If you are “upside down” or “underwater” – the value of your home having declined below the amount you owe on it – you are not alone. Nearly 20 million homeowners in the US are facing this scenario right now. It’s psychologically lousy for all of them and financially lousy for those who must sell because of a job loss, reduction in pay, divorce, death or other reason. For them, it’s a financial train wreck.
A short sale can be an good solution for you. Of course, your lender has to approve the deal as they have accepted the home as collateral for the loan. The right questions to ask are 1) How it works, 2) What becomes of the shortfall amount, 3) What tax liabilities will there be and 4) how can I be protected from future deficiency suits. Let’s start with number one.
Short Sales Work Like This
The short sale is conducted in exactly the same manner as a traditional sale, with one important additional step. When a suitable buyer is found your “application for a short payoff” is submitted, along with the offer, to the lender. The application includes an explanation of the hardship that led you to this situation.
The HUD-1 Settlement Statement also shows payoffs for junior lienholders like 2nd Mortgages, tax liens, etc.
The lender will review the application and get their own assessment of the value of the homeeither by hiring a local Realtor to provide a Broker Price Opinion (an inexpensive appraisal) or by using the Automated Valuation Model – a computerized estimate of net proceeds if the home goes back to the lender as an REO. It usually takes the lender at least 30 days to approve the deal and could take as long as four months or more. I have had short sales take up to two full years to resolve and I have had some take as few as 60 days from start to finish.
Short sales have gotten plenty of press in recent years. You may harbor some false notions of just what they are. Let me start by debunking the most common misconceptions.
1. Banks would rather foreclose than approve a short sale
The foreclosure process is lengthy and expensive. The short sale process is short and fast. So, it’s the lesser of two evils. If all things are equal, the bank gets their money months faster through a short sale.
2. Short Sales are only approved for homeowners who are in Default
This is not true. The factors considered are whether or not the offer is reasonable and whether or not the buyer seems qualified.
3. Short Sales take too long to succeed after the foreclosure process has begun
This is a myth that probably hurts homeowners the most. Many do not realize that foreclosure is a process, and that there is time to stop a trustee sale right up to the day of the sale. I have convinced trustees to phone the auctioneer to stop the sale the very morning of the auction (not recommended!).
Lenders appreciate the advantage of a sort sale. Not only is it better for them financially and politically, it is better for the owner (faster credit score recovery) and better for the community (vacant, foreclosed REO homes). Therefore lenders typically welcome a short sale application as an alternative to foreclosing and will delay the foreclosure process to evaluate your application.
Myth #4 – Listing My Home as a Short Sale is an Embarrassment
It is understandable to have reservations about letting the world know that you owe more on your home than it is worth. However, according to recent estimates, one out of five homeowners in the U.S. is in the same situation. Estimates are that 40-60% of U.S. home sales in 2009 and 2010 will be short sales or foreclosures, you are not alone.
5. Good Buyers steer clear of short sales
The opposite is true. Smart buyers and smart agents know that there are great deals to be had in short sales.
Short sales are here to stay for many years. Millions of homeowners will use short sales as a way to workout their portion of the housing crisis. As a workout solution they provide significant advantages over many other options.
Want to find out more about actually getting short sales done? Visit Rockwood’s site at Home Loan Modification. This article, Sell Your Home Short? has free reprint rights.
