Short Sales
How To Do Short Sales
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.
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
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.
- Preliminary Net Sheet
- Hardship Letter
- Proof of Income and Assets
- Copies of Bank Statements
- Comparative Market Analysis
- Purchase Agreement & Listing Agreement
Before You Buy a Short Sale
Buyers pursue short sales to get a good deal. So when you see a price listed for a home that you think is too low for the neighborhood, before you jump on that price like hot fudge on a sundae, ask your agent to call the listing agent to find out if the home is a short sale.
Because you might want to think twice about making an offer on a pre-foreclosure, short sale home. It's not as simple as you may believe, and very few can close in 30 days or less.
What is a Short Sale?
A short sale means the seller's lender is accepting a discounted payoff to release an existing mortgage. Just because a property is listed with short sale terms does not mean the lender will accept your offer, even if the seller accepts it.
Be aware that the seller will need to be in default, to have stopped making mortgage payments, before a lender will consider a short sale. Also, the seller might have over-encumbered, owe more than the home is worth, so a discounted price might bring the price in line with market value, not below it.
Selling Homes on Short Sales
Who Profits from Short Sales?
For home sellers who owe the lender more than their home is worth, it's not as bleak as it might sound. Negotiating a short sale with the lender could be the solution.
This means the seller or the seller's agent sells the home to a buyer at market, or slightly below market value, and the lender agrees to accept the proceeds as payment in full on the mortgage, even though the sales price is less than the existing encumbrances.
The downside is lenders are not required to negotiate discounted payoffs, and there is no guarantee your lender will let you do a short sale.
Who Makes Money on a Short Sale?
The question is if the seller isn't making any money on a short sale, who is making money? Because you know that somebody is going to come out ahead.
And it's not going to be the seller. The truth is everybody under the sun will make money on a short sale except the seller.
Let's look at who profits from short sales:
Existing Mortgagee.
Listing Agents and Buying Agents.
Title Company.
Escrow Company.
Real Estate Lawyers.
Tax Consultants and CPAs.
The Internal Revenue Service.
The Buyer.
The New Lender.
The Appraiser.
The New Mortgage Broker.
County Tax Assessor.
Insurance Company.