With this realization has come a huge problem. Real estate agents and real estate attorneys are starting to tout themselves as "short sale experts" with little knowledge of the process. While short sales aren't rocket science, they do take practice as well as a understanding of the process. The process is detail-oriented and the smallest mistakes can lead to delays that can run weeks or months.
If a sale takes too long, many bad things can happen. Two of them include: 1.) the buyer may become disinterested and walk away; and 2.) if you are delinquent with your payments and your lender files suit, the bank may successfully foreclose.
Regardless of whether you choose to list your home with T. Nicholas Realty, make sure that your agent has experience with these transactions and that this agent is working with an experienced attorney.
Can You Explain To Me What A Short Sale Is?
When a homeowner purchases a house or condo, he or she usually cannot afford to pay for the entire purchase without obtaining a loan. When a bank or credit union helps you make a purchase using a loan, you give the lender a mortgage (this is actually the opposite of what many people think, as most people think of a bank as giving a mortgage).
In recent times, as housing values have decreased, some sellers are in the awkward position of owing more money to their lender than what the property is worth. If you owe $300,000, for example, and the house is worth just $250,000, you become "upside down" on your home.
One alternative in situations like this is to sell the home for its market value and the seller can then bring money to the closing table for the difference. However, many homeowners do not have the resources to do this. Another alternative is to do a short sale.
On a short sale transaction, you approach your lender and ask them to accept a payoff that is less than the amount being owed. You attempt to "short" the lender, which gives rise to the name "short sale."
Most lenders these days will allow short sales in certain circumstances. It is important for you to discuss your individual scenario with your real estate broker or your attorney, as they can give guidance to whether a short sale might work for you.
I Know A Real Estate Agent Who I Like & Trust. Why Wouldn't I Use That Person To Do A Short Sale?
While a short sale transaction has some of the same characteristics as a conventional sale, there are a number of facets to these transactions that make them more complex.
Because there are additional things that must be done in a short sale, it is absolutely essential that you work with someone who is experienced with these transactions.
If you have an agent who you know and trust and want them to benefit from the sale of your home, T. Nicholas Realty is happy to pay them a referral for your business. Just have them give us a call and we can work with them to get your transaction started.
If Short Sales Are So Hard, Why Should I Do A Short Sale Instead of Letting The Bank Foreclose?
If a lender forecloses on your loan, this occurs because you have a long history of default -- which can be extremely damaging to your credit. Further, the most likely scenario is that a deficiency judgment will be pursued and you will become liable for the amount of debt that is forgiven. The purpose of pursuing a short sale is to leave you in a better position than had you been foreclosed upon.
To complete a short sale, you may not necessarily have to be in default. And, if you are, it usually is for a time much less than how long it would take for a foreclosure to unfold -- meaning that the number of missed or late payments is significantly less.
There is another key difference. When you sell your home short, the lender will usually report to the credit bureaus that your account has been "Settled in Full". If you are foreclosed upon, the deficiency may remain a "Current Balance" (typically with the full amount being reported as due).
While we cannot guarantee you that your lender will ultimately waive their right to pursue a deficiency, seeking a waiver of deficiency is something that is important when you undertake a short sale. We work with your attorney to get this accomplished whenever possible.
Selling A Home Involves Cost. Who Pays for This on a Short Sale?
The three largest expenses that are incurred when selling a home are typically: 1.) brokerage commissions; 2.) title insurance; and 3.) attorneys fee.
When conducting a short sale, it is typical for all three of these costs to be paid for from the sale proceeds (i.e., you don't pay any of these things and the costs become absorbed by the lenders being shorted).
If I Sell My Home Short, Will I Be Required To Make A "Seller Contribution" or Sign A "Promissory Note"?
There is not way to know this until you go through the short sale process with your lender. Different lenders have different requirements.
Part of the calculation that the lender will use when determining if you will be required to provide either of these is the reason for your short sale. A seller who is strategically defaulting may be required to make a contribution and sign a promissory note whereas a truly distressed seller may not.
I've Heard That I Might Owe Taxes If I Do A Short Sale. Is This True?
The discharge of debt is typically a taxable event. When debt is discharged, the creditor issues a 1099 that usually becomes reportable on an income tax return
The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.
This provision applies to debt forgiven in calendar years 2007 through 2013. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.
Investors who are selling properties that have been used for rental purposes are the most likely to be taxed on forgiven debt. One exception to this may occur if your are deemed to be "insolvent." You are defined as being insolvent when your total debts exceed the total fair market
value of all of your assets. To determine if you would qualify as being"insolvent," it is recommended that you consult with a tax attorney or accountant.
If I Was Planning on Letting the Bank Foreclose Anyway, Is There Any Risk to Attempting A Short Sale?
The biggest risk is that you lose the time it takes to complete paperwork. When you consider that the upside is the potential to escape a deficiency and diminish the impact on your credit, the risk seems like a small price to pay.
If I Do A Short Sale, How Long Will It Be Before I Can Purchase Another One?
When you are foreclosed upon, many lenders will not allow you to obtain a home loan for five to seven years. While a short sale can impact your ability to borrow, Fannie Mae only requires two years of "seasoning" before a new loan can be obtained (providing that the borrower meets all of their other requirements).
What Are The Documents I'm Required to Complete for a Short Sale?
While the documents may differ among various lenders, they usually include the following: financial information summary; monthly budget; hardship letter; last two (2) years of tax returns; bank statements from the past sixty (60) days; paystubs from the past sixty (60) days; and an affidavit of arm's length transaction. You can click here to more specific information about various lenders.
How Can I Start My Short Sale with T. Nicholas?
We have made the work of listing your home extremely easy by pre-prepaing listing documents for you. You can click here to get our Short Sale Listing Package.
Can You Tell Me More About Doing A Short Sale With My Particular Bank?
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