The Short Sale

Everywhere I turn and hear a short sale story… it always seems that it is a bad one. Our society has taken on a whole meaning of its own in regards to a short sale. It’s become a dirty word. And for the life of me, I really don’t understand why. 

Shorts sales (see my first Jersey Girl Foreclosures post), are beneficial to the property owner. It enables them to dispose of the property at a fair market price based on condition, much quicker than waiting for the lender to foreclose, and resets the credit clock for that owner. An owner can’t begin to repair their credit if they are still in default. Most lenders won’t write a loan for a borrower unless there is at least 2-3 years minimum from the date of disposition. Which means, the date of closing for a short sale, the date the deed is recorded on a deed in lieu or the date of sheriff sale. 

Why not speed things up for yourself and work the short sale. In my opinion, it shows you are being responsible for the debt you incurred. That you are trying to make the lender as whole as possible. 

 If you are considering a short sale, the first thing you need to do is let your lender know and ask them for a short sale package. You, the homeowner, will have to fill out financial information and send it to them so they can see where you are at financially. Along with the financials, you will be requested to submit bank statements and also a letter of hardship. The hardship letter should detail out what happened,  how you got behind and why you can’t continue making payments. The lender should assign you to a caseworker/asset manager in their short sale department or loss mitigation department. Please keep in mind, even though you are working on a short sale with them, the foreclosure action continues. It does not stop. 

Next, you will want to choose a licensed agent to get your property on the market. Lenders typically want to see a minimum of 30 days on the market before evaluating a contract.  Here, you really need to choose carefully. The people involved in your process can make or break it. You have no choice at this point on your lender. You have a contract with them for your loan. But the licensed agent and seller’s attorney can make the difference of a smooth sail or a very bumpy ride. The agent should have completed listing short sales before and ideally should be certified by some third party that they have been trained to list and sell a short sale. I’m not currently aware of any short sale certifications for attorneys but, ask them if they have processed short sales before. In many cases, if you have an experienced licensed agent, they will be working with a short sale attorney anyway. 

The purpose of the attorney is to make sure that your legal interests are upheld if the short sale is approved. Their fee is typically put on the closing statement as part of the seller’s closing costs that the lender will pay. The fee is not usually an upfront fee. At least that has been my experience with the attorneys I have done business with. An attorney will make sure the short sale agreement from your lender doesn’t require you to pay the deficit after the short sale completes. They can also prepare the estimated closing statement on your behalf which the lender will require as part of the short sale package for review. The buyer’s attorney doesn’t represent you and may not be willing or able to prepare the closing statement on your behalf. 

If you are still occupying the property, you may receive a relocation incentive from your lender. The incentive is to help you with relocating out of the property. While this is beneficial to a seller, please keep in mind that this is considered income to you and you will be sent a 1099 for it from your lender. You will also receive a 1099, unless the government has an exception in place, for any deficit on the short sale. Talk to your accountant about this. Because you took out the loan and didn’t pay that portion back, it’s considered income. 

The benefit to you remaining in the property is that the property will be maintained and therefore will get better value on the market than if it is vacant and falling into disrepair. Vandalism often times occurs on vacant homes as well as broken/frozen plumbing and water damage. 

Many lenders have tweaked their short sale processes and are able to offer a response within 30-45 days. Far less than it was back in 2007-2009. While there are still some that are taking much longer, it is not as long as it used to be. 

As the seller to the property, you will want to collaborate with your agent about pricing and how to handle offers when they come in. It is still your decision as to whether or not you want to accept an offer even though you still have to get your lenders final say.  Oftentimes the first offer in may be the best. It will also enable you and your agent to find out exactly where the lender stands in respect to what value they will allow the property to sell for. 

A short sale also helps the neighborhood. Did you know that? It helps your neighbors maintain better values in the neighborhood. And if you are living in the property and maintaining it, it helps to keep the neighborhood looking consistent. Ever drive down a street and pick out all the homes in default? Those would be the ones with overgrown yards and disrepair. They not only bring values down but also bring down the appearance of the neighborhood. 

There can be things that go bump in the night with a short sale. I’m not naive enough to think I’ve heard it all, but I have heard some good ones. There can be liens on the property that the seller is not aware of. For example, we once had a property where the seller had an employment lien he was unaware of. Child support can be a lien on the property. Or, in the case of natural disaster, we are seeing Hurricane Sandy damaged homes with grant liens requiring the property to be raised. These are things that can cause a short sale not to be able to complete or cause delays. It doesn’t hurt to check public records in your county, especially if they are online, to see what, if anything other than the mortgage, is against the property or your name. Check with your county’s clerk about where to look for this information.

Your lender is not going to allow certain things when it comes to delays with the short sale approval. When they give approval, there is typically a timeline for getting the property closed. They aren’t going to allow a home sale contingency for the buyer. Meaning, the buyer has to sell their home to close. If you negotiate in attorney review for the buyer to do a home inspection after short sale approval and the buyer doesn’t like the home inspection and now wants the price cheaper, your lender will not negotiate. They are going to want to cancel the contract and have you begin again with a new contract submission to them. Talk to your attorney about the pros and cons of the buyer doing the inspection before or after short sale submission to the lender. 

In the case of additional offers… if you have already accepted a contract and sent it to your lender, that’s the contract the lender is going to work on. They typically can’t work on multiple contracts. One at a time. Your short sale attorney will be able to advise you in this regard. Subsequent offers are typically held as backups. However, it is always good to inform your lender if you have additional offers and if any are higher than the existing contract. I’ve had some lenders tell me to send them the higher offer for review and I’ve had some lenders tell me they can only process the current contract. Either way, as long as you have it in writing what their position is, it’s best for the lender to give direction. Again, consult your attorney. They will advise you.

I hope this helps you to feel more comfortable about the short sale process. If you have additional questions, please feel free to ask.