off?

The mortgage lender can quote a payoff and real estate companies can state their marketing fees. Title companies can quote figures for title insurance and other closing costs. The only other usual seller costs are the appraisal and survey.

What's less clear are the costs that might have to be incurred to get the property to qualify for a buyer's financing. The type of financing the buyer chooses affects the standards that appraisers and lenders will apply.

Estimating the equity that a couple could split if one keeps the house is also something to consider. 

Hire an appraiser (about $400) to help establish value and note the items that lenders look for. Hire a home inspection service (about $250) to look for repair items that buyers might say must be fixed or they won't go through with the transaction. Finally, hire an engineer approved by the Municipality to test the well and septic system (about $500, plus pumping and Municipal fees).

If any of these reports show a need for corrective action, get contractor bids. These figures can be deducted from the equity that the couple plans to split. The work doesn't have to be done: the one who winds up with the house can assume the respon­sibility for taking care of these items later, having been "paid" by the divorced spouse by a division of a smaller equity.

From the time of the divorce forward, the spouse with the house assumes all the risks and responsibilities of home ownership. At least the risk of surprises is minimized.

After agreeing on the equity, what if the spouse who is keeping the house doesn't have the money to buy out the spouse who leaves? This is a common problem.

It may be possible to balance the books through the rest of the property settle­ment. Considering cars and other personal property it may be possible for the spouse who leaves to end up with enough of these items to balance what the "house spouse" keeps as equity.

The other answer may be for the "house spouse" to give the departing spouse a note secured by a deed of trust recorded against the house. The payments can be negoti­ated to fit both parties needs and capabilities. The items to consider are the term of the note, whether the remaining balance is due at any particular future date, the term, inter­est rate and payment. Simple financial calculators can provide these answers for spouses who are doing their own dissolution.

There are so many other things that can be considered as trade offs, but this is the short version of what to consider if you should find yourself in this situation.