Short Sales Resources: Basic Questions
What is a real estate short sale?
A Short Sale transaction is where you are selling your property for less than what is owed to the bank. The mortgagee would accept less than the loan amount in order to avoid a foreclosure proceeding. On the buyer side a Short Sale sometimes results in a discounted purchase price. Once the transaction is approved by the Seller’s Lien Holder the purchase continues in much the same as in any conventional realty transaction.
How late in the pre-foreclosure process can you start a short sale?
You can start the Short Sale process anytime prior to the Foreclosure sale. However, the later on in the process the more difficult it becomes to negotiate the sale and the terms of the Short Sale to the benefit of the Seller. For that reason, time is of the essence and you should try not allow to much time go by before you decide to go forward with a Short Sale.
Will a lender allow a real estate short sale when the seller has some a good amount of equity?
If the home has some considerable amount of equity and can sell for more than what is owned it is not a short sale. In this scenario the lender may choose to continue with a traditional foreclosure proceeding to regain title to the property and dispose of it at a market price. Given the current state of affairs with the real estate market, the home will most likely be over encumbered, hence the reason for the short sale in the first place. A glut of homes for sale in the market area of the home may make the lender think twice about taking title to the property.
What documents are necessary to proceed with a short sale?
The individual documents necessary to proceed with the short sale will depend on the lender. Typically the lender will require hardship letter detailing the circumstances behind the short sale. A signed, valid purchase and sales contract, preliminary HUD-1 settlement statement detailing a preliminary estimate of proceeds to the lender. There will also be an additional request for more information on the financial condition of the seller, ie; pay check stubs, bank statements, a personal financial statement and a monthly budget assessment.
Will the seller’s credit rating be affected if they allow a short sale on their property to occur??
While it is up to the individual lender to decide what to report, what often happens is the loan will report as "paid" on their Credit Report. While that is good news the bad news is that there will likely be a reference that says "settled for less than originally owed" or something similar. It is certainly more advantageous to have the short sale referenced than to have a foreclosure on their credit report.
Will a lender allow the seller to make a profit on a short sale?
By the nature of the transaction, the seller is not going to make a profit on the short sale. They may have extracted equity from a previous refinance of the home, but their current loan balance will be higher than the selling price of the home. There may also be affidavits that the seller will need to sign prior to sale that states thae he is not profiting from the transaction in any way
If a seller is in bankruptcy, will that affect the short sale of the property?
Absolutely, as most lender would not consider a short sale if the homeowner is in the middle of a bankruptcy proceeding. Negotiating a short sale between the parties is considered a collection activity and such a negotiation is prohibited in bankruptcy.
Will the bank or lender require an appraisal on the home in a short sale?
Some lenders will require that a full appraisal be submitted in the short sale package. Some may only require a BPO or brokers price opinion. The lender will need some formal assessment of the value of the home in order to make a decision as to accept or reject the short sale offer.
Are there tax implications in the short of real estate?
Much like the issue of credit reporting, the circumstances are individual to the lender. As a short sale represents a loss for the lender, they can report the amount lost as a forgiven debt by the seller. If a formal tax form 1099 is filed, the seller may be responsible for paying taxes on the amount of debt forgiveness.
Why would a lender allow a short sale to occur?
Quite simply, it may benefit all the parties involved in the transaction. The seller is relieved of the home they cannot afford. A costly foreclosure proceeding by the lender is avoided and the buyer purchases the home at an attractive price.
How long does a short sale take?
A Short Sale is a lengthy process that could in some cases take up to a year. In most cases it takes somewhere between 3-6 months. The Short Sale can become more complicated where there is more than one Lien Holder. For Example if you need to get the approval from both a First Lender and a Second Lender.
How important is the Approval Letter?
The Approval Letter is extremely important. This is the terms by which the Lien Holder is agreeing to release you from its Lien. This is what dictates how and to what extent you will be released from any further liability.
Will I have a Deficiency Judgment?
You will not have a Deficiency Judgment at the time of the Short Sale. However some banks reserve the right to pursue a deficiency judgment at a later stage. With a Short sale you are trying to negotiate the best outcome for all parties involved.
What is the difference between a Short Sale and a Foreclosure?
A Short Sale is where you are selling the property with the Lien Holders Approval in an attempt to recover some of the Lenders loss. A Foreclosure is where the Lender has gone through the Judicial Process to force ownership over the property inorder to recover its loss by way of a Foreclosure Sale.
Why would a Lender approve a Short Sale over a Foreclosure?
This Approval is granted because the Lender feels like the Sale although at a loss is in its best interest. A Foreclosure can be a lengthy and expensive process for the Lien Holder and so allowing the borrower / Seller to sell with his approval may be in their financial best interest. With a Short Sale everybody is participating in getting the property sold and so the property is in most cases better maintained and looked after. Foreclosure properties tend to have been abandoned and sometimes striped of all its fixtures. This adds time and cost to a sale following a foreclosure. Lenders like to avoid this. Short Sale avoids all these pitfalls for the Lenders.
Why would the Borrower / Seller choose the Short Sale route over a Foreclosure?
For a Borrower / Seller a Short Sale gives the seller / Borrower leverage. They are cooperating to mitigate the Lenders loss and so they have a better chance of being released of liability from the Note owed to the Lender. There is no Automatic deficiency judgment on a Short Sale. Although there is no guarantee that with a Short Sale you will not have a Deficiency Judgment brought to you there is a guarantee that you will have one with a Foreclosure. A Short Sale is looked upon more favorably than a foreclosure by future Creditors. Although both will hurt your credit people tend to recover easier and secure credit easier in the future when they have chosen to Short Sale as opposed to where the Bank was forced to Foreclose. A foreclosure can financially devastate your credit for a very long time. A Short Sale that is done quickly can have a much quicker healing process.
If you have any questions about short sales, or any other short sale property listed on our site, please feel free to contact us or call us at 561.245.8722.