Selling Your Home Short Sale & The Short Sale Process
What is a Short Sale?
A short sale is a method of selling your home or investment property at market price with the approval of your lender, which results in loss or short fall to the lender/bank.
An example of a short sale would be selling your home for $100,000 when you owe $180,000 to your lender, which results in an $80,000 short fall to the lender.
Overview: Requirements, PROs and CONs of a Short Sale
- The seller must be deemed to be in a hardship situation by the lender in order to qualify the home as a short sale candidate
- There are no closing fees or commissions charged to the seller on a short sale property
- Average length of time to complete a short sale is 90 days
- Depending on a seller's financial position, a lender may require a seller to make contributions
- Waiting period requirements for getting future loan can be shorter for Short Sale vs Foreclosure on conventional loans (4 years vs 7 years) unless the mortgage loan was discharged in a bankruptcy during a foreclosure (then the waiting period may be the same).
Questions and Answers About Short Sale Transactions
Does the seller pay any closing costs or commissions in a short sale?
No. Typically the lender pays all liens including HOA, real estate commissions, title policy, documentary stamps on deed, and all allowable closing fees.
Can anyone short sale a home?
CNot everyone is in a true hardship position, which is the underlying general condition for a lender to justify a short sale. In today's difficult economic environment, many sellers can justify a degree of, if not significant, hardship. Hardship is one condition for a short sale to take place. As a general rule, a lender may not approve a seller without conditions for a short sale that fails to show true hardship, such as the seller has on-time credit payment history and/or has reasonable to good credit and liquid assets. These factors usually won't prevent a short sale from taking place, but they may invite a request by the lender to seek some seller contributions to go along with the banks loss. The exact amount of seller contributions is totally negotiable. If the lender wants the seller to contribute to the short sale then this amount will be negotiated between the seller, the lender's negotiator, and our team of negotiators. Everyone must agree or no deal!
What are seller contributions?
After the lender evaluates the hardship of the seller, they may request the seller to contribute some combination of cash and/or a long-term note. An example might be $2,000 cash and a $10,000 note with zero interest for 20 years. This example is by no means an average. Many sellers pay zero seller contributions because they truly have no extra money and no assets. Many times investors are asked for contributions due to the fact that income was made from the property.
Why does the lender request contributions from the seller?
The lender wants to prove and justify that the seller is in a true hardship and at a minimum pays as much as possible to assist the lender/investor in minimizing their financial loss. It is this investor that looks at the assets, credit, and hardship of the seller and battles our negotiating team at ADDvantage for their best deal while we fight for our client's (seller's) best interest.
What is a hardship?
Under-employment, unemployment, cash-flow issues, age, health, retirement issues, credit score, slow-pay, cash on hand, psychological issues and other monetary and non-monetary are all situations that cause hardship.
How do you price a short sale?
ADDvantage® will complete a CMA (comparable market analysis) of recent sold properties in your area or subdivision and recommend a price a few thousand dollars above those comparable sales.
When do you accept an offer on a short sale?
Accept an offer no lower than 2-4% below the lowest comparable sale. This will make it more likely to be accepted by the lender.
How do you keep a buyer patient during the tedious short sale process?
Making the escrow deposit non-refundable for 120 days is always good practice in a short sale. This is located in the short sale addendum. Keeping your buyer informed is always the best way to keep them on board.
Who are the players and what are the motivations in a short sale?
The short sale process is a give-and-take bargaining process where buyers try to buy as low as possible. Buyer's agents try to get their buyer a good deal but not too good or the lender/investor won't take the deal. The listing agent wants a contract that is very close to market value. The lender/investor wants everything. The short sale negotiator(s) work with all parties in an attempt to keep the buyer happy, negotiate acceptable terms for the seller, negotiate acceptable terms for the lender/investor, and of course, close the deal.
How long does a short sale take?
The average time for a short sale is around 90 days. It takes typically 70 days on fast track with one lender, 4-6 months with two lenders (first and second mortgage) and possibly longer if the lender is unresponsive or the buyer(s) is missing in action.
Does the second mortgage holder have say in a short sale?
Yes. They can hold up the short sale process. They also may choose to do their own BPO (Broker's Price Opinion) appraisal in addition to the one completed by the primary lender.
Can a seller stay in the home until closing?
As long as the lender is talking about a short sale and no court sale date has been published in public records, then the seller is the owner and can do with the property as any owner would do.
How does bankruptcy impact a short sale?
Always consult an attorney for advice, but normally it stalls a foreclosure. A short sale cannot proceed until the bankruptcy is finalized.
Does bankruptcy remove the second mortgage holder?
Consult a bankruptcy attorney's advice, but typically, yes.
Do IRS Federal tax liens effect a short sale?
Yes, a seller would need to pay the IRS lien off or request an "IRS set-aside", which is where they temporarily remove the lien, allowing the closing. If the sale is greater than $2,000,000, the IRS may not do a set-aside. Consult an attorney for advice.
Will the IRS want money from the short sale?
Not if the property was owner occupied. Investment property will result in a 1099 from the IRS for the loss. Money borrowed and not paid back is considered income by the IRS. Always consult an attorney for advice.
Who loses money in a short sale?
The loss is usually taken by the lender/investor that bought the note/mortgage from the lender.
Who negotiates short sales?
We have a team of well-qualified and knowledgeable people to track, negotiate, and close our short sale home listings. Our affiliated title company, New Frontier Title, is seasoned in the handling of short sales and is experienced in dealing with the complexities of this type of closing.
Can the lender come back years after the closing and seek a deficiency judgment from the seller?
Under the HAFA government program, some owner occupied homeowners may qualify for a non-recourse short sale. When a lender and their investor have agreed to the terms of a short sale, they will issue an approval letter, which clearly defines whether there is a risk of a future deficiency action by the lender. The best protection from this possibility is language in that approval letter that states that the lender(s) and investor release seller(s) from all liability ,including any future deficiency action. The HAFA program can take longer than a traditional short sale.
If you are considering a short sale, call ADDvantage® and we would be happy to answer any questions that you may have. We offer our short sale services in all cities in Florida.