Easy Steps to Short Sale Success

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Home Page > Finance > Real Estate > Easy Steps to Short Sale Success

Easy Steps to Short Sale Success

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Posted: Nov 02, 2009 |Comments: 0
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Having to step away from owning a home is not easy for anyone, regardless of the circumstances that created the situation. In order to avoid the worst case scenarios, such as foreclosure or bankruptcy, homeowners might consider the selling their home using the short sale system.

While going forward with a decision to short sell your home can be time consuming, there are several steps that can make the entire process less stressful, such as:

1. Before you sell, have an independent real estate assessment done on your home. This will give you a true starting point for determining what your home is currently worth.

2. Hire a realtor that is familiar with the short sale process. Try to find out how successful he/she has been in the past with short sales. Ask if his/her rates are negotiable.

3. Calculate all of the costs involved in selling your home, including realtor’s fees, closing costs, etc.

4. Determine the price of homes similar to yours in the area. How does your home’s value compare?

5. Based on your home’s current value and your outstanding mortgage, will there be a financial shortfall if you sell? (if not, lenders will not accept a short sale request)

6. Draft a Hardship Letter to your lender regarding your inability to continue with the mortgage payments. Let them know that you are considering moving ahead with a short sale and would like their approval. At this point, they may have alternate suggestions to help with the situation such as lowering the cost of the loan.

7. Lenders will usually have forms for you to fill out if they are considering allowing a short sale on your property. Give the lender all the information required make a decision on your request. This could include:

* three actual properties sold in nearby district

* three current listed properties in nearby district

* the condition of your property and if repairs are required, estimated costs

* Brokers Price Opinion (BPO) on the exterior, or drive-by evaluation of the home, and the interior BPO done by the lender.

8. Be aware that selling your home on a short sale will most likely affect your credit score in a negative way. Be sure you understand the recourse, if any, from the lender regarding the difference between the final sale price of the home and the amount of the mortgage prior to the short sale proceeding. Will the lender require a repayment of the difference between how much is owing, and what the net results of the home sale will achieve?

If all of the steps required successfully produce an offer that is adequate, sell the home and make sure there are no loose ends on the part of any participant in this deal.

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It can be very hard for owners to accept when the market forces them to sell for less than they want to get out of their home. Lately, some sales are even for less than the owners still owe on their home. This is never easy. Known as a short sale, it is an alternative to foreclosure for down-on-their luck home owners. But they aren’t a simple process, requiring the lenders approval at every stage. If an offer is made, the bank needs to decide if it is within the range they will accept. If they do accept it, the owners need to find out for sure if their remaining debt will be absolved. Some lenders will do this but others may force the seller to pay their remaining debt by selling off their other assets.

The chance of being absolved of debt is very appealing to down-on-their-luck home-owners, considering the alternative is to foreclose. Foreclosures mark ones credit rating for seven years. Sadly, a bad credit rating can stop one from getting another mortgage. Further, some renters and even employers check credit ratings and see them as a sign of trustworthiness and competence. Plus, there’s the humiliating process of having one’s home on the public auction block. So the impacts of foreclosure are far reaching and can really turn ones life in a negative direction. It should be noted, however, that although a short sale shows up differently on your credit report, it is still there, and can also have a negative impact.

Most banks prefer to accept a short sale than to foreclose, as they must pay taxes on every property in their possession. Taking a small cut in the sale of the home may still save them the money and hassle involved in foreclosing. So short sales are a better option, but they can end up taking months longer than conventional home sales.

A short sale is a serious thing, and won’t be accepted by the lender without proof that the market drop has created a situation wherein the homeowner will absolutely not be able to sell the home for what they owe. Also, a short sale usually can’t happen until after the homeowner is in default, or is about to go into default. In the past, no bank would consider it until the owner had missed mortgage payments. However the current economic climate has made lenders realize that it’s sometimes better to quit while they’re ahead, so to speak, and accept a short sale before they loose too many payments. However, the homeowner will probably be expected to show, in writing, why they are unable to make further payments or pay the remainder of their debt. Suitable reasons include a death or critical illness in the family, divorce, loss of a job or bankruptcy. Homeowners will also need to show the lender that they have little or no assets. Ultimately, it is in the lenders hands whether or not a short sale is accepted.

A short sale, by definition, is the sale of a property to a lender for less than the amount of the mortgage owed.  This sale is often only permitted under extreme circumstances.  The bank or mortgage lender takes into account current economic outlooks, the personal financial situation of the debtor or home-owner, the local real estate market, and the reasonable possibility that the bank will recover some, if not the entirety, of the mortgage loan.  The advantages of short selling a property to the debtor are obvious.  A short sale is often pursued instead of foreclosure proceedings.  Thus, by short selling a property, a debtor can keep a foreclosure off of their personal credit history.  Also, the difference between the original mortgage and the short sale offer, also known as the deficiency balance, is partially under the control of the debtor.  This means that the debtor is free to pay back the deficiency under their own terms.  Sometimes, though rare, this debt is forgiven completely.

The advantages of a short sale are less obvious for the bank or mortgage lender.  These institutions are primarily concerned with recouping their financial losses on bad or risky loans.  Thus, they may choose to allow a short sale if they believe that this course of action will result in a smaller financial loss than foreclosure proceeding.  Whereas a foreclosure can cost the bank or mortgage institution a certain amount of money through legal fees and court proceedings, a short sale is simply an agreement between the debtor and the lending institution and entails much less hidden costs to the lending institution.  Oftentimes, a short sale is the best method for the bank to guarantee at least a partial return on a bad or defaulted loan.

A short sale is a fairly common business transaction.  However, lenders do not like to view these transactions as financial favors to the debtors.  Rather, these institutions view these short sales as sound financial extensions of credit.  When retaining an asset makes little business sense or is economically unfeasible, a business will default on their loans.  If enough of these loans are defaulted on, a bank or mortgage lender can be put in dire financial straits.  Thus, a short sale is utilized to reacquire these economically unfeasible assets and recoup a portion of the extended and defaulted loans.  In this manner the financial institution looses only a fraction of the accumulated debt.  In these types of business short sales the deficiency balance is almost always forgiven.

There are a number of steps that debtor must take in order to secure a short sale from a bank or other financial institution.  Most banks require that a Notice of Default be completed.  This alerts the local government of the impending default and stipulates the location, relative value, and financial history of the defaulted property.  While conditions vary from bank to bank, several levels of approval are usually required.  This is often a long and complicated process for the debtor.  Some banks have set limits on short sales, and these restrictions can vary in amount or type.  For example, many banks won’t approve a short sale if there are tax liens held against the property.  However, if approved, a short sale can be a great way to relieve debt obligation without permanently affecting your credit score.

An increasing number of individuals is presently in danger of having their properties foreclosed by their mortgage lenders.  This goes to show that the mighty real estate is not spared from the recent world economic crises.  In fact it’s one of the most heavily affected.  Either as a buyer or as a seller, one is directly hit by the crises.  Thus, like any business entity, one is in dire need of a bail-out plan to save such investment.   

A handy remedy for this scenario is the real estate’s own-version of a bail-out plan the, short sale purchase.

The Short Sale Purchase mechanism works in way where the existing soon-to-be foreclosed property is sold at a lower value to an interested buyer by the property owner, with the concurrence of the mortgage lender to an interested buyer.  It may sound as easy as it is.  But there are some considerations to fully consummate the transaction.

The Mortgage Lender, whom the soon-to- be-foreclosed property, is under mortgaged plays a major role in this transaction.  For one, it dictates at what price the property is to be sold; it, likewise, determines whether the buyer is qualified to enter such sale transaction; if indeed the buyer is qualified, it further examines whether there are available co-debtors, relative to the remaining balance of the loan mortgage value, since the property will be sold at a lower price than that of the original mortgage value;  finally, it will determine whether the property in consideration is qualified for a short-sale transaction.

The property owner, on the other hand, is the initiator of the short sale transaction.  At the onset, being the owner, he has to execute a HARDSHIP LETTER to the mortgage lender.  Once approved by the mortgage lender, he now acts as the offeror or the seller of the property to any interested buyer.  In selling the property, the property owner/seller has to ensure that all terms and conditions, including the price/value of the property should equate with what is approved by the mortgage lender.

 

The Short Sale Purchase is considered as an of the many easy bail-out remedies for any soon-to-be-foreclosed properties.  However, one must not immediately succumb to such mechanism without proper information.  Hence, it is always advisable to consult with any real estate professional prior to any engaging any of such transactions.