Archive for June 10th, 2008

In my sidebar is a link to my Yahoo! Answers profile, which lists over 250 (to date) of my answers to real estate related questions. The questions vary in nature and many are quite interesting. 54% of my responses have been voted as the best answer, which gratifies me.

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Short Sales

Given the state of the economy and the number of people who are either delinquent, owe more than their home is worth, or both, the short sale is becoming a very common and misunderstood term.  I did my first short sale in 1997 (I learned from the best), so I am going to offer my thoughts on the matter.

First, a definition: A short sale is when the lender allows the borrower to sell their home for less than what they owe with no further obligation. Let’s suppose I bought a house in 2007 for $400,000 with 3% down. I owe $388,000 after I close. The market then tanks, I lose my job, and I fall behind. I put the house on the market, and the best offer I can get is $365,000. I am unable to pay the difference to make good on the loan, so I approach the bank and explain that I am experiencing hardship, that I have done my best to make good on my obligation, I am selling the house in good faith, and that my home is worth less than my debt. If the lender checks things out and agrees, I have just gotten an approved short sale. The payoff is short of the amount owed, hence the term “short sale.”

My definition is simple, but the process is not easy, especially if there is more than one mortgagee. The loss mitigation department of the bank handles it, and the borrower has to complete a fairly extensive hardship package, including financial disclosures, tax returns, a letter explaining the hardship, and more. The lender then has the house appraised or has a broker submit a Price Opinion, and, lest I forget, nothing can happen without an offer to purchase. In my local market, it is a team effort with the seller, their attorney, the listing agent, and hopefully a cooperative person at the lender.  The buyer has to wait patiently for the lender to approve their offer, and once that comes through they seldom get more than 15-30 days to close.

The lender not only eats a loss on the mortgage, they have to pay all the seller’s fees, like the real estate commission, attorney fee, back taxes, transfer tax, and in some cases even reimburse the broker for things like winterizing. I have seen lenders lose $100,000 in a short sale. Why do they do it? Primarily because it is the lender’s least costly option. Foreclosures often take a year (that is an awful lot of back payments & back taxes to eat), command massive legal fees,  involve securing & managing the property, and then selling the place for far less than what it would have gotten when it was owner occupied.  The sooner they can get the bulk of their money, the better.

On the seller’s end, they avoid a foreclosure and start out from scratch. They get no money in a short sale, but they don’t have to come up with anything either.

In extremely rare cases the bank may want some of the debt repaid in the form of an unsecured note after the sale, but this is rare. On occasion some banks issued a 1099 for the forgiven debt which caused a tax consequence for the seller, but this is now forbidden if the home has been the seller’s primary residence for 2 years. I have never seen a 1099 issued to a seller. Even if either of these things were to happen, a short sale is certainly a better option than a deed in lieu of foreclosure or an outright foreclosure. Both are far worse for the borrower’s credit and can result in a deficiency judgement.

Clients of mine who hav googled the term “short sale” have gotten information that varies from accurate and helpful to grossly distorted and lousy. I do short sales for a living. At any one time I have a dozen or more in process. The attorney I work with is the best on the eastern seaboard. It is my hope that in comparing my commentary with what is floating around out there in cyberspace that the reader will consider the source.

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