How to do short sales?
Short sales are not as pleasant as one might think. When a short sale is involved in selling a home, it typically means that the homeowner is in a distressed situation. This can cause embarrassment, loss of sleep, worry, and uncertainty in their lives that most people cannot relate to. There is nothing more unsettling for someone than to not be able to afford a roof over your head much less worrying about getting food on the table to feed the family.
Short sales are an unpleasant process for banks as well, since banks are authorizing the sale of the house for less than the mortgage balance. Banks are frequently loan servicers on behalf of investors, and they must follow certain guidelines and answer to their investor clients for the “hit” the investor is taking on the loan.
Since half of all real estate sales are distressed, short sales have become more widely known to the public. Not all homeowners qualify for a short sale, since a borrower must demonstrate hardship in order for a bank to consider a short sale. And even if the homeowner is in a hardship situation, an approved short sale is not guaranteed. The bank will weigh their net from a short sale against what they project they could get from a foreclosure.
If you are a borrower in default and you want to short sell your home to prevent foreclosure and further damage to your credit, there are a few steps you can take to increase the odds that a bank will approve your short sale.
Call your bank and tell them that you would like to short sale your home. Ask your lender what their procedures are for this and what paperwork they require. Your lender will provide you with forms to fill out and instructions to follow to submit your short sale paperwork.
Next consult an attorney and CPA or accountant to understand what the legal and tax ramifications are for your situation. You should know upfront what the risks and benefits are to short selling your home. If the home you are short selling is your primary residence, for instance, there are different legal and tax considerations than is the case for an investment property or second home. Since Congress passed the Mortgage Forgiveness Debt Relief Act of 2007, primary residence homeowners generally have less legal and tax liability than do investment property owners.
Hire an experienced short sale listing agent. If you mistakenly hire an inexperienced short sale agent, you will almost kill your chance of your short sale getting approved, especially if you are not sure if you have a strong case for the bank to accept your short sale.
Therefore, when you are interviewing agents, qualify their short sale experience, ask them about their success rate with negotiating short sales? What banks have they worked with? How long have the agent been negotiating short sales? Ask about any failures your agent has had with deals that didn’t close. If your agent tells you that they close 100% of their short sale deals, I would question their integrity. You should listen for the depth of their experience, and what they did when confronted with a challenging situation.
Once you hire a short sale listing agent, the next step is to complete the short sale package, which your agent will then submit to your lender when its ready. Your agent will coach you along the way to make sure the bank gets what it needs to make a decision on your short sale. Make sure you have copies of paperwork ready to go so your agent can expedite getting the short sale package over to the bank.
Paperwork you should have ready to go:
- Short sale hardship letter – should be handwritten; provide supporting documentation of your hardship
- Bank statements
- Financial worksheet (use the form provided by your bank)
- Authorization to release information (use the form provided by your bank)
- Payoff statements for all liens
- 2 years of tax returns
- 30 days of pay stubs
Your short sale listing agent’s job is to establish a price for the house based on a comparative market analysis (CMA) and market the house to get the best and highest offer to minimize the bank’s loss. Your agent will submit the listing agreement, CMA, purchase contract, and any paperwork the bank asks for pertaining to the marketing of the property.
Your job is to prove your hardship, while your agent’s job is to justify the sales price of your home. This is why hiring a great short sale listing agent is critical to the success of getting your short sale approved.
As part of the short sale negotiation, a great agent will request that any offer your bank approves is contingent upon a waiver of deficiency and reporting the short sale as a “paid as agreed” entry on your credit report. Although the bank has no obligation to accept such a contingency, its been our experience that they might hem and haw at first, but then give in to get the short sale process done so they can close the file.
Keep in mind that the credit report status is not always negotiable. But the good news is that there is no entry on a credit report for a short sale, so how your bank reports the negotiated settlement to the credit agency is much more favorable than the alternative – a foreclosure, which is extremely damaging.
If you are considering short selling your home, be sure and fill out our confidential short sale form, so we can discuss your options and help guide you through the short sale process.
If you have any further questions about short sales, please contact us.