Short Sale for Sellers
A short sale occurs when a Property sells for a price that is insufficient to pay back the loan(s) secured against it (or any other liens against the Property, such as delinquent Property taxes, Homeowners / Condominium Association Fees, Etc.) as well as standard sales closing costs. In such a case, in order to complete the sale, you, as a seller must either: (1) come to the closing with sufficient cash from other sources to cover these shortfalls: or, (2) your lender(s) must agree to forgive all or a portion of the amounts you are short or make other arrangements for a repayment (such as execution of a promissory note). The second alternative is commonly known as a Short Sale. Your lender will generally not allow you to receive any proceeds or otherwise obtain any monetary benefit as part of a Short Sales.
What Other Options May Be Available Other Than A Short Sale?
Depending upon your financial condition and other factors such as other liens against the Property and available interest rates, you may be able to negotiate a modification of your loan(s), refinance, deed the Property back to the lender(s) in lieu of foreclosure, or declare bankruptcy in lieu of attempting a Short Sale. You may also be eligible for government assisted refinancing options such as FHASecure (for more information call 1-800-225-5342). Other options may also be available depending upon your individual circumstances and you should consult with legal, tax, credit or financial advisors to help you evaluate these options and determine whether any others may exist and be more appropriate for your circumstances.
What Is The Process For Getting A Short Sale Approved?
There is no universal set of rules or regulations that determine whether you are eligible for a Short Sale or whether your lender(s) will approve a Short Sale. Each Lender is different and each has established their own criteria, which may or may not be available to you. Some lenders will not communicate with anyone but you regarding possible Short Sales and others may not discuss the possibility of a Short Sale unless you are in default, or until a contract offer is presented. The basic general steps in the Short Sale Process after listing the Property for sale are:
- Proving Financial Hardship: You must typically prove to your lender(s) that you are experiencing financial hardship and will be unable to continue making loan payments. In some, but not all cases, you may already be in default of your payment obligations. Most lenders will require you to provide specific information such as a financial affidavit, tax returns, bank statements, and pay stubs in order to prove financial hardship.
- Determining Property Value: Once you have proven a financial hardship, you must be able to demonstrate that the Property is worth less than the total amount owed to your lender and any other lien holders. Frequently, your lender will require a Broker’s Price Opinion (BPO) or comparative Market Analysis (CMA) from a Realtor, and it will also usually order an appraisal of the Property from a licensed appraiser of their choosing. In some cases, you may be responsible for this expense.
- Finding a Buyer: A qualified buyer must submit an offer to purchase the Property, which is then submitted to the lender for approval. Each lender with a mortgage or lien against the Property must approve of the potential purchase to the extent that their loans will not be paid in full at closing. Many lenders will not even consider a Short Sale, review the Property’s value or evaluate your financial hardship until a bona fide offer to purchase is received.
- Final Approval: Once your lender acknowledges your inability to continue satisfying your payment obligations and the fact that the Property is not worth as much as the loan(s) secured by the Property, you or your representative must convince the appropriate decision makers at each lender that it is in their best interest to approve the Short Sale. Most lenders have a specific department that handles these requests which is commonly referred to as the Loss Mitigation, Pre-foreclosure, or Loan Workout Department.
How Will I Know If My Lender Has Approved A Short Sale?
In all likelihood, your request for a Short Sale will be subject to different levels of approval by your lender. At various times throughout the process, you (or your representative who is in communication with your lender(s) may be told or otherwise get the impression that your lender views your request favorably or believes that it will be approved. However, you should not assume that a Short Sale has received Final Approval unless and until you have written confirmation from the lender setting forth its approval and all of the specific terms of the compromise. Your lender will in all likelihood have the ability to withdraw its approval up until that time. If your Short Sale is approved, the approval should be provided to the settlement agent so that they can prepare the appropriate documents needed for the closing of the transaction.
How Long Will It Take To Get A Short Sale Approved?
Every short sale situation is different depending on your individual circumstances, the nature of the loan(s) and other liens against your Property, and your lender’s criteria and staffing. If your lender will consider a Short Sale prior to the submission of an offer to purchase, the process may take less time because you should be able to provide your lender with all of the required documentation in advance and the lender may order an appraisal of the Property sooner. Even if your lender will not consider a Short Sale prior to submission of an offer, you should have all of your financial information (mortgage documents, bank statements, pay stubs, tax returns, etc.) organized and immediately available to avoid unnecessary delays. In the current market environment where Short Sale requests are occurring with much greater frequency, your lender may not be able to respond to your inquiry or evaluate your request as quickly as you would like. While some lenders are able to review and approve Short Sales requests quicker than other, many lenders take at least 3 to 4 weeks, if not longer. In addition, it is important to understand that there is no assurance that they have approved and the specific terms to which they agreed, you should not assume they have given approval, regardless of what you may be told verbally. You should begin to consider any and all other options available to you now in the event your request is denied.
What Should Be Disclosed To Prospective Buyers and Brokers?
Because only your lender will have the ability to approve Short Sales, your Broker will disclose in the Multiple Listing Service (MLS) and other advertising the fact that the sale of the Property and payment of the offered brokerage commissions is subject to lender approval. A contract that you accept should be an “AS IS” contract as it will likely be considered more favorably by your lender. It should also have a provision making the contract contingent on lender approval. If the lender approval provision is not included in the contract, you may be obligated to close the transaction and pay off your loans in full from other sources of funds if you do not obtain Short Sales approval.
What Are Some Negatives That May Be Associated With A Short Sale?
If a Short Sale results in the reduction or “Forgiveness” of part of your loan balance, as a condition of approving Short Sales, some lenders may require you to sign a promissory note for the difference between the total amount you owe and the amount the lender is receiving from the Short Sales (the “Deficiency”). Even if your lender does not require a promissory note and is forgiving the Deficiency, the IRS may treat the amount of the loan being forgiven as imputed or “Phantom” income and you may be required to pay taxes on that amount. Also, even if you are not in foreclosure, a Short Sale may adversely affect your credit rating as it is a reflection of your inability to satisfy this financial obligation. You should consult with an attorney and/or tax or financial advisor regarding these issues prior to pursuing Short Sales.
How Do I Get Started?.
You agent should have the following Short Sale Listing Forms:
- Short Sale Addendum – Exclusive Right of Sale Agreement – includes important terms and conditions regarding the listing of your home and other information concerning the Short Sale process.
- Seller Short Sale Information and Documentation Checklist – a list of documents you should gather to begin the Short Sales process.
- Authorization to Release Information (Optional) – Your authorization to communicate on your behalf directly with your lender(s).
If you are considering a short sale, I strong urge that you consult with a local real estate attorney, one who specializes in Short Sales