What is a short sale? A short sale occurs when the seller of a property owes more money against that property than what they can ultimately sell the property for.
Example, you have a $500,000 loan against your property, but now it is only worth $400,000. Adding the costs to sell your property at $400,000, including any/all other existing debts against that property (property taxes, homeowners association dues, or any other liens); the bank that holds your loan would have to agree to taking less than $400,000 against the $500,000 loan.
From the example above, it is easy to see that both you the property owner and the bank (your lender), are both in a tough situation. At this point the bank has to evaluate it’s position, your complete circumstances, and how they may mitigate their losses.
One of the bigger myths is that because the bank has a bad asset or nonperforming asset, the bank has no choice but to capitulate to the demands of buyers because the bank has either already written off the bad asset or cannot carry the nonperforming asset for a long period of time.
For the last year we have had inventory shortages while the banks have had record nonperforming loans go to foreclosure or short sale. or try a modification program. The banks appear to be controlling the flow of inventory as to not flood the market and not sink prices any farther.
Since the banks are not quick to cut their losses on their nonperforming loans, it is important to understand if a short sale is the right option for you? It’s really easy for a real estate agent to convince you to put your home for sale and lock you into a six month contract. However, without properly evaluating your situation, you could become that agent’s indentured servant in an unbreakable contract.
Before making the decision to try and sell your home with a short pay option, it is imperative to figure out what the probability is to sell your home short.
The following issues are important and can increase chances of your lender agreeing to a short sale:
- You experienced a real hardship and can you prove it (i.e. health, employment)
- You property is marketable and it does not have deferred maintenance or show poorly.
- After figuring all the costs of the sale there a minimum of 10% of the value of the second lien holder or most junior lien holder(s).
- If not, can you contribute some money or would you be willing to sign a promissory note?
- You have more than one loan or they both with the same name holder.
- You can provide all documents necessary as required by your lender in a timely manner?
- If a notice of default is filed on your property, your lender allow you time to sell your property.
- You are not presently in bankruptcy or planning to file bankruptcy.
The following issues can hurt your chances of your lender agreeing to a short sale:
- You do not have legitimate hardship.
- You have not missed any payments on your loans and are presently current on payments. (If you are current this is not advise to default or make late payments)
- There’s not enough money to pay off your first loan and you still have junior liens.
- You are in bankruptcy.
- You completed a recent cash out refinance
- You cannot provide full documentation for your hardship package.
- You have liens or judgments with a private party.
- There is an notice default and your lender will not give you time to sell.
- You or your real estate agent priced your home dramatically under market value.
All the above conditions are not a definitive list of who can and who cannot successfully sell their home with a short pay option, it is a good outline to begin a plan. There are many complex legal and tax consequences associated with the conditions above. Nothing contained above is intended to be legal or tax advice. If you plan to short sell your home, you will need to contact attorneys, tax professionals and/or CPAs.
Last, the personnel in the loss mitigation departments at the banks across the country are overwhelmed and swamped with more than 75 files on their desks, sometimes over 100. They have little incentive to cooperate on a short pay. Complete thorough documentation, updated regularly and contact with the loss mitigator assigned to your file, several times a week throughout the process, is only part of what it takes to get a short sale approved. If you plan to go down the short sale path, persistence and tenacity must prevail throughout the process.
As I find related links I will add them here:
- Taking A Short Sale Listing: “To Be or Not To Be?”
- Three Important Concerns with Short Sale Offers
- Simi Valley Short Sale Information
Thanks for reading Simi Valley’s Premiere Real Estate Blog!
Author – Ted Mackel Simi Valley Real Estate Agent – Keller Williams Realty
Ted Mackel is a top producer at Keller Williams Realty Simi Valley,
specializing in Simi Valley Real Estate