How do short sales work?

[zoebartlett]

So with all of the real estate threads I''ve seen lately, I thought I''d add one of my own. How do short sales work if you''re the seller?

Some of you know that my husband and I may move down to NC if he gets a new job. We have a condo to sell where we currently live, and we don''t think we''ll have any luck getting what we paid for it, never mind anything above that. So it looks like we could have two places to pay mortgage/rent for if we did move this summer, and we just don''t think we can afford to do that.

A realtor came by a couple of months ago and said she''d list our condo for $34K less than what we paid for it 3.5 years ago. Since we just don''t have that kind of money laying around, we''d be looking at doing a short sale to get out from under the mortgage payments, I''m assuming. We want OUT of this place because we feel so tied down to it. The thought of moving is stressing me out big time as it is, and this definitely isn''t helping.

Does anyone have any thoughts and/or insight into how to handle this? We''re going to speak with a real estate lawyer who deals in short sales, but I wanted to see if anyone here had any experience with this. Any tips would be greatly appreciated!

 

[cara]

What state are you in? I am no expert in short sales, but know that the law varies widely on this. In CA, the bank cannot come after you for more than the house on a primary mortgage, but in many other states the bank can continue to pursue you for money unless you declare bankruptcy. My cousin actually decided to declare bankruptcy to get out of his mortgage, because they were so far underwater and like you didn''t want to be stuck there. But this option is not for everyone. Since you can currently afford your mortgage payments, the bank may be unwilling to deal unless you force their hand. And the banks idea of what you can afford and your idea may be different. There are also consequences to having a short sale or foreclosure on your record in terms of credit score, etc. Again, not an expert, but it will probably make the cost of borrowing for another place (or something else like a car) much higher or impossible in the near term. All things to discuss with the short sale lawyer.

Also it is important to know how far underwater you are. You probably haven''t made too much dent in your principle if you have only been making loan payments for 3.5 years, but did you put any money down?

 

[Tacori E-ring]

Zoe, DH does this all the time. Basically the bank has to agree to the lower price. There are lots of documents and forms you have to fill out and obviously they can say no. Also they will send out their own Broker to see how much the house is worth. I know in DH's cases he has to prove (he is the buyer) that the seller is desperate, can't afford the payments and basically convince the bank they will lose MORE money down the line (ie foreclosure) than if they just settle it now. He sends pictures if the property is damaged/run down, a letter from the seller expressing why they cannot make their payments, comps to prove they are upside down in their mortgage (meaning they owe more than the house is worth), basically anything to prove his case. He said going to a lawyer is a waste of time and money but you will need the agent to run comps. Hope that helps. First step is talking to your mortgage company (according to him).

ETA: they used to have the ability to 1099 you for the "profit" (I think that is it) but DH says they past a law against this so I think you will be fine.

 

[zoebartlett]

Thanks Cara and Tacori for chiming in. We have no problems making our mortgage payments now, but we won't be able to afford to continue making morgtgage payments AND paying rent if/when we move. So is a short sale only possible if you can't make payments? My husband is currently unemployed (but that could change next week), and I'm assuming that has to factor into all of this somehow.

My brain isn't functioning right now, so I'm going to have to reread this thread again in the morning. Thanks again for giving me your thoughts.

ETA: Cara, we're in NH.

 

[neatfreak]

Date: 5/7/2009 8:42:56 PM
Author: Tacori E-ring
Zoe, DH does this all the time. Basically the bank has to agree to the lower price. There are lots of documents and forms you have to fill out and obviously they can say no. Also they will send out their own Broker to see how much the house is worth. I know in DH's cases he has to prove (he is the buyer) that the seller is desperate, can't afford the payments and basically convince the bank they will lose MORE money down the line (ie foreclosure) than if they just settle it now. He sends pictures if the property is damaged/run down, a letter from the seller expressing why they cannot make their payments, comps to prove they are upside down in their mortgage (meaning they owe more than the house is worth), basically anything to prove his case. He said going to a lawyer is a waste of time and money but you will need the agent to run comps. Hope that helps. First step is talking to your mortgage company (according to him).


ETA: they used to have the ability to 1099 you for the 'profit' (I think that is it) but DH says they past a law against this so I think you will be fine.

Can I hire your DH to help me with the buyer's side of things?

Zoe-I don't know how it works from the seller's perspective but in order to attract more buyers (many shy away from SS's):

1. Get a listing agent who knows what the heck they are doing.
2. See if you can talk your bank into giving you an approved price BEFORE you list it. If they say they'll take $100k-then you can list it for that and there is more transparency for the buyer because they know if they offer $100k the bank is likely to take it. Short sales often take a long time for the bank to even look at the offer-so if a buyer knows that their offer is likely to be accepted they are more likely to wait around for it.

Best of luck with your potential move!

 

[cara]

Basically, as Tacori said, you have to convince the bank that accepting the short sale is the best move for them financially. They don''t care if you want to move or your DH got laid off - they want you to pay off the mortgage according to the terms you signed. However, your DH getting laid off does on paper make you look more desperate. And if you moved and had rent payments at the new place that might convince them you were in over your heads financially and were going to soon be unable to make the mortgage payment (and since you were no longer living in your condo, would probably choose to pay rent not mortgage.) Of course, you would have to be prepared to get yourselves in over your heads financially, and the outcome might not be so smooth unfortunately.

You may have to stop paying your mortgage to get their attention - I''m not saying you should, I''m just saying that as long as you keep paying every month the bank doesn''t have much incentive to agree to take the loss now by accepting the short sale rather than just keep taking your money every month and pretend everything is hunky dory. Or even worse, they could give lip service to the idea of a short sale, preapprove some price, drag out the short sale approval process for as long as possible only to, after months of ''review'', reject a perfectly good offer at current market value because the bank would prefer the deal they''ve currently got - ZoeB and her husband paying the mortgage on the old terms.

I know nothing about NH, so figuring out what the state-law consequences of short sale or foreclosure are in your state is going to be important. And you should also research what short sale/foreclosure/missed mortgage payments do to your credit rating, to make sure you know what the fallout will be.

 

[Loves Vintage]

Zoe,

Have you thought about renting your condo out? Do you know how much you could lease it for? Would the rental payment cover mortgage, fees and taxes, or at least most of them?

You may be better off renting your place, rather than going the SS route. Your credit will be protected, and the market will improve eventually, at which time you would have reduced your principal as well.

You should also look into how a SS might affect your ability to purchase in NC. Will a new bank give you a mortgage after a SS of your existing place? How much time must pass before you could qualify for a mortgage again?

If you do lease your place, you may want to use a real estate agent to help you find a good tenant, or at the very least, you should have a credit check performed and talk to the potential tenant''s last landlord.

Best of luck,
LV

 

[zoebartlett]

I''m apparently feeling chatty this morning, so this may be long. I hope the following makes sense and is not a bunch of rambling...


Cara, we didn''t put any money down when we bought our condo. I know, I know, not the ideal situation, but that''s what we did. We''re not going to file for bankruptcy, and we don''t want our credit scores to be affected. This situation is a little more complicated I think because right now, my husband is unemployed. He''s collecting unemployment benefits, and has been for the past 6 months. We don''t want to purposely get into a dire situation and start missing payments in order to prove that we need to do a short sale. We''ve been in touch with the mortgage company and we made sure they knew that we''re doing everything we can to make good on our payments. They know that if his benefits runs out, THAT''S when we''d be in trouble. We wanted to contact them ahead of time so they know that we''re communicating our situation in advance of being in real trouble.


Tacori -- I don''t think I brought this up when we met because I didn''t want to bore you with this at our first GTG. We''re probably going to ask at least one more realtor to come out and see what he/she would list the condo at. We only have the figure from the one realtor we met with. I know it would still be lower than what we paid but it could be higher than the first realtor''s figure. As I mentioned last night, we can afford the mortgage payments perfectly fine right now. Now, if/when my husband''s unemployment benefits run out, THEN we''re going to have a real problem on our hands (if this other job doesn''t come through). My salary alone isn''t enough to cover the cost of the mortgage payments and our other expenses. If he gets this job though, obviously things would look different. I''m afraid we still wouldn''t be able to afford two places if we rent down in NC. We''ve talked to our mortgage company and we''re waiting to hear back from them.

NF -- Sure, you can borrow my husband! Thanks for your advice. I really appreciate it.


LV -- We have thought of renting out the condo. We know that we wouldn''t get the equivalent of our mortgage payments in rent, so we''d have to kick in the rest. I''m assuming that we could get about $800 per month for our condo (first floor corner unit in a garden style building, 1017 sq. ft, 2 bedrm, 1 bathrm). That''s what we were told a few months ago anyway. That''s about $700 less than what we''d need to get per month to cover everything. If we did rent out our condo, we''d definitely use a property management company (maybe the one our complex uses) or an agent. We have no interest in becoming landlords ourselves.

I appreciate everyone''s advice! Thanks again!

Ah, this is so confusing!

 

[Tacori E-ring]

Zoe, For every 10 short sale proposals DH summits only one gets approved. Banks are about risk. If you are high risk on paper they might be willing to approve one. Do you have two mortgages? Usually a second can get bought off for $1,000 or so b/c if your house got foreclosed (not saying you are in that position or you would let that happen) the second mortgage would get NOTHING. They know this so they will usually ALWAYS take barely anything. Also know it it takes time but you do have some things in your advantage.

1. the current economic climate. Banks are scared. If they aren''t they should be. When it forecloses they lose more money that SS. Are other condos being foreclosed or doing SS? Get the MLS info and add it to your file to summit to your bank. Is there high crime in your area? Lots of houses with long days on market? Is your city more stressed than others (w/ unemployment, etc)?

2. it is EXPENSIVE for them to have homes when people aren''t paying the mortgage. By law banks have to hold the amount of your note (or maybe even more) so that means THEY can''t invest that money or lend it to smaller banks. They have to pay lawyers, agents, insurance, and others for every foreclosure. There is liability. Will the house get vandalized? Burn down? Acts of nature? Plus if the homeowner files bankruptcy they can live in there house up to TWO YEARS for FREE. Legal system is slow and of course the homeowners (in most cases) take advantage of that.

3. Make your case seem as bad as possible. Now is not the time to sugar coat things with the bank. Like Cara said not sure they will take it seriously if you are not behind on your payments. Show bank records (if you have little money). Expense reports. Show your DH is out of a job and you don''t make enough. Is the condo in good condition? If not take pictures. You need to prove to them that you cannot afford the house AND the house is not worth what you owe. They will not approve it if they think you can make what you owe on the MLS and usually require good faith that you tried to sell it for that amount before and no one would bid.

4. Banks have to answer to the investors. Everyone has a boss. Every quarter there is a rush to get some of their distressed mortgages off the books b/c they don''t want angry shareholders. The person YOU talk to has to answer to their boss. Ask how often they meet to present SS offers. Be pushy. Try to find out a timeline and call them back if they do not call you. They are busy and have lots of cases, you just have one. Obviously it means more to you as well.

5. Helps to have a buyer. Let''s say your house was bought for $100,000. $80,000 with lender A and $20,000 with lender B. You have a qualified buyer that is willing to buy your house for $60,000. Include a "sales contract" in your package. Show that the bank can be done with this NOW. After they agree get it in writing to show lender B. Like I said they will take a low amount and usually ALWAYS agree to it. Unless they changed the law you also need to sign something that you (as the seller) is not getting any financial benefit from the SS.

I guess that is everything I know. DH is the expert but this is just stuff I picked up along the way. I have helped him with SS packages in the past b/c it does require so much time. Good luck Zoe! I would start the process b/c Mr Zoe gets another job.

 

[D&T]

from a few short sales that I've done, but I've been out since last year, anyhow,,, make sure like Cara stated, know your law... Is there and will there be a dificiency judgement on you for your short sale in your particular state? thats a serious question to know.. because the bank/investor involved can and will come after you for the remaining amount sure there is other factors involved, but I am not an attorney nor a tax professional so that is something you will have to also ask them. If this is your only home - Primary then there is a form 982 Mortgage forgiveness on the remaining debt so it doesn't count against you come tax time.

First off- some Lenders. will not allow you to put your home as a short sale, until it has been on the market (but these time has obviously change - my suggestion is to contact your lender first) for FMV (fair market value) for about 90 days (and you have to miss at least a payment for 30 days), however again, different variables and lenders can choose to allow you to put your house on the market as a short sale home. Your agent can and some do state their listing is a short sale, although unless it is an APPROVED short sale, many buyers who are not aware of this, gets the run around with paperwork and lost time, creating longer wait time and buyer frustration. I can go through different steps with only one lenders and with short sale that has two mortgages,, but it would be a very long post, however, I would recommend some questions to interview a realtor if they in fact have experience in short sales, and not just only experience listing short sales, but have had successful short sale close escrow is more important thant what they will list your home for... any agent can do that, heck, you can do that your self, just pricing other homes out in your area. Hope this somewhat helps.

ETA: But Good luck... I wish you the best, and hope you find a very good realtor... doesn't matter how long they are in the business, I've worked with a buyer's agent who have been a realtor for over 15 years, and I have had only 4 years, but I was experienced in short sale, not her, so in my cases, years didn't matter imho, its the experience in the specific area.

 

[Tacori E-ring]

Also, when you call your mortgage co. ask them what documents they need for a SS. Many have their own forms they will fax/e-mail. Many just tell you what they need. Have the package complete before you send it. No one likes to waste their time and there is nothing they can do unless they have all the info they requested.

 

[purrfectpear]

Zoe, I hate to be the bearer of bad news but unless you plan to continue to support two households, or pay the difference in the rent out shortfall, your credit is going to be ruined. There''s no gettting around that. No bank will accept a short sale until you are late, period. Once you start missing payments that will have an impact on your credit. That said, I haven''t made a payment since August of last year and the mortgage holder still hasn''t bothered to report as late to the credit agencies. Go figure. Sooner or later (probably when my foreclosure auction is held) it will show up.

Just so you''ll know, the difference in impact to your credit score between a short sale and a foreclosure is pretty minimal. Both will have a severe negative impact. The main difference is that a foreclosure will prevent you from being able to secure another mortgage for several years. No underwriters will approve your loan. A short sale may have a similar effect. Plan on having to put down a minimum of 20%, and a FICO of at least 720 if you need another mortgage.

I got around this by paying cash for my latest condo. No mortgage !

 

[DivaDiamond007]

Date: 5/8/2009 12:34:41 PM
Author: purrfectpear
Zoe, I hate to be the bearer of bad news but unless you plan to continue to support two households, or pay the difference in the rent out shortfall, your credit is going to be ruined. There''s no gettting around that. No bank will accept a short sale until you are late, period. Once you start missing payments that will have an impact on your credit. That said, I haven''t made a payment since August of last year and the mortgage holder still hasn''t bothered to report as late to the credit agencies. Go figure. Sooner or later (probably when my foreclosure auction is held) it will show up.

Just so you''ll know, the difference in impact to your credit score between a short sale and a foreclosure is pretty minimal. Both will have a severe negative impact. The main difference is that a foreclosure will prevent you from being able to secure another mortgage for several years. No underwriters will approve your loan. A short sale may have a similar effect. Plan on having to put down a minimum of 20%, and a FICO of at least 720 if you need another mortgage.

I got around this by paying cash for my latest condo. No mortgage !

+1.

In sum, a short sale is when the lender agrees to accept less than what''s owed on the mortgage in a sale. Where I live, Ohio, you generally first have to be behind on your payments and then have your home listed with an approved realty for a certain amount of time before the lender will agree to a SS. In the meantime your credit will be trashed due to non-payment and, if the SS is approved by the bank, your credit report will likely state that the account was "settled for less than amount owed". Big ding there, especially on a mortgage account. I''m not entirely sure what happens when there''s a second mortgage involved - i.e. if they can sue you for that debt or if they take a portion of the SS proceeds and then call it a day.

Also, touching on the foreclosure side of things - make sure you know what the law in your state is if you consider this option. In PP''s case the mortgage company is prevented from going after her, but that is not true in all states. A call to an attorney that specializes in foreclosure defense/bankruptcy should know the answer for you.

 

[TravelingGal]

Zoe, my advice to you would be to rent it out. Send it to property management if you can''t handle it yourself. I agree with DD and PP. Short sales are a major PITA and it will screw up your credit.

From what I have researched, you do have to be behind on payments in order for the bank to consider a SS. Also, your agent will have to submit a lot of paperwork PROVING that you cannot pay for the property. Stuff that people submit are divorce papers, unemployment papers, etc. I looked into this because on my end, I am interested in whether you can really buy a short sale.

If you have PMI, I''ve read somewhere that your chances of doing a short sale are essentially zilch. The bank is better off foreclosing on you.

They are going to want fair market value to even consider a short sale. The problem is that people are not going to want to pay fair market value on a condo at this point in time when they think it''s going to sink further. It is up to you and the buyer to prove that the bank is better off doing the short sale now vs taking ownership of it and trying to put it on the market themselves.

 

[february2003bride]

Zoe-

We completed a short sale (we were the sellers) on a secondary property. It was a huge pain in the arse! We did use a real estate company that specialized in short sales and we had a real estate attorney.

1) A short sale is going to be placed on your credit report. It lists as a collection/foreclosure and your credit score will drop. You will not be allowed to buy another property for 2 years starting when the short sale has been completed. In our case, we already owned our "forever" home, so that does not impact us.

2) You have to be late on your payments for a short sale to be considered and that does go on your credit. You will have to file a hardship letter and do a financial exploratory. It''s not fun, but necessary.

3) If I were you and you HAD to do a short sale, buy the home you want to buy in NC before you get late on your current home.

4) Before you consider option #3, try to rent out your condo first.

5) There is a chance that the bank will never approve your short sale and will list it for auction/foreclosure. I believe then it''s 3 years from the time it''s completed to when you can be considered for a new home loan.

I''ve got to run, but will post more later!

 

[D&T]

Date: 5/8/2009 3:00:24 PM
Author: TravelingGal
Zoe, my advice to you would be to rent it out. Send it to property management if you can''t handle it yourself. I agree with DD and PP. Short sales are a major PITA and it will screw up your credit.

From what I have researched, you do have to be behind on payments in order for the bank to consider a SS. Also, your agent will have to submit a lot of paperwork PROVING that you cannot pay for the property. Stuff that people submit are divorce papers, unemployment papers, etc. I looked into this because on my end, I am interested in whether you can really buy a short sale.

If you have PMI, I''ve read somewhere that your chances of doing a short sale are essentially zilch. The bank is better off foreclosing on you.

They are going to want fair market value to even consider a short sale. The problem is that people are not going to want to pay fair market value on a condo at this point in time when they think it''s going to sink further. It is up to you and the buyer to prove that the bank is better off doing the short sale now vs taking ownership of it and trying to put it on the market themselves.

Actually, Private mortgage insurance helps the bank recoup some of the loss due to deficiency or short sale the short sale that went through had PMI , the PMI company must also approve the short sale as well.

 

[TravelingGal]

Date: 5/8/2009 3:29:02 PM
Author: D&T

Date: 5/8/2009 3:00:24 PM
Author: TravelingGal
Zoe, my advice to you would be to rent it out. Send it to property management if you can''t handle it yourself. I agree with DD and PP. Short sales are a major PITA and it will screw up your credit.

From what I have researched, you do have to be behind on payments in order for the bank to consider a SS. Also, your agent will have to submit a lot of paperwork PROVING that you cannot pay for the property. Stuff that people submit are divorce papers, unemployment papers, etc. I looked into this because on my end, I am interested in whether you can really buy a short sale.

If you have PMI, I''ve read somewhere that your chances of doing a short sale are essentially zilch. The bank is better off foreclosing on you.

They are going to want fair market value to even consider a short sale. The problem is that people are not going to want to pay fair market value on a condo at this point in time when they think it''s going to sink further. It is up to you and the buyer to prove that the bank is better off doing the short sale now vs taking ownership of it and trying to put it on the market themselves.

Actually, Private mortgage insurance helps the bank recoup some of the loss due to deficiency or short sale the short sale that went through had PMI , the PMI company must also approve the short sale as well.

Ah, good to know. I will have to look into this. I thought that PMI was in case of foreclosure, not short sale. I''ll come back if I can find the websites where I read it and also look into what you said. Thanks!

 

[purrfectpear]

Date: 5/8/2009 3:28:48 PM
Author: february2003bride
Zoe-

We completed a short sale (we were the sellers) on a secondary property. It was a huge pain in the arse! We did use a real estate company that specialized in short sales and we had a real estate attorney.

1) A short sale is going to be placed on your credit report. It lists as a collection/foreclosure and your credit score will drop. You will not be allowed to buy another property for 2 years starting when the short sale has been completed. In our case, we already owned our ''forever'' home, so that does not impact us.

2) You have to be late on your payments for a short sale to be considered and that does go on your credit. You will have to file a hardship letter and do a financial exploratory. It''s not fun, but necessary.

3) If I were you and you HAD to do a short sale, buy the home you want to buy in NC before you get late on your current home.

4) Before you consider option #3, try to rent out your condo first.

5) There is a chance that the bank will never approve your short sale and will list it for auction/foreclosure. I believe then it''s 3 years from the time it''s completed to when you can be considered for a new home loan.

I''ve got to run, but will post more later!

Doing #3 used to be great advice. Unfortunately (or fortunately depending on how you view it) the government woke up and realized people were doing that just prior to walking away. You will NOT be able to take out a mortgage on a second home unless you can show that you can make BOTH payments and still meet the 30-35% guidelines. Most salaries won''t cover that including two mortgages of indebtedness.

If you are planning on say "oh but I''m renting the other one out" you have to have SIX MONTHS of rental history and a lease showing your tenant has been there, plus deposits of rent.

No way to fudge the second home.

 

[zoebartlett]

Thank you everyone for your thoughts and suggestions regarding short sales. I didn''t mean to abandon this thread, but I haven''t had a chance to post much in the past few days. I really appreciate your help! My husband just got offered a position and I think things are looking up. We still need to sell this condo but I''m confident that we''ll be able to rent it out for the time being. We''ll have to put some of our own money into it each month but we''re okay with that for now.