MagnumOne Realty

A short sale is where the sales price of the property is less than what
the seller still owes and the lender is willing to accept less than they
are owed.

Why would a lender agree to a short sale?  Mortgage lenders are in the
business of making loans not owning property.  When a loan is in default,
it is viewed by the lender as a non-performing loan.  In addition to not
earning interest on their loan the Federal Reserve requires the lender to
put aside funds to cover the bad debt.  These funds are called a reserve
and cannot be lent to other clients.  In addition there are some rules
about how many non-performing loans can be kept on the books and the
punishments for exceeding these limits are serious so banks and other
lenders are anxious to get these loans resolved.  It should also be noted
the foreclosure process is long and expensive for lenders.  The reason
many investors look for bank owned properties is, historically banks have
not been very good at selling property.  All of these reasons are why
lenders are willing, in some cases, to take less than they are owed.

Steps to a Successful Short Sale

1.     Determine if the property qualifies for a possible short sale.
There are two elements to determine if your home qualifies for a short
sale. First is what you owe on your combined mortgages more than what you
could sell your house for less the selling costs?  In other words after
you have paid all the closing costs will there be enough money left to pay
off the lenders?  If the answer is no to this question your property
qualifies for short sale consideration.



2.     Determine if you qualify for short sale consideration from your
lender.  Mortgage companies make loans to borrowers and use the home as
collateral.  Their first source of repayment is you, your income and
capacity to pay.  Their second source of repayment is the liquidation of
the collateral, in this case the house.   Since we have already determined
the selling of the collateral is not going to repay the mortgage in full
the lender will look to the borrower to pay the balance.

You will only qualify for short sale consideration if you have had a
hardship and can demonstrate to the lender you have no capacity to pay the
balance that will be owed after the sale is complete.  A financial
hardship can be death of a co-borrower, divorce, unexpected medical bills,
loss of a job, reduced income, and even a job transfer that requires you
to relocate.  Any or a combination of these must have drained your
capacity to pay.  The lender is not going to grant a short sale if you
have a large investment portfolio, savings accounts, and/or a 401k pension
account.  In reality they may accept the short sale contingent on the
borrower paying the balance from savings.

3.     Hire a Realtor with experience.  Find a Realtor with direct hands
on current experience in working with lenders to secure a short sale or at
least make sure they have access to such a person.  Selling the home is
easy; you just keep lowering the price until a buyer shows up.  Having an
experienced agent who knows how to contact the right department within the
lender’s organization and find out exactly what their short sale package
requirement are and knows how to put it together in a way that makes the
decision for the lender easy is who you must have working for you.  This
agent will also be able to explain the process to you and, as importantly,
to your buyer and their agent.



4.     Willingness to bare your financial soul.  The requirements for a
short sale vary from lender to lender but they all will want to verify
your claim that you are going through difficult financial times and do not
have the capacity to pay any unpaid loan amounts after the sale of the
home.  This means they will want items like pay stubs, bank statements,
pension, credit card and other statements.  In addition they will want
copies of recent tax returns.  They will want to understand what your
monthly obligations are including alimony, child support, insurance,
utilities, etc.  In most cases the lender will be asking you for more
information than you may have provided to get the loan.  Here again your
experienced Realtor can help you put together the package in a manner that
will limit subsequent information requests and speed up the process.



5.     Patience and flexibility.  These are key ingredients in many things
but are vital in the short sale process.  Lender employees working on
short sales are swamped right now, most packages require many requests for
more information and they have no emotional attachment or need to have a
relationship with the borrowers they are dealing with.  Consequently it
may take days or even weeks to get an initial response.  In my opinion, I
think some are trained to give non-encouraging feedback.  They will
generally hire an appraiser to come out and give them a value; they may
question your Realtor on the negotiated price.  In other words it is often
a back and forth process that can take weeks to complete and most lenders
are not very good about keeping you and/or your Realtor informed.



6.     Understand the credit and tax consequences.  Although recent
changes to the tax laws appear to relieve the forgiven amount as taxable
income consult with a qualified CPA to make sure you have a complete
understanding.  There is a misperception that a short sale will not be a
negative on your credit report.  That is not true; it will negatively
impact your credit and ability to get a loan in the future.  Talk to a
credit professional and make sure you understand exactly what a short sale
will do to your credit.

Many homeowners, especially here in the Sacramento area where we had such
rapid appreciation and a large number of homes built in the 2004-05 time
frame, are finding their homes are not worth what they paid for them and
worst yet, they now owe more than the house is worth.  These homeowners
should not panic or start working on utilizing a short sale unless they
are experiencing a severe financial hardship.  In that case a short sale
may be an option to avoid foreclosure.  The best advice I can give is,
contact and talk to an experienced professional and make sure you explore
all your options because there may be others.

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