Short Sales, Still Not Real Clear to Many

Short sales have been a major part of our market for two and a half years and counting. We all seem to know someone that has either sold or purchased a home via a short sale but I am always surprised by how little is really known about the process. I get two or three calls a month asking about it so I thought I would spend a few paragraphs shedding a little light on the process.

First and foremost, they aren’t called “short sales” because they happen quickly, that is for sure! They are called so because the home owner is selling the house “short” of what they owe. When a homeowner is upside down on their house, they have a few options. They can try a loan modification with their lender(s). They can simply walk away and let the bank foreclose or they can try to get their lender(s) to agree to allow them to sell the house for less than the amount owed to the bank. Let’s focus on the short sale from the seller’s perspective for this exercise.

The process is very cumbersome but getting better. Typically if you call and ask your lender if they will consider a short sale, the answer is something like, “No” or “…we don’t know, give us an offer and we can find out”. The reality is, no bank is going to tell you that if you can present them with an offer of $XXXX that they WILL approve a short sale.

So how should most people start? Do your homework! Before you do anything else, contact two people…an attorney and a Realtor(naturally me!) It is so important that I require my clients to work with an attorney in order to move forward with a short sale. Now don’t panic! Getting an attorney DOES NOT mean you will be spending thousands in legal bills and going to court. In fact, it is quite the opposite. Most attorneys will do the work with little or no cost to you. Their money comes from the sale of the house, not from you as the home owner. Think about this, you are breaking a contract with a very large corporation. Chances are you are out gunned if it is you versus them. An attorney levels the field. You want to make sure when the sale is closed that you are 100% clear of any future liabilities. What about tax consequences? You want to make sure you aren’t going to be hit with a large tax bill because of the forgiven debt. A final benefit is that the sale will go more smoothly and quickly with a law firm working on your behalf and they become the point of contact with the bank, not you!

What is next? Work with your Realtor to get your home ready for the market and priced right for a quick sale. Once an offer is received on your home, you negotiate the all the terms, price etc with the buyer. After both parties agree on all the terms, it is submitted to your lender for approval. This is the point that short sales earn their reputation for being difficult! The contract is sent to your lender along with some of your financial information. This is all prepared by the attorney(see how helpful they are!) Typically the bank will assign this to a “negotiator” within thirty days. So…there is thirty days of no activity. Once assigned the negotiator will get to it as his or her workload allows, usually a week or two. They will complete their own appraisal to determine if the offer is reasonable. This can take four to six weeks(we are potentially up to ten weeks by this point!). Depending on what the bank has determined the home to be worth, they may make a higher counter offer or they may not, you never know. That is why sometimes an offer is rejected even if it is a full-price offer. The bank will not say what their bottom line is until they receive the offer and review it. Therefore the home’s list price might not have been acceptable to begin with…we just don’t know.

The hope is, the home was priced right for today’s market and the attorney’s have done a good job negotiating on your behalf. Assuming that is the case, the bank will provide a letter stating they approve of the contract and from there they will require the sale to close within thirty to forty-five days. See how easy that was?

Obviously along the way there are many scenarios that can occur but to detail each one of them would be a book in itself! This entry is just to illustrate why short sales are so time consuming and what is going on along the way. Deciding to go down this road is not an easy decision and can have legal and tax consequences that every home owner needs to consider and in my opinion, consult someone that specializes in these areas. If a Realtor tells you that they can easily short sale your home and does not recommend that you seek other’s professional advice, consider this your warning! As always, feel free to contact me if you any questions specific to your situation.