A short sale is when a homeowner in financial distress owes more against the home than what the home is worth, and the homeowner MUST sell.
If the homeowner does not have to sell, or does not want to sell their home, there are MANY options available to homeowners. They could [photopress:shorts_1.jpg,thumb,alignright]move into a more affordable home and rent out their existing home, they could take on a roommate, they could refinance (although this is not always the best path. Homeowners in a short sale situation are often in financial distress, which means higher rates and fees because you’re seen as a higher credit risk to a new lender), they could talk with their existing lenders to re-configure the terms of the loan. Homeowners who do not want to sell or do not have to sell ought to seek out a HUD-approved housing counseling agency that offers default counseling. Why? Because at bare minimum, SOMEONE, in this case our federal government, has deemed the housing counseling agency competent. What a homeowner should not do is to blindly trust that the signs by the side of the road are from reputable folks. In fact, the assumption ought to be that if a deal looks and sounds too good to be true, it is. There are no angels on earth. Homeowners, you can be easily taken advantage of by these folks. Wake up and keep reading.
Selling short means you’re asking the underlying lender(s) to accept less than their payoff in order to facilitate a sale of the home, instead of foreclosing on the home.
Foreclosure is expensive for a mortgage lender. Mortgage lenders are not in the business of foreclosing on houses. Banks and lenders are in business of making loans. They don’t want the house back. This is a business decision for the lender. Which means it has to make rational, logical sense.
Homeowners, you will be asked to prove financial distress. This means you will have to submit proof that you don’t have the money to make up the shortage. If you do have the money, this is no longer a short sale, the industry calls this a “seller to bring cash in at closing” sale. If you ask your real estate agent to help you in hiding assets, an agent cannot assist you with defrauding a lender.
[photopress:bartangel.jpg,thumb,alignleft]If an “angel” investor offers to ‘take over the payments’ and lets you pay rent until you’re back on your feet, and then asks you to sign a quit claim deed, transfering title to the investor, stop everything and go get some legal advice immediately. You might be thinking: I’m in financial distress; how can I afford legal advice? Contact your local bar association for a referral to free legal aid. A quit claim deed transfers interest but not liability. This means you are still liable to make sure the mortgage is paid, and further, transfering yourself out of title means your lender might decide to call your note due and payable. There are many foreclosure rescue scams to be careful of. If the rent is set too high, thus not allowing you to really get caught up at all, this has a name: equity skimming. Go see an attorney.
Homeowners, you will be asked to pay back the shortage. That’s right, your lender will ask you to sign a brand new unsecured note in order for you to pay back the difference in monthly installments. If, out of the goodness of their heart, (don’t count on it) the lender “forgives” the debt, then the IRS sees this as a taxable event. Homeowners: Go see your favorite tax attorney or CPA for tax advice if you are in a short sale scenario.
Homeowners, the worst mistake you can make is to go into denial and stay in your “happy place” and not make those hard decisions. Let’s review. The best steps you can take are preventative. When you see yourself getting close to needing to sell in order to avoid foreclosure:
1) Decide if you absolutely must sell or if you’re better off riding out the financial tough road. If there’s a light at the end of the tunnel, and you don’t want to sell, perhaps you’re better off not selling.
2) Talk to a HUD-approved housing counseling agency that offers “default” counseling.
3) Don’t ignore letters or calls from your lenders. I recommend renting and watching the movie “House of Sand and Fog” to wake you up from your state of denial. Talk to your lender.
4) If you’re committed to selling, interview three licensed real estate agents. If one of them offers to purchase the house right there in your living room…..ask the agent if that’s ethical and legal and see what they say. Real estate agents have an obligation to put YOUR interests ahead of their own interests. State agency laws vary, but this is a core concept of agency.
5) Always seek legal counsel if you are a short sale homeowner. There are things attorneys can do that real estate agents cannot do.
Real estate agents: The best steps you can take are to educate yourself about how to present your firm offer to the underlying lien holder(s). In a short sale, title is transferred using a warranty deed (in some states it is called a different sort of deed like a bargain and sale deed) which means title must be clear of all liens and encumbrances (except for items that will run with the land like easements, real estate taxes, and the like.) This means you might have to present the firm offer to more than one lien holder. Example:
Sale price: 300,000
First mortgage payoff: 250,000
Second mortgage payoff: 100,000
Real estate agents: In the above example, if you’re trying to work with the first mortgage lender and they’re not giving you the time of day, it’s because they are expecting to get all $250K because they’re in first lien postion. Your work will be with the second lien holder, who has much to lose should the first foreclose and everything to gain by negotiating with you NOW, before foreclosure.
Real estate agents, check your local Multiple Listing Service (MLS) policies and procedures about disclosing the “short sale” terms to the other members of your MLS.
Real estate agents, the lender(s) will ALWAYS ask you to cut your commission. Always, always, always. It is their duty to mitigate losses. That means asking everyone to cut their fees. Don’t take it personally. So, should you cut your commission? These transactions are difficult, time consuming, gut-wrenching, and ulcer-inducing. Why on earth would you accept a low fee? When asked to slice your fee to the bone, say “no.” The lender needs you more than you need them; the lender does not want to foreclose.
Sometimes real estate agents tell me they wouldn’t touch one of these deals because of the increased liability and the hard work. To that I ask, “Well, what if you were the one who sold them the house?” Then the room usually falls silent.
Real estate agents should always ask the homeowner this simple question: “What are your plans for housing once the home sells?” If the homeowner is in financial distress, often their plans including moving in with relatives. If not, you may wish to connect the homeowner with social services sooner rather than later.