**DISCLAIMER** This article is for informational purposes only. Do not use the information in this article as legal or financial advice. Before making any legal or financial decisions, you should contact a licensed attorney or accountant that specializes in real estate matters in your area. When it comes to selling a short sale home, you should contact an experienced short sale agent. If you happen to be in Southern California, the Marchena Home Team can help you sell your short sale home and make the process as easy as possible.
If you find yourself in a situation where you need to sell quickly and your home is worth less than what you owe on it, then you probably need to consider a short sale. This is a guide detailing the different aspects of negotiating and finalizing a short sale.
Selling at a Loss: Short Sales Explained
The term “Short Sale” means that the current market value of your property is less than, or “short”, of the amount that you still owe to your lender. Due to various reasons, some of which may be out of your control, homeowners often find themselves in this unsustainable situation and need to sell via a short sale. When housing values decrease, but the cost of living increases, it may become impossible to survive on your current income. For property owners who would like to avoid bankruptcy or foreclosure, a short sale may be the preferred option.
When your bank/lender agrees to do a short sale, it means that the bank/lender is agreeing to accept less than the total amount owed on your loan. However, not all lenders accept short sales, and not every seller or property is eligible for a short sale. This is especially true if it is more financially beneficial for the bank/lender to just foreclose on the property.
With short sales, lenders are in complete control and have the final say and must approve an offer before the owner can sell the property. Lenders rarely, if ever, suggest a short sale to an owner experiencing hardship. Instead, most banks/lenders hope that the buyer can sell the homes themselves and repay the loan. However, when the borrower has no other choice, they will discuss a short sale with their bank/lender. The bank/lender may agree to the short sale to avoid the potential of an unruly eviction, where occupants will not move from the premises without legal intervention.
Owners should keep in mind that a short sale may still affect your credit score. However, you may end up having the debt forgiven by the lender. Should your lender ‘forgive’ your debt, then the amount of the debt forgiven must be reported to the IRS as income.
If your only solution as a property owner is to sell your home, you must remember that selling your home in a short sale is very different from selling your property under normal market conditions.
For example, when selling your property under normal market conditions, your lender may not even find out that your property is on the market until you or your lawyer request a payoff. With a short sale, the lender is an active participant and will help move the deal along. Additionally, there is frequently more paperwork involved when completing a short sale.
The Role of your Real Estate Agent
Your real estate agent will play an instrumental role in getting your short sale completed. Your real estate agent will monitor the process with the bank/lender and ensure documents are correct and timely. Your real estate agent will submit the short sale package to the lender and negotiate the terms of the deal. Keep in mind that the buyer’s agent will not be allowed to talk to the lender. Some real estate agents may hire outside companies or assistants to do their job. This is risky as it can result in your short sale being rejected. Ensure that the agent you hire is not subcontracting this sale.
Before you choose an agent, ask about the agent’s track record as it pertains to short sales. Ask the agent the following questions:
- How many years of experience do you have selling short sales? You should aim to hire an agent who has at least three years of experience, explicitly selling short sales.
- How many short sales have you successfully closed? The more short sales that an agent has closed, the more likely the agent is familiar with how your lender operates and what it takes to get an approved short sale.
- Do you see any potential problems with my short sale? This question goes to the same point, that if you have an experienced agent, they should be able to catch any potential problems with your prospective short sale.
- Who will negotiate my short sale? This is your opportunity to find out if your agent is outsourcing the job to other agents or third-party vendors. If possible, you want to hire an agent who is negotiating the deal himself/herself.
Contact Your Lender
You first need to contact your lender to talk with the person in charge of short sales. Please note that you may have to call and talk to several people (or departments) before you finally talk to the person in charge of making decisions regarding short sales. You should outright refuse to talk to the “work-out” department or something similar. The goal is to get the short sale application and the contact number of the person making the final.
Submit Your Letter of Authorization
Once you hire a real estate agent, you then need to get written permission for your bank/lender to communicate with your Real Estate Agent and any other professionals that you have to hire, such as the title company, closing agent, or lawyer.
The letter should include the following:
- The Date
- Your Name
- Best Contact Information
- The Property Address
- The Loan Reference Number
- Your Agent’s Name and Contact Information
Preliminary Net Sheet
Next, you need to fill out a preliminary net sheet. This is simply an estimated closing statement that will detail the sales price that you expect to receive and the cost of the sale, any unpaid loan balance, late fees, and real estate commission, if applicable. Your closing agent or lawyer can help prepare this for you if you do not know how to calculate any of these fees. Please note that if the bottom line shows cash to the seller, then a short sale may not be the best thing for you.
Draft a Hardship Letter
Your real estate agent should be able to help you draft a persuasive hardship letter. In your hardship letter, you must detail why you are not able to afford your home and need to sell at a loss to the lender. The letter should have a statement of fact, thoroughly explaining how you arrived at your current financial situation. At the conclusion of the letter, you should make a plea to the lender, respectfully asking that they accept less than full payment for your loan. Be prepared to attach credit card bills, W-2s, and any other proofs of inability to pay. Overall, banks/lenders are somewhat reasonable and will understand if, for reasons beyond your control, you cannot pay your loan in full. However, banks/lenders will not be sympathetic to situations involving criminal conduct or dishonesty.
Submit Proof of Income and Assets
When trying to get approved for a short sale, you should strive for complete honesty and transparency. Your lender will require you to disclose all your financial information. Specifically, the lender will want to know the balances and value of any saving accounts, stocks or bonds, money market accounts, other properties, cash, or anything of tangible value.
Submit Copies of Bank Statements
Your Lender will ask to see copies of your bank statements, which can get complicated. If your bank statements show any unaccountable deposits, large cash withdrawals, or an unusual number of checks, you will have to explain each suspicious item to your lender.
Prepare an Accurate Comparative Market Analysis
Your Real Estate Agent will prepare a comparative market analysis (CMA) for you, which is required to show the bank that the market value of properties in your area have fallen, which may be one of the reasons you can’t sell your home at a high enough price to repay your lender in full. A (CMA). which will show the prices of similar homes:
*Active on the market
*Similar Properties sold from the past six months.
Purchase Agreement & Listing Agreement
Have Your Agent Prepare the Sales Contract
Once you reach an agreement to sell your property with a buyer, the lender will require a copy of the bona fide offer, along with a copy of your listing agreement and the sales contract between the parties. You should be prepared for your lender to allow for payment of certain items, such as termite inspections. Also, the lender may want to renegotiate your agent’s commission.
Your real estate agent will ensure that the sales contract indicates that the deal is contingent upon the lender’s approval. Additionally, most lenders will require that you submit what’s called an arm’s length affidavit. This affidavit indicates that there is no pre-existing relationship between the parties. This ensures that the buyer is making a fair market value offer.
Get an Approval
Once your agent has submitted the required documents, the waiting game begins. Most lenders, unfortunately, drag their feet on short sales, so it is up to the agent to hound the bank/lender for approval or rejection.