What is a Short Sale:
The term “Short Sale”, to “sell short” means exactly that, when you sell for less. The World Book Dictionary defines “short” as used in this sense as “not coming up to the right amount, measure, standard, etc… The cashier is short in his accounts.”
From the point of view of the bank, selling short means that the bank is going to get less money than what is actually owed on the property.
Because of this reason, the bank has to agree to you selling the property for less than what is owed.
The advantage for you is that you may avoid foreclosure and the bank may (they not always do this) forgo chasing you for the deficiency balance. In other words, you may walk out free & clear though technically speaking you would have still owed the bank the difference between what you borrowed & what you sold it for.
This tells you a lot about the short sale:
• The bank has to agree.
• You need to ask permission to do it.
• You will sell it for less than you owe.
• You may end up owing nothing -your debt may be forgiven.
• You are the one that communicates with the bank.
• You are in charge of the process.
Why would the bank do it? Because it is less costly to do a short sale than to foreclose on the property, fix it and then put it up for sale. In addition, through accounting gymnastics, banks have a way to show on their books that they didn’t really lose that much money and sometimes they also get it from the Federal government.
As you can see, they do have numerous incentives to agree to short sale a property, however, this is not guaranteed and some types of short sales will not be approved.
The bank will let you off the hook if you can really demonstrate that you cannot pay for the mortgage and that the property is for personal use. If you are an investor with a rental property, chances of getting a short sale approved are slim in the best of cases.
Depending on the bank, they are going to require that you prove your financial circumstances, they are going to ask you for:
• You will need to show your tax returns, sometimes all the way back to three years.
• Recent bank statements covering the last few months, (sometimes the last 6 months).
• Letter of Hardship, this means a letter where you explain in detail what happened that you find yourself unable to pay.
• They are going to look at your credit report & they are going to question any item that does not make sense with your story.
• They are going to make sure you do not receive any monetary and non-monetary benefit from the sale of the house, in their view they are helping you get off the hook so they don’t want you to profit in any way.
• They are going to review every single piece of paper from the sales transaction: purchase contract, listing agreement, etc…
• They are going to require that you give them all the phone numbers and contact information of everyone involved: yourself, realtors, escrow or attorney, etc…
• Sometimes they are going to require that you & your realtor sign an affidavit that the transaction is an arm’s length transaction, this means that the parties are not involved in any way but they are all independent from each other.
This is why short sales take such a long time, there is a lot of paperwork that needs to be chased. Having said that, if you follow the process diligently and supply all the needed information promptly, you can expect to successfully complete a short sale in under two months.
Myths About Short Sales:
The Internet has mystified the process. There are countless ads about “negotiators” & about Realtors that supposedly have the “secret” of how to do a short sale or make the bank agree to do one.
As of this writing, (year 2010), the banks are flooded with short sales, most of them have developed strict rules & processes to follow. 97% of your time is going to be spent filling up forms & gathering documentation to send to the bank, at the very end of the line, you may have a chance to speak to the bank’s representative assigned to you and the degree of negotiation is going to be very small, even if you don’t know anything about it, you’ll come out alright.
Some people even pay 15% to a so-called “negotiator”. The only advantage of having someone else go through this process is that when it is your house you may be emotionally involved and this may cause you suffering. If this is the case, give your Realtor a written authorization so he or she acts on your behalf, in this manner you can remain more objective, however you can be in charge of the process.
• The bank wants to talk to you, not some other party. They will accept a written authorization for your Realtor and someone else to represent you.
• You & your Realtor communicate with the bank, not some other company.
• You are in charge of putting the house on the market, selecting the realtor and you are the one who accepts or rejects the offers being presented.
• Doing a short sale is pretty much like doing a regular sale, the only difference being that you need to obtain prior bank approval and you need to keep communicating with the bank until the process is all done.
• Once you start receiving the offers, you & your Realtor decide which is the one that has the most likelihood of closing and send that to the bank.
• A difference between a short sale & a regular sale, is that in a short sale the bank is not so much interested on price, they are interested in the property actually closing. This is why they will give priority to an all cash offer, even if much lower than the asking price. Price is not what they are looking after, they want the house sold fast and they want it done.
• While doing the short sale you may get a lot of phone calls from so-called “investors” offering you all sorts of deals in which you may profit. Some of the schemes are really ingenious and seem win-win. They are going to lean heavily on the fact that you cannot derive any benefit from the short sale & they are going to offer you cash incentives if you do the transaction their way. They are also going to call your Realtor and offer him/her cash incentives to slant the transaction in such a way that they can buy it for less. All these are highly questionable practices if not downright illegal, don’t fall for that!
The purpose of the short sale is to be able to sell your house for less than owed and walk away with minimal damage to your finances and credit. Your credit will be dented, no matter what everyone else’s say, but it would be less than a foreclosure and other lenders will see that you at least took responsibility.
A short sale makes sense when you cannot afford to pay for your house anymore, but yet you cannot sell it because the market would not even pay what you owe on it.
Types of Banks:
Banks have been very slow to catch up. You have two extremes, you have banks such as Wachovia who are totally geared and “user-friendly”, their paperwork is minimal, their decision making process ultrafast and you can actually talk to a real human being who makes sense and sometimes you can speak to the decision makers.
On the other side of the spectrum you have banks such as Chase, who are very rigorous & strict, where you need to send them reams of paperwork before you can speak to anyone and where the process has many levels and you only get to speak to someone at the very end.
In either case, all you need to do is be patient and follow the process. You need to keep tabs on it, they are so flooded with short sales that it is not realistic to expect a phone call from them.
Most of the communication will be by e-mail, letter, fax and text messages. Because they are so busy, it is hard for them to return phone calls and they will try to avoid calling you. If you don’t have e-mail, don’t like it or cannot type that fast, get a friend or your Realtor to help you.
You need to be very organized, keep copies of everything you send them. Type everything, do not send them any hand written communications, be very thorough, always include the loan number, the date, the complete name, etc… be formal, thorough, organized, fast, accurate and succinct. If you help the bank’s representatives with their job by supplying good, legible, business-like paperwork, they are going to reward you by giving priority to your case, answering your questions and giving you whatever limited help they can.
Short Sales are usually dealt with by a Short Sale Manager or what banks call a “Loss Mitigation Department”. While you are doing the short sale, the other departments or areas of the bank are still going to continue to do their job, this means for example, if you haven’t paid your mortgage you will still get letters, phone calls in general be subject to their collections efforts.
Whether or not it is better not to pay your mortgage before you get into a Short Sale is not so easy to answer.
Remember, you are doing the short sale in the first place because you can’t pay the mortgage anymore. Getting into communication with the bank when you see that you are going to be unable to pay any longer is a good idea.
Mortgage Plus Line of Credit:
It may be that your property has two loans. The main mortgage plus a line of credit or also known as equity line of credit or HELOC for short.
If this is the case you basically need to do the process twice. You would be sending paperwork to two entities which are basically going to be asking you the same questions, so it is a good idea to make at least two copies of everything you do.
The second lender, the one with the equity line of credit, will want to see everything about the first lender: their latest mortgage statement, name, etc…
As the transaction progresses, the second lender will want to see a “Settlement Statement” this means a summary of who is getting paid & how much once the house sells. They want to make sure that you don’t get anything.
First Lien Holders, this means the bank who has your first mortgage, sometimes will give you what they call a “relocation expense” to help you move out. Wachovia for example, as of this writing, is offering to pay $5,000 by the close of escrow or closing.
Some second lien holders, such as Chase, would want you to give them that money. In this case you need to close escrow and take possession of the relocation allowance and then send it to the second lien holder. Many first lien holders will not give you any allowance if they see you are going to turn around and give it to the second lien holder.
If you don’t have a second lien holder then you basically keep the allowance and use it for moving expenses.
Steps To do a Short Sale:
1.- The first thing to do is determine whether or not a short sale is beneficial to you. I believe you will need the help of a Realtor, hopefully one who has some experience with this process. Therefore the first step that I recommend is that you educate yourself about short sales, besides reading this article, you should also do research in the Internet and then I personally recommend that you find and retain a Realtor.
2.- By far the hardest part of the short sale, the part that will consume most of your time, believe it or not, is to find out who to talk to about doing a short sale. I have specific contact information about two lenders, Wachovia Bank Shortsales & Chase Bank Shortsales, click on them.
3.- Most likely your lender will be different, what you can do is go to the online banking provided by your lender and most systems have an intra-email communications feature.
A way for your to send e-mails to the bank about your account with them. Send them an e-mail requesting the name, phone & fax number of their department who handles short sales.
If you can’t find it, call them or have your Realtor call them to find out who is the section of the bank who deals with the short sales.
4.- Before the bank will give you an approval, you need to send them an offer. Therefore what you do initially is you contact their short sale department and tell them you are going to do a short sale because you can’t afford the payment nor can you sell.
5.- This means first you need to put the house on the market. Here, you and your realtor need to exercise care. Price IS NOT, I repeat IS NOT what you should be aiming at. What you and your Realtor should be aiming for is a fast sale that will close. This means someone who is able to come with a substantial down payment or all-cash.
In order to attract a Buyer like this, you will need to price your home at the LOWER end of the market, NOT the higher end of the market. Further, I recommend using what appraisers call the “Income Approach”. This means, determine what a fair rental for a house like yours would be in your market and work backwards to determine what is the price your home would have to sell for, assuming a 20% down, for the mortgage payment to be equal or very close to the rental amount.
Example, if the fair rental amount for a house like yours is $1,000 per month, then the mortgage the new Buyer would have to pay should not be greater than $1,000 per month (this is including taxes & insurance), assuming a 20% down, this would mean a price no greater than $165,000.
6.- You may be surprised to see that this price is lower than maybe the lower end of the market, however it is a realistic price which will attract investors and people with cash.
The reason why it is important that this price be set right, is because once you forward the offer to the bank, they are going to base ALL their calculations on this amount and they are going to set the MINIMUM they would take BASED on this amount.
If you send them a high offer and the transaction does not close, then you will need to MATCH that high number again which may not be possible. If you send them a realistic down to earth offer which they approve and that offer falls through which is likely unless (in my opinion) you do the above, then it is much easier to find a new offer to match the previous one.
7.- The Bank will give you a window of time to close, therefore that is why it is important to have the right offer that can close at the right offer price. If the offer falls through then you will have very little time to get another one.
8.- You and your Realtor need to exercise a lot of care in selecting an offer that can close. You need to ask for a copy of the first page of the Buyer’s credit report, proof of funds and down payment, if the offer involves financing, you should NOT accept a pre-qualification letter from a broker, you should demand to see an approval from a Major lender! I cannot over emphasis too much who important this is. Remember, you don’t care about price, if you do get a high price that’s even better, what you want to make sure is that the buyer is serious and that he has the capability to close fast.
9.- Check all the paperwork the buyer sends you. Call the bank that shows on his bank statement to make sure the statement is not bogus, call the major lender who approved him to make sure his approval is real, check ALL documentation carefully.
10.- Tell your Buyer that it is going to be at least two months before the short sale is approved and have at least one more back up offer of the same strength.
11.- Now, the short sale process starts as such. During the next two months you would be sending paperwork to your lender or lenders in case you also had an equity line of credit. Be diligent. Write down all phone calls you place to your lender(s) and who you speak to, have a log, try to do everything in writing and keep copies of everything you send or receive.
12.- If you follow up with the paperwork and stay on top of it, and if your Realtor did a good job at determining a realistic price, then your short sale most likely will be approved.
13.- Once approved, the bank will send you a copy of the approval letter, READ that letter VERY CAREFULLY and speak to an attorney if there is anything in there you do not understand fully. There would be a clause on that letter which says whether or not the bank will pursue you for the deficiency balance. That clause should say that they will not chase you for the balance, but it may say the opposite.
This is when you will need to do some negotiating. My personal recommendation and opinion is that you should NOT accept the approval if it doesn’t spell out that you will be NOT chased for the deficiency balance. Be bold, call them or write them and say the truth: there is no incentive for you to carry through with the short sale unless they remove that clause. That IS the reason why you are doing all this work in the first place! So they would leave you alone and you won’t owe anything once you are done with it!
In my experience, the first lien holder would remove that clause and the second lien holder would want an extra payment to do it.
Wachovia has paid up to 10% of the outstanding balance of the second loan in order for the second lien holder to release the lien and allow the house to be sold. Other banks may have different policies, however most first lenders will give the second lien holder something.
The second lien holder stands to receive nothing if the first lien holder forecloses on your home, therefore it is in their best interest to cooperate.
14.- Basically removing the deficiency balance and determining a dollar amount for them to do so, are the areas that you and your Realtor would need to negotiate.
A short sale takes a lot of work and time. The end result is that you may walk out free & clear from a bad situation, your credit may be dented though. However, in my opinion, the short sale would create the least damage to your finances and credit.
The above has been my experience and personal opinion, you should show this information to your realtor and legal counsel and follow THEIR recommendations. A short sale may create a tax liability, the IRS may consider that the benefit of the short sale, that is the balance you were forgiven, as taxable income and charge you taxes for this. Your local attorney and/or local realtor would be able to give you more information on this topic.
I am not an attorney, I am a licensed Real Estate Agent in the State of California and I decided to write the above information to help people facing the possibility of doing a short sale. When I needed information about doing a short sale I couldn’t find anything that really helped me, most of what I found were advertisements from different people to hire them. This is why I decided to write this, I want to genuinely offer valuable & practical information to anyone considering doing a short sale. I believe this information will help you since it helped me.