Short Sales

Last year, nearly 10% of all transactions in the DC metro area were short sales.  While this number is down slightly from previous years, short sale transactions are still very commonplace in our market and a “must-practice” for any agent who wishes to stay current with the needs of his or her clients.  To meet the demands of this market, I began focusing on short sales after the downturn and currently employ a full-time short sale team who knows how to get the job done.  Please read the frequently asked questions below and don’t hesitate to contact me for a personal consultation to discuss your unique situation.

What is a short sale?
A short sale is the sale of real estate in which proceeds from the sale fall short of the amount owed to the bank. While short sale agreements do not automatically release home owners from their obligations to repay the debt, this is something we will negotiate for you. Short sales are one of the most common forms of loss mitigation for home owners who are no longer able to keep up with mortgage payments and do not qualify for other alternatives.

Why would the bank allow a short sale?
Your bank does not want to foreclose on your house as it costs them a lot of time, money and resources. So if they think foreclosure is in your future, they’d rather sell at a loss today. Furthermore, banks aren’t in the business of owning real estate, they are in the business of loaning money.

What’s the benefit to doing a short sale rather than foreclosure or deed-in-lieu?
Two reasons: 1) a short sale will be less detrimental to your credit and 2) we’ll negotiate the deficiency judgment with your bank so they don’t come after you later for the amount lost.

Who is eligible for a short sale?
Just about anyone who can demonstrate a financial hardship may be eligible. Here are some common hardships:

  • Unemployment
  • Reduced income (furloughs, new job, partner’s loss of job, pay cut)
  • Illness or medical emergency
  • Job transfer (voluntary or involuntary)
  • Divorce, separation or marital difficulties
  • Exotic mortgage terms (an adjustable-rate loan)
  • Military service
  • Death in the family
  • Incarceration
  • Increased expenses and excessive debt
  • Unexpected repairs or home maintenance

Do I need to be delinquent on mortgage payments to qualify?
No, although about 8 out of 10 of our short sale clients are. Being delinquent helps build the case for hardship but isn’t mandatory. If you are not delinquent, we simply need to demonstrate to the bank that you’re at risk of becoming delinquent in the future.

So the bank won’t ask me to contribute any money?
Each case is different and depends on many things such as your assets (amount and type), the bank’s loss and the number of loans. More often than not, we’re able to obtain short sale approval without seller contribution. If the bank asks for seller contribution, you can decide at that time whether to move forward. Any savings you have in retirement accounts is protected. If you have savings in a non-retirement account, we’re happy to speak with you about how to protect it.

After closing, will the bank be able to come after me for the rest of the debt owed?
In general, a short sale does not automatically release you from the remainder of the debt owed to your bank, however this is something we will negotiate for you.  In the majority of cases, we are successful in negotiating a full lien release.  Also, all terms and conditions of the short sale will be outlined by the bank in writing and presented to you prior to closing.  If you are not satisfied with any of the terms (i.e. if the bank does not agree to release you from future judgments), then you do not have to move forward with the sale.

Can I pocket money from the short sale?
Your bank will not allow you to receive any consideration from the buyer, your Realtor or any other parties involved.  However, there are programs available, such as HAFA, that may provide you with money towards moving expenses at closing if you qualify. You can read more about HAFA here.

What are the tax consequences?
If you owe debt to someone and they cancel or forgive that debt, the canceled amount may be taxable. Historically, this was the case for any debt forgiven in the event of a short sale or foreclosure.  However, in 2007,  the Mortgage Debt Relief Act came into effect and prescribed that if the debt forgiven is for you primary residence, then you may be excluded from this tax.  You can read more about this here.  Unfortunately, this act expired at the end of 2013.  While Congress may retroactively extend the debt forgiveness law at some point, it would not be recommended to count on this.  Please speak with your CPA if you have concerns about the tax repercussions.

How will a short sale affect my credit?
The short sale will be noted on your credit report. If you have not become delinquent on mortgage payments, the impact on your credit score will be very minimal and you may even be able to qualify for a new mortgage shortly after. Late payments, however, affect your score more dramatically. Depending on how late you are, your score could drop 40-135 points, and it may take 2-3 years for recovery. Keep in mind this is still not as detrimental as a foreclosure, which will stay on your report for seven years.

What is needed to do a short sale?
Each bank’s requirements are different but you’ll definitely need to provide:

  • Copy of last two years tax returns
  • Copy of last 2 pay stubs
  • Copy of last 60 days bank statements on all accounts
  • Hardship letter (we have examples if needed)
  • Income/expense statement (we’ll provide a template)
  • Purchase contract with qualified buyer (we’ll help you get one of these)
  • Estimated HUD1 settlement statement (we’ll create one for you)
  • Other disclosures required by your bank (we have these as well)

What are the steps and how long does the process take?
There are three steps to the short sale process:

  1. Finding a buyer. A well-priced home should go under contract within 30 days.
  2. Short sale negotiation. This can take 60-90 days depending on your bank’s response time and your ability to provide us with requested documents.
  3. Closing. After receiving short sale approval from your bank, it usually takes about 30-45 days for the new buyer to complete their loan process and close on the house. If working with a cash buyer, this can be done much quicker.
    Overall, expect the process to take about 3-6 months.

What are the benefits of working with an agent?
Opting to work with an agent who has short sales experience will help expedite the sale, make sure you have all the correct paperwork and increase your odds of getting an approval. To be honest, it’s a tedious and arduous process. You’re going through enough – let us handle this for you.

What experience do you have with short sales?
Lots. I employ a full-time short sale team who has successfully negotiated nearly 300 short sale transactions since 2005.

What do you charge for handling the short sale?
There are no out-of-pocket expenses for the home owner for our services. Our commission comes out of the banks’ bottom line.

 

The information on this page serves as a basic overview and is believed to be accurate but should not be relied upon without verification.  Please call us to discuss your unique situation and always speak with an attorney and/or CPA when applicable.