IS A SHORT SALE RIGHT FOR YOU?
THE FOLLOWING ARTICLE DISCUSSES THE AUTHOR’S PROFESSIONAL EXPERIENCE WITH THE SHORT SALE PROCESS. IT IS NOT INTENDED AS AND DOES NOT CONSTITUTE LEGAL, FINANCIAL OR TAX ADVICE. PROSPECTIVE PARTIES TO A SHORT SALE TRANSACTION ARE ADVISED TO OBTAIN SPECIALIZED LEGAL, FINANCIAL AND TAX ADVICE BEFORE ENAGAGING IN A SHORT SALE TRANSACTION.
Many of you have probably heard the expression “short sale” by now. Maybe you are looking to buy a new home and your Realtor informs you that the house you are looking at is a short sale; or maybe you are dealing with a hardship situation that makes it impossible for you to keep your home and you need to sell but, given that your property is worth less than the amount you owe on your mortgage(s), you are advised to explore a short sale with your Realtor.
So, what is a “short sale” after all? A short sale can be defined as the sale of real estate transfer where the sale price is insufficient to cover the sum of all loans secured by the property and the costs of the sale and where the seller’s lien holders (typically the bank(s) holding mortgages on the property) forgive all or part of the seller’s debt in excess of the value of the property in order for the closing to occur.
Before we continue, please keep in mind that the details of the short sale process may vary significantly from bank to bank. However, the following conditions are generally applicable to most short sale transactions:
1. The property is worth less than what the seller owes on all loans secured by the property and the closing costs associated with the sale. The listing Realtor will usually prepare a Comparative Market Analysis to reflect the relative health of the real estate market for similar properties. If, based on the Comparative Market Analysis, the seller decides on an asking price which is less than the sum of loans secured by the property and the closing costs associated with the sale, a short sale may be appropriate.
2. The seller has a hardship situation that makes it impossible for him to continue making payments on the loans secured by the property. The loss of a job, the death of a spouse, divorce, incarceration, medical costs are all examples of such hardship, as they usually result in the substantial diminution of the seller‘s income.
3. While a short sale may be the avenue for a seller to avoid a more catastrophic outcome such as a foreclosure or bankruptcy, a short sale is still a severe financial and emotional event, demanding the seller’s understanding of the seriousness of the situation and her willingness to cooperate with the listing Realtor to undergo the short sale process. Dealing with a hardship situation could understandably be embarrassing for the seller, who may be reluctant to commit to a short sale process during which the details of the seller’s hardship would be revealed to third parties such as the lenders, the buyer, the buyer’s Realtor, etc.
4. The lender(s) holding liens on the property are contacted and express a willingness to consider a short sale. The seller needs to authorize the listing Realtor in writing to discuss the seller’s situation with the lender(s) on behalf of the sale and to negotiate the waiver of all or part of the seller’s mortgages.
5. The property is listed in the local Multiple Listing system (MLS) as a potential short sale, subject to the seller’s lien holders’ approval.
6. Once an offer is received on the property, the offer needs to be submitted to the lender along with a hardship package. The hardship package varies from bank to bank, but is usually comprised of: a hardship letter where the seller accurately describes the hardship situation; documentation of the hardship (e.g. medical bills, divorce decree, death certificate, unemployment statement); federal tax returns for the last two years; bank statements for the past two months; the two most recent pay stubs; a personal financial statement; and a preliminary HUD-1 statement that is issued by the closing agent.
You are probably wondering now, after reading all this, what is lender going to do? Sometimes they ignore the offer (yes, unfortunately, even lenders are sometimes in a denial phase, ignoring the current market conditions). They can also reject the offer, with or without an indication of what contract price would be acceptable to them. The lender can also press the seller to make up for some or all of the shortfall at the time of the closing. And last, but not least, they can approve the offer as submitted.
Needless to say, there hardly is such a thing as a smooth short sale transaction. The fabric of a successful short sale is sewn together by patience, skilful negotiation, honest information sharing, and a lot of give and take between buyer, seller, lender(s) and real estate agents. In the end, a short sale may be the right compromise solution between the interests of all parties at the negotiating table.
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Need more info? Call Mariana D. Doseanu, Realtor with Keller Williams Realty at (850)339-5671 or email her at [email protected]