Seller’s Guide to a Short Sale

    Short sale: a real estate transaction in which the sales price is insufficient to pay the loan(s) encumbering the property in addition to the costs of sale – and where the seller is unable to pay the difference. A short sale involves number issues as well as legal and financial risks. This guide is meant to explain the process, but should not be used as legal advice. A seller who thinks they may be in a short sale situation should consult an attorney for legal advice.

    Sellers call us regularly for help when they need to sell their home – and sometimes we just cannot get enough money out of the sale to pay off their mortgage and all liens on the property, plus factor in the costs to close the sale. If you’re in that situation, you’re not alone. Some firms and agents refuse to list a property that could end up as a short sale. The process is time consuming and complicated – and the work just begins once you find a qualified buyer. Our office is skilled in handling short sales. We can help you through the process and are not afraid to do the work.

    We created this guide to educate sellers about the process, so you can make informed decisions about venturing into a short sale. Note that in the guide we also discuss foreclosure, as sometimes the seller may be in serious financial distress and facing foreclosure as well. Not all short sale sellers are in this situation but it is common enough that we should mention it.

     

    Should You Do A Short Sale?

    First, understand the lender’s options if you default. The lender’s options vary depending on what type of loan you have. The lender’s recourse is different in a home equity line of credit situation than it is in a purchase mortgage. The lender will look at your overall financial strength and how much it will cost the lender to foreclose. In Pennsylvania, lenders may foreclose on a mortgage in default by using the judicial foreclosure process. It is not a quick process normally, and the lender may prefer to work with you on a short sale than go the foreclosure route.

    Second, if you are struggling to make your payments and distressed, be aware of predatory “rescue” scams and short sale fraud. These scams could cost you money and ultimately your house. Beware these red flags:

    • Guarantees to stop the foreclosure
    • Large upfront fees
    • Instructions not to contact the lender
    • Transfer of title or lease of the property
    • The proposed buy may be a LLC
    • Requests that the homeowner execute a power of attorney
    • The proposed buyer, at the buyer’s sole expense, retains a third party to negotiate the short sale for the seller’s benefit

    For more information on foreclosure and short sale scams, see these sites:

    To find out how your lender in particular will handle a short sale, go right to the source: contact your lender. Gather the last mortgage statement or your coupon book and call the lender. Ask for the home retention department or loss mitigation department. Explain your situation to them and find out of the lender is willing to discuss your options.

    Based on what the lender says, it’s good advice to contact both an attorney and a tax professional to find out your legal and tax implications of a short sale. A successful short sale is never guaranteed, even if we manage to get what we think is a great offer.

    Also be aware that there may be serious consequences if you damage the property or remove fixtures such as sinks, toilets, cabinets, water heaters, etc. as the bank will consider this “waste” and may be able to sue you for damages. Do not physically abuse, damage or destroy any part of the property.

     

    Options Other Than Short Sale

    A short sale may not be your best option. Here are other options you may want to consider. Ask your lender which (if any) of these options are open to your particular situation.

    LOAN WORKOUT

    • Reinstatement: Paying the total amount owed by a specific date in exchange for the lender agreeing not to foreclose.
    • Forbearance: An agreement to reduce or suspend payments for a short period of time.
    • Repayment Plan: An agreement to resume making monthly payments with a portion of the past due payments each month until they are caught up.
    • Claim Advance / Partial Claim: If the loan is insured, a homeowner may qualify for an interest-free loan from the mortgage guarantor to bring the account current.

    LOAN MODIFICATION

    The lender may agree to change the terms of the original loan to make the payments more affordable. For information on this process see the government website Making Home Affordable.

    REFINANCE

    Another option may be to refinance your current mortgage with a different lender. We have lenders in our office that we work with regularly if you’d like to talk to someone about this option.

    DEED-IN-LIEU of FORECLOSURE

    Deed-in-lieu literally means you hand the bank the house back, and they don’t foreclose in exchange. The bank may not want to do this option if there are other liens against the property. HUD provides an excellent FAQ page here: Deed-in-lieu of Foreclosure FAQs.

    WORK OUT SALE

    Sometimes the lender will allow you to have some time to sell the property. If you can get more than is owed on the property, then you won’t necessarily be in short sale territory. In some cases the bank may allow your buyer to assume your old mortgage.

    BANKRUPTCY

    If bankruptcy is an option for you, consult an attorney right away.

    FORECLOSURE

    If all other options are exhausted, allowing the lender to foreclose is an option. Consult an attorney, and ask about the possibility of a deficiency lawsuit after foreclosure. See professional tax advice about the consequences of a foreclosure.

    Short Sale Basics

    If you decide a short sale may be the best option for you, read on for the next steps.

    CONTACT A QUALIFIED REALTOR

    Not all agents know how to handle a short sale, and some outright refuse to list short sale properties. Our broker, Erica Ramus, has taken specific short sale negotiation courses and holds NAR’s Short Sale and Foreclosure designation (SFR). One of our agents will list your home, with Erica’s guidance in the background and with her handling the short sale paperwork and negotiating.

    CONFIRM YOU ARE QUALIFIED FOR SHORT SALE

    Just because you are short equity on the property (making it a short sale situation) does not mean you qualify to complete a short sale with the lender. Being short equity alone is not a qualifying factor. We will interview you and ask you to fill out documents regarding your financial situation, to be sure you qualify. Briefly, you will need to prove financial hardship, and may not own assets that would allow you to pay the difference between what you owe on the mortgage and the proceeds from the house sale. You cannot, for example, get $100,000 for your house from a buyer, owe $120,000 to the lender, and have $40,000 in the bank in a savings account. The lender will expect you to dip into that savings account to pay the difference. Also know that if you have more than one loan on the property, we need to get approval for the sale by all the lenders, not just your main mortgage. This complicates it a bit but it is doable.

    FAIR MARKET VALUE OF THE PROPERTY

    The lender will expect you to get fair market value for the property, so you cannot list the home for significantly less in order to sell it quickly. We will provide you with a fair market analysis and show you a range where the house should reasonably sell for in today’s market. When we get an offer that is acceptable to you, we then have to prove to the lender that the offer is fair. The lender will look at our analysis, and will probably order one or even two separate valuations to be sure we are correct.

    TALK TO AN ATTORNEY

    We’ve said this before, but it’s too important to not repeat here. If you have not talked to an attorney about the legal implications of a short sale, please do so now. Even if the lender agrees to a short sale, they may not completely forgive the debt may require you to pay the difference as a personal obligation. They may release the lien on the property, but reserve the right to pursue a deficiency judgement against you later.If you don’t pay the debt, they may pursue collections.

    TALK TO A TAX PROFESSIONAL

    If the lender forgives the debt, the IRS may consider that income for tax purposes. See the IRS documentation: https://www.irs.gov/uac/Home-Foreclosure-and-Debt-Cancellation.

    YOUR CREDIT SCORE MAY TAKE A HIT

    Both a deed-in-lieu and short sale may affect your credit. Granted, it’s not as bad as a foreclosure, but it still hurts. It may appear on your credit report as “pre-foreclosure redemption” or “paid in full for less than full balance” or something similar. This also could impact future home purchasing. There may be a waiting period before you can purchase another home.