Real Estate Tips: What is a Short Sale and is it an Option I Should Consider?

by Kandy Klee

Here's how a flipped house could look.

A short sale is simply when a home is sold for less than the total of loans on the home. It is often used as an “alternative to foreclosure” but is actually much more. There are many reasons homeowners may want to consider a short sale:

  • Divorce
  • Death of one borrower
  • Needing to relocate immediately
  • Loss of income/reduction of income
  • Illness
  • Payment increase or mortgage rate adjustment
  • Too much debt
  •  And, of course, one we’ve all experienced, a decline in home value.
But whatever your need for a short sale, it is not something to be embarrassed about.  “Any fool can criticize, condemn and complain, and most fools do,” said Dale Carnegie. Don’t worry about what neighbors will think; act quickly and get the options.
Options
Homeowners actually have many options IF you act quickly. Procrastination is a distressed homeowners worst enemy. Many homeowners get discouraged, stop answering the phone, dreading the mail and hoping the problem will go away.  It won’t.  It will get worse. Keep in mind, it isn’t a problem that can be resolved overnight, so take steps to lighten the load and steadily it will get better.
1.  Call your first mortgage lender. For example, if you call regarding your ARM because it is about to adjust, he/she may tell you they can’t help you.  The reason may be they only do new purchase loans, so be sure to ask the right questions.  “Do you have a modification department?  Can I speak with your manager? Who could help me with options?”
2.  Call second mortgage and other lenders. Did you buy a car or take a vacation with a home equity loan and now your value has declined? Contact the second lien holder.  They will negotiate on payoffs. The key to negotiating liens is kindness and persistence. Getting in a yelling match with the person on the phone will just get your file pushed to the bottom of the stack. Instead, ask him/her “How can I help you? How do you prefer to receive documents? Should I put my account number on every page?”
3.  Call a real estate agent experienced in short sales. Short sale agents will have an option sheet for you. You may not want to sell and that is okay.  Handling properties that are distressed or soon may be is a methodical process.  An experienced agent can explain other options, will have a step by step “things to do” for each option and a list of who to contact for help negotiating if you choose not to sell.  If you do choose to sell, your agent will usually handle the negotiations on your behalf.  So you can stop avoiding the phone calls from the bank and turn them over to your agent! You may be eligible for a modification or a second modification or even to refinance with a new lender. Look for realtors with distressed property designations such as SFR (short sale and foreclosure resource) and CDPE (certified distressed property expert). CDPE is a designation with a $99/monthly fee, so you may ask an agent if they have completed the courses but may not pay the monthly fee to be able to put the CDPE after their name.
While a short sale may not be the road a homeowner plans to take, there are advantages.
1.  Get out of a bad loan or loan that was taken in artificially inflated value time. There is an old expression, “don’t throw good money at bad,”even if you can continue making the payments, does it make sense to pay on a $800,000 loan if the home is valued at $675,000 now? If it isn’t your dream home, the answer is probably not.
2.  If you are not delinquent on mortgage payments, after a short sale you can get a mortgage in two years, sometimes less. The credit report dent caused by a short sale continues to decrease. FICOs for many loans just dropped to 550 so I expect the two year timeline to decrease even more.
3.  If you are already delinquent on mortgage payments, you can continue to live in your home while the short sale is being negotiated without making a payment. Once you miss a payment, your credit score will suffer, so if it’s already taken a hit, the 8-12 months it typically takes to negotiate a short sale is an opportunity to save and plan your move.
4.  Short sale incentives from lenders and the government are every changing, but they do exist. Some lenders advertise up to $30,000 in moving expenses. I haven’t seen amounts this high actually paid; we do see sellers regularly receive some incentive from their lender. Lenders pay incentives to get homeowners to move out quickly after closing and without taking the kitchen with them. Some incentives depend on how quickly escrow is closed, so it is helpful to work with an experienced short sale agent who understands these timelines.  While it is not legal for a seller to receive proceeds from a short sale home, a seller is able to receive lender and government incentives. These checks are usually mailed a week after closing.
5.  Mortgage Forgiveness Debt Relief Act was extended to 2014. In the past if you sold for $500,000 and you owed $600,000, the $100,000 difference had to be listed as income on your taxes. As long as this act remains active, you do not have to pay taxes on the deficient amount.  See irs.gov for more information.
6. The homeowner selling a short sale does NOT pay the realtor commissions. These are paid by the lender. A short sale typically does not cost the homeowner anything at closing.
The key to learning if a short sale is right for you and how to navigate the long process is gathering good information. You don’t need to pay a service to help you. Once a property is in pre-foreclosure the loan information becomes public. You will receive marketing from short sale agents and credit consolidators that are offering valuable services. However, you will also receive the flyers from “avoid foreclosure for $399” scammers. Be careful and let your experienced agent guide you without a fee.
Realtor.org is the National Association of Realtors website and has more information on short sales.
Next week, we will look we’ll look at short sales from the buyer’s perspective.
Kandy Klee
BPOR, SFR
Calumet Realty
859-402-6328 cell
859-201-1417 fax

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