Introduction To A Short Sale
A Short Sale or Short Pay is when:
• A lender accepts less than what is owed or on a mortgage to avoid a possible foreclosure auction or bankruptcy. Instead of buying from the seller, we purchase the property directly from the lender at a discount.
Example:
Someone is facing foreclosure, and has an existing mortgage of $200,000.Our offer to the lender will be for $150,000.00, which is accepted as full payment and final payment for the loan. Why is the bank willing to take such a discount?
• First of all, banks do not like excess inventory and bad loans on their books. Therefore, if they see an opportunity to get rid of a property without a huge loss, they do it everyday.
• Lenders know they could lose a lot more money if the property goes to auction. There are so many fees involved, that they are usually better off taking the discount beforehand and be finished with the headache of owning the property.
Foreclosures are currently at an all-time high.
Since foreclosures are increasing, so are the number and frequency of short sales. It is safe to say that most lenders will discount, however, there are some that will not. If the numbers work out, they will generally do it.
A short sale is most effective (that does not mean it cannot be done):
• When the homeowners are 1 or more payments behind on their mortgage.
• The Notice of Default has been issued, then banks become really motivated!
• When the Homeowner has a “Qualifying Event”.
The more repairs on the home...the more you need a short sale! Banks DO NOT want to do repairs and then HOLD the home while repairs are done.
Short Sale – The Process!
• We Cannot Do This Without Your Cooperation! You must make yourself available for signing papers. We have a limited amount of time to submit the documents the Lender!
• Authorization To Release – since the Lender does not know us, this gives us the O.K. to speak with them about your situation. This is the 1st step. Once this form is filed, and we have a chance to speak with your lender, we will inform you of the prospects for success. There is no obligation to proceed.
• The Lender controls whether the deal can be done, not us! Therefore, we cannot and will not make promises we cannot keep! There are NO GUARANTEES! However, our success rate is approx. 80%! We want to buy your home, as long as the bank is reasonable about price.
• The Lender can issue a deficiency Judgment (Lien) for a foreclosure, Deed in Lieu or Loan Modification. This is very unlikely to happen in a Short Sale since we request that amount to be forgiven or the contract will not be accepted.
• A downside to be aware of is that your Lender may send you IRS Form 1099 for you to pay taxes on the amount ‘forgiven’ as ordinary income!
So if the original loan amount was $100,000 and the bank accepted an offer of $75,000, the $25,000 the bank ‘forgave’ could be taxable to you. This can now be offset using IRS Form 982 for a Short Sale only! This protection does NOT apply to foreclosure or Deed in Lieu, etc. Check with your accountant.
The good news should come shortly after 3-4 weeks. Your closing costs will be minimal, if any. We will purchase or assign the home and close with all cash in as short a time as possible once the bank gives their O.K.
You will receive full documentation of the loan being PAID IN FULL!! Once the Lender gives their approval it is only a matter of days until we close. The loan will be out of your name, you will be discharged from the obligation.
Q & A
Q: Why would the bank take such a large discount?
A: That is nothing compared to how much a foreclosure costs! The lenders are not stupid! They have actuaries who mathematically figure out whether it is more beneficial to take an offer and let you off the hook or to pursue you for the debt. Ironically, the more you owe the more likely they will be to settle!
Q: Why provide all this complicated information?
A: That is the only way to do business. That is why we have taken the time to make sure you understand this process.
Q: What if I change my mind?
A: This is the most costly of all the problems for us. Someone who decides to proceed with the Short Sale and then changes their mind sticks us with the cost of items such as estimates, title searches, contractor bidding process, labor, time, package design, administrative costs, etc. We want to be sure you are not going to change your mind before we get started that is why we talk to the bank first and then inform you of the chances for success. If you do not have a choice and the “qualifying event” is strong enough we can get started preparing the package in one stop and do the rest by fax and e-mail!
Q: What if I cannot be there to show the home for the BPO (aka Broker’s Price Opinion or “As-Is” Appraisal)?
A: That would be best. We prefer to work with the Broker since we speak their lingo. The Broker or Appraiser will speak a different language—estimates of repair, comps, market conditions affecting sale, average selling time and expenses, tax values, etc. If you have to be there, just blend into the background!
Q: What if I can afford to pay?
A: Then you should. Up to the point where you are putting your financial future at risk. However, if you have spent some of your retirement funds, savings, or kids college fund trying to keep the mortgage paid, especially because of a “Qualifying event” you should consult us immediately!
Q: What is a “Qualifying event”?
A: The best way to explain it is a financial change that has occurred since you took out your mortgage, i.e., divorce, job loss or transfer, relocation, medical bills, repairs, foreclosure, no equity, taxes, etc.!
Q: Will this affect my credit?
A: Yes. If you were not late on the loan, then the mortgage company has no reason to sell short, especially if you have ANY WAY to pay the mortgage. If you are already late then debt relief should be paramount, and, if successful, the debt will be “Paid In Full-Less Than Agreed” and your credit report should reflect that. The short sale is most effective when the mortgage cannot be paid or is already in arrears. In such cases, credit concerns become less important compared to facing a Foreclosure or filing Bankruptcy and/or getting stuck with a judgment or lien against you!
Q: What happens if the bank does not accept your offer or offer is too low?
A: This happens all the time for a variety of reasons. Maybe the appraisal, which is not done by a certified appraiser (in most cases), came back too high or at an inflated value. The person doing the BPO may think they are doing the bank a favor by selecting a higher value than the home is actually worth. This leads the lender to think the home is more valuable and we have a difficult time reaching the price we need. We have introduced a new program (see “Pre-REO”) for situations where the lender needs more money. This is a ‘Hybrid’ of a Short Sale and we have been test-piloting this program with several lenders – who seem quite pleased with getting more money and the homeowner, still derives the benefits of a short sale. Truly a situation where everyone wins!