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Short Sale Basics - Frequently Asked Questions & Answers:
Q: What is a Short Sale?
A: Short Sale is a Real Estate sales transaction contingent upon the successful negotiations with sellers lenders and it's investors, lienholders and/or other third parties to agree to sell the property for less than the total amount owed. Short Sale approval letter should address a release from the liability to repay the loan and whether the lender agrees to waive the right to pursue deficiency judgements in the future.
Q: Who qualifies for a Short Sale?
A: A Short Sale applicant should have some kind of uncurable financial hardship that has caused to miss mortgage payments or is about fall behind. There are many reasons for Short Sales. Examples of financial hardship include: Job loss/ Unemployment, Death of spouse, Business failure, Reduction of income, Sudden Illness/ Medical emergency, Divorce, Increased property taxes, Forced relocation, Bankruptcy, Military service, Natural disasters or any event that changes the homeowner's financial ability to continue making mortgage payments. Note: loss of equity is not considered a hardship.
Short Sale Example: If the loan amount on your property is $280,000 and the property can only be sold for $180,000 today (less $15,000 in closing costs), you would only have $165,000 left to pay to bank. You have 2 options: 1) Bring $115,000 cash to closing, or option 2) Short Sell and ask the bank to forgive the difference. In a short sale, the bank will have to agree to reduce the outstanding loan balance to $165,000 in order to allow the short sale to close. The seller's closing costs are paid from the bank proceeds: Realtors Commissions, Sellers Attorney legal fees, Property Taxes, Title insurance, etc.
Q: Why Banks Agree To Do Short Sales?
Banks prefer short sales because short sales make more financial sense to bank than foreclosure. In most cases, banks receive more money through a short sale than foreclosure. Foreclosure process is very costly and time consuming to bank. By the time a property is fully foreclosed/ repossessed, there may be damage due to lack of utilities, vandalism, etc. and the value goes down. Most banks are willing to work with short sales if the seller is in some kind of legitimate and verifiable financial hardship and a reasonable offer is submitted.
Foreclosure: The average loss per Foreclosure (REO) is 65%. That means the lender or it's investors/note holder nets only $35,000 on a $100,000 note.
Short Sale: The average loss on a Short Sale is 40%. Using the same $100,000 original note example, the lender ends up with $60,000, that is a savings of a 25% of Short Sale versus Foreclosure.
Q: I heard Short Sales are impossible to do and never close, is it true?
The national average short sale approval rate is 8%, that's why many real estate agents and brokers prefer to stay away from short sales, however, if you list your property with us, there is over 90% chance the deal will successfully close. We have extremely high short sale approval rate (9 out of 10 closed). Our experience, connections, marketing and pricing strategies is the key - Click here to see my closed transactions
Q: How long does it take to do a Short Sale?
A: There is no specific answer to this question. Short Sale process can take as little as 2 months or could go for over a year depending on who the lenders are and how quickly the buyer is found with a reasonable offer. 5-6 months is the average timeframe to complete a short sale process: 1 month marketing time (finding a buyer), 2-3 months for bank review/approvals, 30 days to close the deal.
Q: What is a HAFA Short Sale? >> http://makinghomeaffordable.gov/hafa.html
Q: Who do you represent in a Short Sale, the Seller or the Bank?
A: We represent the property seller, not the bank.
Q: Who pays the seller's closing costs: real estate commissions, attorney fees, unpaid property taxes, title insurance, unpaid assessments and other closing costs?
A: The Bank (Seller's Short Sale Lender).
Q: Do I have to pay taxes on the cancelled mortgage debt?
Mortgage Forgiveness Debt Relief Act (Bill HR 3648) was signed by President Bush in 2007 and extended by President Obama through 2012 called Emergency Economic Stabilization Act of 2008 extended debt forgivness through 2012. Your lender will issue a 1099 form and send a copy to the IRS and the seller/homeowner after the short sale is completed. The new law eliminates the homeowner's liability for paying taxes on the cancelled/ forgiven debt. This Act ensures that any deficiency written off as part of the Short Sale will not be treated as taxable income. The new law no longer requires taxpayers to pay federal income tax on the forgiven debt, provided the property is their principal residence ONLY. It includes debt reduced through mortgages, refinancing, home equity lines of credit as well as short sales qualify for the examption, if the forgiven debt was used to buy, build, or improve the principal residence. The law applies to debt forgiven in 2007, 2008, 2009, 2010, 2011, 2012. The limits are $2 Million for married couples and $1 Million for a single person or married filing separately.
Use IRS Form 982 with your tax return: http://www.irs.gov/pub/irs-pdf/f982.pdf
Sellers who do not qualify for the above exemption may qualify and claim 'Insolvency'. Basically, you are insolvent when your total debts exceed the total value of your assets. When the debt is cancelled, some or all of the cancelled debt may not be taxable to you.
*You should speak to a professional tax accountant to determine the amount of tax consequences from the short sale, if any.
Q: Will a Short Sale affect my credit?
A: Yes, 50-100 points depending on how many payments have been missed, but not as much as a foreclosure would. You should be able to rebuild your credit within 1 year provided all other bills are being paid on time. Short Sales are not reported on a Credit History, Foreclosures are reported on Credit History (200-300 point loss), stay there for 7-10 years. Foreclosures are public record items, Short Sales are not. Foreclosure is one of the most credit devastating items one could have on their credit report besides bankruptcy. A ‘short sale’ settles your mortgage debt on the credit report. The loan is typically reported as 'paid in full', 'settled' or 'paid as agreed‘. There is no specific reporting item for 'short sale'. The negative points on your credit are from missed or late mortgage payments.
Q: Will I be able to buy another property after the Short Sale and how soon?
A: Yes. We had clients who purchased another property weeks after the short sale was completed on their home. However, someone who does a short sale will not qualify for government backed loans for 2 years (FHA/ VA/ Fannie Mae), so you will have to find a small lender who does not sell loans to government (keep their own loans).
Q: Can I do a Short Sale if I have a 1st mortgage and the 2nd mortgage or a Home Equity Line of Credit?
A: Yes. If the property can not be sold for the amount that would satisfy/pay off the 1st mortgage in full, you will need short sale approvals from all lenders involved. The first mortgage will probably offer some money to the 2nd lender (3k-10k). However, in some cases, the 2nd lender may ask for additional funds, that we will negotiate at a substantial discount for the seller. We may also ask the buyer to pay part of the seller's closing costs that the seller's lender does not agree to pay. This is sometimes necessary because the foreclosing lender (1st lender) is usually not willing to share more than $3,000 with the 2nd lender.
Q: How to do a Short Sale? Short Sale Process Overview:
1.) Seller lists the property for sale with a broker
2.) Buyer sends an offer to the listing agent/broker
3.) Seller sign/accepts the offer subject to bank approval (note: the seller has the right to make a counter-offer to any offer received if the offer seems too low, or reject it if the buyer is not pre-approved for a mortgage or is not willing to wait 60-90 days for bank approvals, or proposed closing date is not realistic, etc.)
4.) Purchase offer/contract along with supporting documents is sent to bank for approval (note: many lenders require a purchase offer to initiate a short sale)
5.) Bank assigns a negotiator, appraisal is ordered (note: the bank will not respond to any offers until their appraisal is completed)
6.) Bank approves the offer and issues a written short sale approval
7.) Seller and their attorney reviews the short sale approval: is the seller fully released from liability to repay the loan? any cash contributions or promissory notes involved? is the bank waiving the right to pursue deficiency? is the bank agreeing to pay the sellers closing costs?
8.) Seller accepts the short sale approval
9.) Closing is scheduled (note: usually within 30 days from bank approval)
10.) Everybody wins: Seller avoided foreclosure, Buyer got a good deal, Bank received most of their money back.
Q: What forms do I have to sign?
A: You will be asked to sign a listing agreement so we can start marketing your property right away, authorization form to share information with your lenders, write a hardship letter to your lender briefly explaining your situation (samples available), provide some financial information to justify your hardship: bank statements, pay stubs, income tax returns, unemployment benefits, etc..
See a Short Sale Addendum To Real Estate Contract
Q: Do we need a 'For Sale' sign on the property?
A: It's up to you. Many of my short sale seller clients choose to not have a sign displayed on their property for privacy and confidentiality reasons. However, if you choose to have a sign on the property, it will be a regular sign and will not say 'Short Sale' on it. We do have to mark it 'Short Sale' in the MLS, though.
Q: What are the odds for the short sale approval?
A: There is over 90% chance for the short sale approvals if you only have 1 mortgage and a legitimate financial hardship. I have listed over 150 short sale properties and so far fewer than 10% have been lost to foreclosure.
*There can be no assurance that your short sale will be approved.
Q: Can the seller live in the property during the Short Sale?
A: Yes, a homeowner can continue to live in the property until the short sale is completed (closing).
Q: Can the Seller profit from the Short Sale?
A: No. Lenders will not allow the seller to profit from the short sale while they are losing money at the same time. The closing settlement (HUD-1) must state: Proceeds to Seller: $0.00. However, some lenders may offer the homeowners some incentives/ moving allowance or relocation assistance for doing the short sale.
Q: Can I short sell the property to a family member?
A: No. A short sale must be an "arms-length" transaction. The property may not be sold back to the seller or the seller's family members.
Q: Can I do a Short Sale myself (For Sale By Owner)?
A: Banks require the property to be listed with a licensed real estate agent. Banks prefer to work with professional REALTORS specializing in Short Sales to ensure the property receives necessary marketing and proper exposure, instead of dealing directly with unlicensed individuals.
Q: How to Price a Short Sale Property?
A: Pricing a Short Sale property aggressively from the start is the key. The asking price for a Short Sale property should be at the low end of Fair Market Value based on the comparable properties sold in the last 4 months, in the same area. And although there is no standard formula for what the lender will accept on a Short Sale, many lenders have stated that their target price is around 90% of the appraised value. You should price it 10-15% below the projected fair market value based on comparables (CMA). For example: if the CMA for your property comes back at ~$250,000 then the asking price should be ~$225,000 to start with, which should be lowered by about 2% every 1-2 weeks, if necessary. Why not list it at $250,000? Because if you do, you will be competing with regular sellers (not short sales) who can afford to wait 6-12 months for a buyer and can close quickly and you can't. Some banks will only give you 90 days to find a buyer for your short sale property and may close your short sale file and pursue other options if the buyer is not found. However, the asking price should not be discounted more than 20% below the projected fair market value because there is a risk the bank will reject the offer. Unless you are running out of time (for example: foreclosure sale/ auction is scheduled for the next week) only then you should price the property way below the market, the idea is to find a buyer/offer quickly before the property is auctioned off.
Issue: Cash Investors/ Offers Too Low.
Once you miss a couple of mortgage payments, you will start receiving solicitations from investors/ flippers offering you 'help'. Do not do business with any unlicensed individuals or investors promising to save your house from foreclosure. They have their own interest in mind, not yours. Do not accept offers that are substantially below fair market value. Banks are not stupid, they may take 10 to 20% less than the appraised value, but they will not take cents on the dollar. These offers will only tie you up for several months and most likely will be rejected by the bank, consequently you will end up being foreclosed on, as there may not be enough time left to find another buyer. Investors place 100's of low offers on 100's of properties, hoping that 1% or 2% will come back approved. You don't want to be a victim of their scheme.
Free Market Evaluation - Click Here
Q: I owe $600,000 to bank but the house will probably sell for $300,000. Will the bank accept such a huge loss?
A: We have closed a short sale for $400,000 where the seller owed $900,000 to bank, another one sold for $65,000 where the seller owed over $300,000 to bank. How much the bank will accept, typically has nothing to do with the outstanding loan balance. It is about the value of the real estate today, which is based on bank appraisal or a BPO.
Q: Can I send multiple offers to bank at the same time?
A: No. Most banks allow only one offer to be sent at a time. The seller selects and accepts/signs the highest and best offer that will be sent to bank for approval. The seller has the right to accept, reject or make a counter-offer to any offer received, so does the bank.
Q: My property is in advanced foreclosure, can I still do a Short Sale?
A: Yes. You are the legal owner of the property until the foreclosure is final. You can try to do the short sale even though the property is in advanced foreclosure until the property is sold at auction or goes REO (converts back to the lender), then your redemption period usually ends but you still have 30 days to move out. In Illinois, you would have to miss at least 3 mortgage payments before the bank can initiate foreclosure proceedings against you. In Illinois, foreclosure process usually takes 7+ months (210 days) or longer (Georgia: 30 days, New York: 400+ days). The final stage of foreclosure is Auction Sale. Don't wait til the last minute. You should plan ahead and list the property as soon as possible in order to allow extra time for marketing/ collecting offers/ bank review/approvals, and continue showing the property for back-up offers until the primary offer comes back approved by the bank. It's possible to get the last minute short sale approval from the lender just before the property goes to auction.
Q: Bank changed my locks, what should I do?
A: Change them back. You are the legal owner even though there is a foreclosure pending. Many banks send out asset preservation companies to secure properties that appear to be abandoned, by changing locks, boarding up windows or winterizing the pipes to prevent damage. Contact us and we will check on the foreclosure status to determine if you still own the property or not..
Q: Can I do a Short Sale if I applied for a Loan Modification, Forebearance or filed for Bankruptcy at the same time?
A: Short Sale is designed to get rid of the property while Loan Modification helps you keep the property. You need to decide what you want to do, whether you want to keep the property or not. You should only apply for the Short Sale if you don't intend to keep the property. If you want to keep the property but need some assistance from your lender, you should request a Loan Modification that may lower your interest rate or payments. Short Sale process will be stalled if you apply for a Loan Modification or file for Bankruptcy during the Short Sale.
Q: Should the seller continue paying utilities if the property is vacant?
A: Yes. The homeowner (not the bank) is responsible for maintaining, securing and preserving the property's condition. If your heating gas or electric bills are not getting paid, your property could get severely damaged/ flooded (sump pump not working), especially in the winter months (frozen/ burst pipes). We can provide you with referrals to companies that will help you get the property secured or winterized in order to prevent damage.
Q: Where will my closing take place?
A: Your lawyer will find a closing place as close to the property as possible. We have over 150 closing locations throughout the state of Illinois.
Q: Does the seller have to go to the closing?
A: No. The seller is not required to attend the closing. The seller can pre-sign the closing docs prior to closing. Closing documents can be mailed to the seller even out of state, including a pre-paid Fedex return envelope provided with detail instructions included.
Q: Why some Banks don't do Short Sales?
A: Foreclosures are sometimes more profitable to banks than short sales if they have some kind of guaranteed loss protection plan or are insured against potential loss.
Q: Who are The Best and The Worst Short Sale lenders to do business with?
- The Best: Citimortgage/ Citi Bank, Harris, Wells Fargo, JP Morgan Chase Home Finance.
- The Worst: Bank of America (long waiting times for response, many times the seller has to bring cash to closing in order to get a clean short sale approval)
Q: Why some short sales fail?
1.) Aurora Loan Service, Ocwen and ING - very difficult to negotiate with.
2.) Current market value substantially below $100,000.
3.) Seller wants to price the property above my recommended broker price opinion.
4.) Too many mortgages or liens on the property: IRS liens, building code violations.
5.) Lack of cooperation from the seller or tenant/ eviction/ no acess to property.
6.) Seller tries to sell to a family member or illegally profit from the short sale.
7.) Severely damaged, stripped, destroyed or vandalized properties. The property must be in livable condition (if only minor repairs are needed, it's OK).
Note: I do not take the above listings due to the slim chance of the short sale approvals.
Q: How much does it cost the Seller to do a Short Sale with Michael Sorensen Team?
A: Nothing. You will never be asked to pay us any money regardless if the deal closes or not. Michael Sorensen Team will spend countless hours working for you, without any out of pocket expenses to you. We negotiate our fees directly with your lender and are paid by the lender, at closing. You have the right to cancel the listing without any penalty if you are not satisfied with the results.
Q: How to choose a Short Sale agent?
1.) Before you hire a short sale agent, ask to see their sales record, Here's mine
2.) Ask about special training/ designations/ certifications, Here is mine:
CDPE: Certified Distressed Property Expert Specializing in Short Sales
3.) Awards/ Recognitions:
Ranked #1 Agent For The #1 Chicago RE/MAX in Sales Volume (2010/2009)
  
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Related Terms & Definitions.
Short Sale. (Short Sell/ Short Pay Off Sale/ Pre-Foreclosure Workout Solution)
Definition: Short Sale is a Real Estate transaction where the proceeds of the sale fall short of the property owners outstanding real estate debt obligations (mortgage loans, real estate taxes, etc).
Mortgage. A mortgage is a loan to finance the purchase of real estate. It's a legal document that ties a promissory note to repay the loan, to the property. The owner holds the title but the lender has a lien on it, as a collateral for the loan.
Foreclosure. Repossession of a real property. It's a legal process to deprive the homeowner of any interest in the property, by which the lender forces a sale of a mortgaged property because the borrower has not met the terms of the mortgage.
REO.
Definition: Real Estate Owned. Refers to Bank or Corporate owned property aquired through foreclosure. If a property does not sell at the sheriff sale/ auction, it goes back to the lender and becomes an REO.
BPO.
Definition: Broker Price Opinion. Its a mini appraisal. Lenders order BPO's or property appraisals to establish Fair Market Value (FMV).
Links:
Looking To Short Sell? Start Here
Short Sale Addendum To Real Estate Contract
HAFA Short Sale Guidelines: http://makinghomeaffordable.gov/hafa.html
Search Short Sales & Bank Foreclosures: CLICK HERE or CLICK HERE (select advanced search and filters: Short Sale, Foreclosure, Bank owned)
Visit my other website: www.ChicagoShortSalePRO.com
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