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Don’t Fall Short On Your Short Sale
By Tony Snyder | January 21, 2010
In this down economy, more and more homeowners are trying to find ways to get out from underneath their ballooning mortgage payment. One option is a “short sale” which allows the homeowner to sell the home for less than the outstanding loan. For this is to work, however, the loan holder (typically a bank of some sort) must agree to take less than is owed (hence the term: “short”).
In a short sale, the bank will typically accept less than the outstanding balance, and in return, discharge the deficiency between what is owed and what is collected. This can end up being a good deal for everyone involved. The sellers eliminate (or limit) their liability on the mortgage, the buyer gets a home for a great price, and the bank is able to collect something for a home which might otherwise sit unoccupied. Banks are in the business of making money, not owning real estate.
But despite avoiding the costs associated with foreclosures (fees, inventory upkeep, collection fees from an uncollectable seller), the banks need to be convinced a short sale makes prudent financial sense.
- Talk To Your Lender—if you think you will be unable to maintain your mortgage payment, talk to your lender about short sale options. In this economy, most lenders have some sort of policy in place and will be happy to share with you what their requirements are, what sort of parameters they are willing to accommodate and what type of documentation you will need to provide. Furthermore, if the bank understands how and why you have fallen into financial arrears, coupled with your continued inability to pay any deficiency, the lender will likely wish to “cut their loses.” Look, here’s the deal: You’re going to have to provide financial documentation to the bank, so be prepared to provide copies of bank/savings account statements, stocks and bonds, approximately two years worth of tax returns, two months worth of pay stubs, and don’t be surprised if you have to update this every 90 days during the short-sale process.
- Get An Evaluation—if you find someone interested in purchasing your home, you will need to convince the bank the offer price is a reasonable one. The best way to do this is with an appraisal from a licensed appraiser. If you really want to impress the bank, obtain a comparative market analysis by a real estate broker. This document will provide analysis of sale prices of your home, compared to other like houses. It takes into account square footage, number of rooms (i.e. bed, bath) and compares that to like houses within the past 6-12 months.
- Protect Yourself AND The Buyer—if you are the seller in a short sale, there are a few provisions you should require, and expect the buyer to require a few themselves. As a seller, consider including a provision which makes the sale contingent upon the bank’s approval of the short sale. If the bank backs out at the last minute, you don’t want to be left on the hook for selling your home at a fraction of the price to the buyer. Equally, you may consider including language that dictates a short sale will only be achieved if the lender forgives any deficiency between the sale price and the outstanding loan price. On the other side of the table, understand that a buyer may limit the amount of time you have to get the bank’s approval for the short sale. If the lender drags the process out, the buyer will likely move on to another piece of property. That leads to another requirement the buyer may require, other pieces of real estate for purchase. If the buyer is looking for homes eligible for a short sale, and in the event another offer is accepted, the buyer has the right to cancel the offer on your property.
- Get Your Ducks In A Row—as soon as you have a potential buyer, order up the necessary title work for quicker transfer. Title companies won’t insure a piece of property if they are concerned about the legitimacy of a neutral, disinterested buyer. If they suspect that your wealthy Aunt Agatha is trying to buy your home for pennies on the dollar, just so that she can “gift” it back to you, the title company will run for the hills. Listen, in this economy, people try less than ethical practices. Additionally, prepare the proper documentation necessary if the bank agrees to forgive the deficiency. This part is crucial, so let me repeat: Make sure you have the documentation ready for the lender to sign if they agree to forgive the deficiency.
In this down economy, it only makes sense to save yourself and your bank the headache that is a home foreclosure. If it has been said once, it bears repeating a million times: Banks are not in the business of owning real estate. The longer they have ownership of homes, the less money they have in their proverbial bank accounts. It behooves a lender to work with you, provided you work with them. Before “walking away” from your home and mortgage, consider speaking with your lender and a real estate attorney regarding the option of a short sale.
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