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
(805) 432-7705
Hey Ted, great post about short pays. You did a great job outlining a situation and circumstances that many homeowners just cant begin to understand.
Thanks Dean & Bonnie,
It’s tough for everyone. There’s a lot of information out there, some is good, some is bad, much of it is confusing.
I just hope if it’s a process a seller is considering, that they understand that there’s a lot of legwork to do to determine if they can have a successful short sale.
H Greiley,
Thanks for commenting.
The only thing I have to add as caution is that median numbers are really not reliable and not to poke too much fun at my own industry, but NAR, CAR, Zillow and most of these data sources, report broad regional data. The broad regional data is far different than what is going on in Simi Valley. Real estate is local, data is local and a much narrower focus has to be looked at.
Appraisers and the underwriters at the bank will accept sales data with in one mile of your home, similar size, bed – bath count and age. So if you live in, say, Simi Valley, county-wide data will not influence your value. Like-wise with Zillow the Zestimate has no ability to differentiate between the age of homes or the upgrades. Zestimates will commonly compare homes built in the 1960 with homes built in the 2000s. I like Zillow, but I work with their information cautiously.
Last, NAR and CAR think they can cheer-lead recovery or will markets by attitude. Unfortunately people buy homes now based on more realistic planing and ability. The liars loans of the 1990s and earlier this decade are no more. Recovery this time around will be based off real incomes and the ability for households to afford the monthly payment. The growth tied to real incomes is very moderate and more inline with the historical growth patters of 4%-6% annually for real estate.
The bottom line is that if you are in a situation where your option is a Short Sale, the bank will have several BPOs and a drive-by appraisal. They will have a pretty good idea of the value of your home. What this means for Buyers of short sales is that they need to understand that their offer will be compared to the market value of the home, if they are significantly below that market Value the short sale approval is not likely. What this means for Sellers in that your listing agent needs to list you property near market value so you don’t waste months trying to get an approval on an under valued property.
My friend as been current on her mortgage payments every month, she filled bankruptsey 2 yrs ago on other debt not involving her mortgage. They called her today and told her she had to put her house up for short sell and she doesn’t understand why. Can anyone explain why this could be, I feel helpless and she is so upset and doesn’t know what to do, she has 2 children.
Hi Brandi,
If her mortgage is being paid on time and she is not in default then I am not sure why anyone would tell her to Short Sell. There are a lot of sharks out there; the call could have not even been from her lender. If she wants to call me or meet for coffee (if she is in Simi). We could set it up for a conference all or you can come to coffee to. I would be happy to look at any paperwork she has and see whats going on. My cell number is (805) 432-8805.
If her mortgage is current we need to figure out how to keep her in that house.