The Short Sale

A short sale in real estate is not always a pleasant transaction. There are many changing processes, many people involved, and many days pass before information is shared between these people. If you are able to keep your expectations in check, you can, though, sell your home at below the amount you may owe on it as an alternative to bankruptcy or forecloser proceedings. One of these options is called a short sale.

In today’s market, the vast majority of the sales I have been working are short sales.

When lenders authorize a short sale in real estate, it means the lender is accepting less than the loan amount due. Not all lenders will accept short sales or discounted payoffs, especially if it would make more financial sense to foreclose. Additionally, neither all sellers nor all properties qualify for short sales.

If you are considering buying a short sales there could be drawbacks. For your protection I suggest that all borrowers obtain legal advice from a competent real estate lawyer. Or, if your home qualifies for a short sale, contact a licensed accountant to discuss potential short sale tax ramifications.

As a real estate agent, I am not licensed as a lawyer or as a CPA and I cannot advise on those consequences. Except for certain conditions pursuant to the Mortgage Forgiveness Debt Relief Act of 2007, be aware the IRS could consider debt forgiveness as income, and there is no guarantee that a lender who accepts a short sale will not legally pursue a borrower for the difference between the amount owed and the amount paid. In some states, this amount is known as a deficiency. A lawyer can determine whether or not your loan qualifies for a deficiency judgment or claim. Many loans against California homes are non-recourse loans. This means the lender may not be able to seek a legal judgment for the amount of their loss. When speaking to your attorney, bring a copy of the loan documents you signed with you for the attorney to review.

All lenders have varying requirements and may demand that a borrower submit a wide array of documentation to qualify a home for a short sale. Here is a summary of some of the steps you need to take to qualify your home.

Call Your Lender. You may need to make several telephone 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” departments. Instead, you want the supervisor’s name—the name of the individual capable of making a decision.

Submit Letter of Authorization. Lenders 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. Your letter should include the following: property address, all loan numbers (including home equity lines of credit), your name, the date, and your agent’s name and contact information.

Preliminary Net Sheet. This is an estimated closing statement that shows the sales price you expect to receive and all the costs of sale, unpaid loan balances (primary, secondary, and lines of credit), outstanding payments due, late fees, taxes, and real estate commissions, if any. Your real estate agent or lawyer should be able to prepare this for you. If the bottom line shows cash to the seller, you will not need a short sale.

Hardship Letter. The sadder, the better. This statement of facts describes how you got into this financial bind and makes a plea to the lender to accept less than full payments on the outstanding debt. Lenders are not inhumane and can understand if you lost your job or were hospitalized; but, lenders are not particularly empathetic to situations involving dishonesty or criminal behavior.

Proof of Income and Assets. It is best to be truthful and honest about your financial situation and disclose all your assets. Lenders will want to know if you have savings accounts, money market accounts, stocks or bonds, negotiable instruments, cash or other real estate or anything of tangible value. Lenders are not in the charity business and often require assurance that the debtor cannot pay back any of the debt that it is forgiving.

Copies of Bank Statements. If your bank statements reflect unaccountable deposits, large cash withdrawals or an unusual number of checks, it is a good idea to explain each of those line items to the lender. In addition, the lender might want you to account for each and every deposit so it can determine whether deposits will continue.

Comparative Market Analysis (CMA). Sometimes markets decline and property values fall. If this is part of the reason that you cannot sell your home for enough to pay off the lender, this fact should be substantiated for the lender through a CMA. Your real estate agent can prepare a CMA for you, which will show prices of similar homes that are active on the market, are pending sales, and that have sold within the last six months.

Purchase Agreement & Listing Agreement.When you reach an agreement to sell with a prospective purchaser, the lender will want a copy of the offer, along with a copy of your listing agreement. Be prepared for the lender to refuse to pay for some traditional sale expenses such as home warranty plans and/or termite inspections—each lender has a different list of expenses they will and will not allow.

If everything goes well, the lender will approve your short sale. As part of the negotiation, you might ask that the lender not to report adverse credit to the credit reporting agencies, but realize that the lender is under no obligation to accommodate this request. Credit report status is not always negotiable.

How long does this process take? It varies widely. I have processed short sales within 45 days; however, many short sales can take upward of 5 or more months.