The phrase “short sale” refers to a real estate transaction where there is more debt owed against a property for sale than its current market value. In other words, the price the buyer is willing to pay is not enough to
1) pay off the loan(s) encumbering the property AND
2) pay the costs associated with selling the property, including closing costs and commissions.
Furthermore, the homeowner seller is also otherwise unable or unwilling to pay the difference of between the sales price and what’s owed plus the costs of the sale. The creditor of the property offered for sale in this situation may be willing and able to allow the property to be sold for less than the debt owed on the loan and thus accept an amount that is less than (meaning “short”) of the debt owed.
Loan balance $500,000
Current market value of home $ 280,000
Homeowner is upside down by $ 225,000
Buyer offers $275,000
After negotiation, lender agrees to accept $275,000
Lien is released and borrower owes $0 to the lender, nothing owed to lender after successful short sale negotiation.
A successful short sale requires that all the lenders involved agree to release the liens on the property in exchange for the net proceeds of the sale.
FORECLOSURE PROCESS ON DEED OF TRUST
1. Borrower breaches contract by missing payments and thus goes into default.
2. Lender may send Notice of Demand to warn borrower of imminent foreclosure.
3. If borrower does not bring payments current, lender initiate foreclosure proceedings.
4. Lender instructs Trustee to record and publish a Notice of Trustee’s Sale (NOS). At this point in time, the trustee may substitute another trustee to take care of the foreclosure process.
5. Trustee then posts Notice of Trustee’s Sale on property. The Notice of Trustee’s Sale will stipulate the time and location of the trustee’s sale. The Trustee’s Sale cannot lawfully occur until the 91st day after the NOS was recorded.
6. The trustee’s sale is held either at a courthouse or at the trustee’s office.
7. The trustee’s sale may be postponed. The number of postponements permitted depends on the servicer.
8. The day before the date of the trustee sale, an opening bid on the property is set. The opening bid may be an amount that includes the principal, interest, late charges, and attorney’s fees. Note that the opening bid may be set even lower in some instances.
9. If someone makes a successful bid that day and then pays for the property, then the property will transfer ownership to that person.
10. Often there is no successful bidder and the property goes back to the beneficiary, the bank. This is recorded as a sale on the county tax records.
11. After a few weeks or months, the bank offers the property for sale on the real estate market through the use of a listing agent.
Benefits of a Short Sale
• Avoid foreclosure
• Avoid the amount of time needed for the foreclosure process. It may take many months for the lender to process, and the whole time the homeowner is constantly looking over his/her shoulder wondering when the locks on the door may be changed
• Might be able to prevent lender from suing homeowner for balance owed, known as the deficiency, in the future
• Avoid the stigma of foreclosure with friends, family, colleagues and on public records
• Less of a “hit” on borrower’s credit score
• Some lenders and government programs offer a cash incentive to seller for completing a short sale
• Easier to get credit to purchase items or apply for a mortgage in the future
• Less uncertainty and faster than waiting for trustee sale to happen
• Not as bad a hit for credit background checks due to insurance, loans, background checks, security checks, rental applications
• If you don’t miss any payments on your mortgage, your credit is affected even less
• As far the public tax records go, the sale is recorded as (and appears to be) a regular sale (versus a foreclosure)
Consequences of a Short Sale
Since the property is not worth as much as is owed on it, after the lender(s) applies the proceeds from the sale to the mortgage balance, there will still be money due left outstanding.
The lender(s) may have a right to collect this balance due in the future.
Forgiven debt will be treated is income for tax purposes and the lender will have to file a 1099-C.
If you have fallen behind on your HOA dues, these will have to be paid for the sale to go through.
If you have fallen behind on your property taxes, these will have to be paid for the sale to go through.
Your credit score might go down (particularly if you have late or missed payments) making it more difficult to borrow in the future.
There will be an entry on your credit stating “paid in agreement for less than owed,” or something to this effect.
The short sale could be an obstacle to qualifying for a mortgage.
The short sale may could be an issue for background checks, such as prospective landlords and prospective bosses.
Short Sale Process
1. Consultation with an attorney to evaluate your current situation. Asset Law Firm, PLLC will determine whether you and the property would be able to qualify for a short sale.
– explanation of the default process that can lead to a trustee’s sale or foreclosure.
– explanation of the process of how a short sale works.
– homeowner provided with a list of documentation you’ll need in order for your lender(s) to consider a short sale.
– explanation of the benefits and consequences of selling a home as a short sale.
2. List and aggressively market the property for sale. Note that you may live in the home while it is being marketed for sale.
3. After an offer is submitted, then Asset Law Firm, PLLC will negotiate with the lender to accept the offer.
This usually takes several weeks, as it takes time to obtain approvals from the investors who currently own the notes.
– note that a strong offer is one that is close to the current market value of the property.
– if the offer is lower than the market value of the home, the bank will counter.
– The buyer may or may not continue to negotiate and come to agreeable terms with the lender. This is why it is imperative to continue to market the property for sale.
4. If the bank and buyer agree on a price, then escrow period begins. So long as the buyer is satisfied with the due diligence inspections and the buyer’s financing goes through, then the transaction should close.
Short Sale Myths
MYTH: I have to be cash poor in order to qualify for a short sale.
FACT: Having cash in the bank that you use to live on will not keep you from being able to successfully short sell your home.
MYTH: I can’t do a short sale because I do not live in the property and rent it out to a tenant.
FACT: Your lender may agree to a short sale on your investment property. Maybe you cannot afford the repairs that are needed to be able to rent the property. Perhaps the rent you receive does not cover your mortgage and upkeep expenses and you cannot afford to pay the difference. Or maybe you are unable to find a tenant who is willing to pay rent that sufficiently covers mortgage and expenses.
MYTH: I can just get my listing agent to negotiate with my lender.
FACT: Most agents do not have the knowledge, skill, or experience to effectively handle short sale negotiations.
* Remember that only an attorney who is licensed by the Arizona State Bar is legally permitted to give you legal advice, act on your behalf, or draft legal documents.
MYTH: I won’t be able to do a short sale on my property because I have a second mortgage.
FACT: The lender with whom you have a second loan will actually fare better with a short sale rather than a foreclosure. If the property goes to trustee’s sale, the second lien holder gets wiped out.
MYTH: I can’t do a short sale on my property because it needs repairs.
FACT: Repairs and problems stemming from deferred maintenance can be reflected in the sales price. As long as the pricing is fair, buyers in today’s market are willing to consider properties that require work to be done.
MYTH: Nothing will happen if I just walk away and let the bank foreclose.
FACT: If you did a cash-out refinance or HELOC you may be liable for the debt. In other words, the lender may sue you to recover for the debt. Even if you don’t have a second recourse mortgage, you may be ineligible for a Fannie Mae mortgage as a consequence of walking away. Borrowers who defaulted and walked from their mortgages while having the ability to pay or those who failed to complete a workout alternative in good faith ineligible for Fannie Mae mortgages for a period of 7 years after the foreclosure date.