It’s a great time to be a seller. In our pandemic-era housing market, homes are selling for prices beyond our imagination and everyone is afraid to admit what they’re really thinking: Will these homes end up as short sales in the near future?
Millions of homeowners in just about every U.S. market found themselves “underwater” on their home’s value after the housing market collapsed in 2008. Predatory lending practices, record-high job losses, and negative equity home values resulted in an unprecedented volume of short sales and foreclosures nationwide.
It took years for home values to recover. And while lending practices have been largely overhauled, if an “underwater” homeowner experiences a financial hardship and can’t make their mortgage payments, a short sale may be their best solution.
What is a Short Sale?
A short sale occurs when you sell your home for less than the balance owed on your mortgage. Your lender accepts the “shorted” payoff and releases the lien on the property.
Every short sale situation is going to be unique, but here are the 9 steps to a successful short sale outcome:
1. It starts with a hardship
You’re going through a difficult time financially and are having trouble keeping up with mortgage payments. You realize that you’ll have to sell your home, but don’t think the selling price would settle the mortgage debt.
To qualify for a short sale, lenders will want proof that you’re experiencing a financial hardship and can no longer make your monthly loan payments. You also must be lacking the liquid funds to “close the gap” between your home’s sale price and the balance on your mortgage.
2. Assemble your team
Once you’ve decided to pursue a short sale, you’ll need to hire these 3 key professionals:
- A real estate pro with extensive short sales experience
- A real estate attorney or short sale negotiator
- A tax advisor or accountant (optional)
The experienced real estate agent or broker will already have an attorney or short sale negotiator on speed-dial, so once you find your real estate broker, the other team members should fall into place.
You may be thinking, “How am I going to afford all these people if I’m struggling to pay my bills as it is?”
With most short sales, you don’t pay your real estate broker or attorney anything out-of-pocket. They are paid through the sale of your home.
3. Your broker lists your home for sale
Don’t hesitate to list your home because you have deferred maintenance, need fresh paint, garage is full of junk, etc. If you are struggling financially, don’t run the risk of your lender starting foreclosure proceedings. Banks won’t wait for you to install new carpet.
4. Your attorney prepares the “Short Sale Proposal”
The short sale proposal are documents that explain your current financial situation. Being “underwater” alone is not enough to gain lender approval. They need an explanation of your hardship and proof that your liquid funds cannot cover the outstanding balance.
5. A Buyer makes an offer
Your real estate broker will make sure that the Buyer is pre-approved and that they’ve made a qualified offer that will be acceptable by your lender, based on its fair market value.
6. Your attorney submits the Short Sale Proposal to your lender
Your short sale attorney includes the Buyer’s offer in the short sale proposal and submits it to your lender. By now, your attorney is intimately familiar with your situation. They will represent you and fight for the best possible outcome with your lender.
7. Your attorney and lender negotiate terms
Your short sale team’s experience will be put to a critical test during this stage. In many cases, your lender forgives the outstanding debt (called a “deficiency”) and you walk away virtually unscathed. (Aside from bruised credit and a potential tax liability. But we’ll address these in a later blog post.)
If your lender chooses to approve the short sale but not forgive the deficiency, they may seek a payment plan from the homeowner via a personal loan. Or worse, come after the homeowner with a deficiency judgment (i.e. lawsuit) after the sale.
While these deficiency judgments sound distressing (and they are), your experienced short sale attorney or negotiator will know to demand a deficiency waiver from the lender as part of your proposal. At the Fed City Team, the law firm we work with has never encountered a lender who refused to sign a deficiency waiver.
A lender may also reject a short sale proposal, opting instead to tie up the property in lengthy foreclosure proceedings. (Especially if they think they can make more money from the house at auction.)
8. Your lender approves the Short Sale
Your short sale attorney will not only ask your lender to forgive the outstanding debt, but they’ll also ask them to pay your relocation costs, and perhaps any outstanding utility bills, etc.
You’re probably wondering, “Why on earth would the lender pay me money when they’re already taking a loss on the house?”
Lender-funded relocation costs are actually pretty common. At Fed City Team, we’ve seen lenders fund between $3,000 and $12,000 for relocation costs after a short sale. Lenders consider it an incentive for keeping your home in good condition until the transaction closes.
Short sales can be complicated and messy, and unfortunately homeowners are beholden to the whim of their lenders. However, most of them will prefer the shorter timeline of a short sale versus lengthy and expensive foreclosure proceedings.
9. You move on, literally and figuratively
After your house has “short-sold,” it’s time to rebuild. Take time to mentally recover from the last several months. Consult a qualified tax professional to guide you on how to claim the short sale on state and federal returns. Then, make a plan to repair your credit.
Assuming you’ve had one or more delinquent mortgage payments, your credit score could be down 100 or more points. But if you focus on good spending habits over the next 12 – 24 months, your credit will repair and you’ll be able to buy another home.
When it comes to debt obligations, always be proactive about seeking the best resolution for your financial health. If you need to get out of an expensive mortgage but have negative equity, a short sale may be your best solution.
If you live in the Washington, DC metro area, call Marc Dosik and the Fed City Team to discuss your options for a short sale. Marc and his team have rescued over 130 home owners from foreclosure proceedings. They work with your lender to sell your home and get the mortgage deficiency forgiven, all at no cost to you. They even negotiate with the lender to pay your relocation costs, giving you $3,000 or more cash-in-pocket to help you get back on your feet.
Avoid foreclosure. Contact Marc Dosik today!
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Disclaimer: Every homeowner’s situation is unique, and local, state and federal laws change regularly. As such, this information should not be considered as legal, tax, financial or investment advice. Consult a qualified professional before making any financial decisions.