This week I had several meetings with sellers that were considering a short sale on their property. When I scheduled the meetings, the sellers involved all seemed to understand the short sale process. In each meeting, one or two things came up that really took the sellers by surprise. With that in mind, I thought I would put together a quick scenario and some frequently asked questions concerning a short sale.
First of all, let’s define a short sale. A short sale occurs when a seller sells the home for less than is owed on the property and the bank accepts that shortage. Example: A family buys a home in 2006 for $350,000 and borrows $315,000. Today the payoff amount is $300,000. Assuming the real estate market has declined about 25 percent since 2006, the home is now valued at $262,500. Now the family gets into a financial crunch and can no longer afford the house payment. If they put the house on the market and sell the home for $250,000, they are short $50,000 when the bank gets paid off. There are also potential closing costs and realtor commissions to be figured in. This is a common scenario for a short sale.
As a seller, there are several things you should know about your exposure with a short sale. Keep in mind that every lender is a little different so please contact a certified public accountant or an attorney to get advice on how a short sale could affect you. The following are some frequently asked questions from sellers:
1. Do I need to be behind on my mortgage? In most cases a lender will not consider a short sale until the borrower falls behind. I have heard some banks have started evaluating short sales with borrowers who are current. Since this is a moving target and each and every bank or lender is different, please call your specific lender and simply ask them. Once you know the answer, you can budget and plan accordingly.
2. Can we talk to the bank before we list and find out what price they will accept? Most banks do not want to have any contact with a realtor until after they have a fully executed purchase and sale agreement. This puts the pressure on the realtor to find the balance between being aggressive enough to get an offer and working hard to minimize the seller’s exposure from the short sale. A good strategy is to be somewhat aggressive in the beginning of a listing and become more and more aggressive as a potential foreclosure date approaches. If an offer is made prior to a foreclosure date, the foreclosure is typically put on hold in order to give the bank time to evaluate the short sale offer.
3. Who signs the contract? In a short sale, an offer is made by a buyer and the contract is then signed by the seller. At this point we have a binding contract between a buyer and a seller. However, there is language put into the contract that the deal is “contingent” upon the lender(s) approval and that the lender(s) releases the seller from any claim, cause of action or judgment. This way, if the bank rejects the short sale, both buyer and seller can walk away from the contract, with earnest money going back to the buyer.
4. What documents are needed for a complete short sale package? Along with the listing agreement and purchase and sale documents, the seller will need to provide two years tax returns, two months bank statements, the last two paycheck stubs, a hardship letter and some type of financial worksheet. Each lender may have a slightly different set of required documents, but this a good start. The banks could also continue to request additional and updated information as the short sale process drags out.
5. I have some money saved up, when can I buy a smaller more affordable house? This is the one question that creates the most discussion. First of all, anyone that has a short sale on their credit is going to have to wait three years to purchase a home again. It doesn’t matter how soon they get their credit score back up to an acceptable level. Today’s guidelines will not allow a new mortgage for three years. As for that amount of money that you have saved, the bank will not approve your short sale and take a financial hit while a seller walks away with a handful of cash. In this case, the bank would require some payment in order to approve the short sale. So, if you are successful in short selling your house, be prepared and ready to rent a home for three years. This will allow you time to re-establish your credit and save up money as you prepare to buy your next home ... in 3 years
Every short sale is different. The need for a short sale may come from a reduction in salary, loss of job, divorce or maybe a medical hardship. Each bank is different in terms or required documentation. Each bank may be different in how they report the short sale on your credit report. While there are challenges, or bankruptcy.
As I mentioned earlier, if you are considering a short sale, consult your CPA and your attorney, then call a real estate professional. You will be amazed at how good it will feel to get out from under that mortgage payment that is weighing you down each month. Another thing to remember is that you are not the only one out there falling a little behind each month. The economy and the real estate market has made it difficult for many, but the short sale is an opportunity to back away, regroup and start over.