Seven Short Sale Questions, Answered

• What is a short sale?

A short sale can simply be said to be when the proceeds of the sale of a home do not cover the seller’s mortgage obligations and closing costs. This closing costs include property taxes, transfer taxes and the real estate agent’s commission. The money realized from the sale will not be able to cover the difference hence it is seen as short. As a result of this shortchange, a lot of short sellers will find it difficult to cover their mortgage loans and this can ultimately lead to foreclosure. However, home owners who bought at the top of the market or who took out large amounts of equity with a refinance and who now need to sell because of divorce or job transfer may also find themselves at a loss, thereby incurring unplanned losses or owing more than the home is currently worth when closing costs are finally factored in.

• What information will the bank need to decide whether to accept a short sale?

Before accepting a short sale, the bank will need some sort of information. This information will be gleaned from a form coupled together in the sellers’ submission package. The sellers’ submission package will include W-2 forms from employers (or a letter explaining the seller is unemployed), bank statements, two years of tax returns and other financial documents stating in clear terms the income, expenditure and debt obligations. The bank will also need comps or a broker’s price opinion showing your estimate of value.

Another document that will be required is the “hardship letter”. By hardship, it simply means the reason why the loan is unable to be paid. This letter will intimate the seller on the true state of affairs and the true level of financial hardship. Someone with the assets or the income to pay is unlikely to be considered.

• What are the other options besides a short sale?

When looking for other options beside a short sale, there are programs designed to aid borrowers.  With these programs, lenders are willing to offer loan modification options. This option can extend the term of the loan, add on delinquent payments to the loan principal, and/or reduce the interest rate to make the loan more manageable for the home owner. Alternatively, a repayment plan will involve home owners to increase their monthly payments until the loan is current. An adjustable rate loan will then be possible with a Federal Housing Authority or conventional fixed loan. However, this has almost no effect on the lenders as they will not postpone a foreclosure just because a property is listed. Things can however be titled in your favor if there is a guarantee of getting funds from an offer soon.

• How should I price a short sale property?

This highly varies. Some short sale experts say that pricing piece of real estate property at or near fair market value is the most ideal form of pricing. Nevertheless, this usually begins with the total payoff amount owned by the seller. Price drop below market value will depend on how frequently prices are dropped and whether the property is in pre-foreclosure. Most banks have a formula for what percentage under market value they will accept and buyers and sellers usually have this in mind.  This percentage is usually pegged at 8- 20%. Properties are usually priced 10 percent lower than comparable to peak buyer interest and initiate buyer activity. Buyers should understand that the bank will not give away the property no matter the conditions.

• How should I disclose about the short-sale property to prospective buyers?

You should be honest about a short sale from the beginning. You can disclose this in the comments section of the MLS listing or any other listing you may want to make. When in talks with a buyer, also disclose that it is a short sale. Some agents use a disclosure form prepared by their brokerages just for short sales. Some go as far as putting up special sign riders for the yard indicating a property is a short sale.

• How long does it take to complete a short sale?

The time used to complete a short sale varies. Response time varies from lender to lender but it can take between two weeks or as long as 120 days to receive an approval of a short sale from a lender. Hence, it is necessary that buyers, sellers, agents and their representative understand and accept that time frame before they make an offer.

Purchase contracts usually include provisions that allow either party to cancel a short-sale contract within a set period if the seller hasn’t gotten the deal approved or the sale closed. Properties with securitized loans (a lot of loans fall into this category these days) usually require a longer time to get an approval of a short sale. This is because of the need for approval from the entity holding the pool of securities.

• If a short sales letter is rejected by the lender, what are the seller’s options?

There are a myriad of reasons why short sales letters are rejected by the lenders. These lenders could be from the bank or the institution involved in the lending process. A reason why it could be rejected may be the low price or if there are too low many files on the loss mitigator’s desk. In these instances, search for another buyer or resubmit the same contract. Banks usually don’t take properties back in foreclosure, so they are going to try to make it work. Prepare your seller in advance for the possibility of foreclosure if a short sale fails.

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