Short Sales FAQ
What is a Short Sale?
The terms “Short Sale” refer to the sale of real property for an amount less than the amount owed to the lender(s) on the property. In the short sale scenario, the lender or investor agrees to accept less than the full balance due on the debt, and often ‘forgives’ all or a large portion of the difference.
How will the Short Sale affect my credit?
Short Sales are still a relatively new concept. Banks have the option of submitting the short sale to the credit bureau as "Paid in Full" or "Settled for less than full balance". As far as your credit score is concerned, there is no evidence whatsoever to support that a short sale will lower your credit score. Some have the idea that this is like a bankruptcy or a foreclosure. From what we hear from large loan servicers and originators like Fannie Mae and Freddie Mac, that's far from the truth! In a short sale, the lender is simply allowing you to pay less than you owe!
If you are currently behind on your mortgage or facing foreclosure, the short sale will actually help your credit! How? Because once you are approved for the short sale, all collection activity will STOP and you will avoid foreclosure!
Credit reporting is not a perfect science and the potential impact to your credit score you may want to review the Federal Trade Commission website for facts about credit scores.
Who benefits from the Short Sale?
Short sales are a win-win situation. Lenders, Mortgagees and Buyers all benefit from the successful short sale. Mortgagors get the majority of their money back, Mortgagees get the relief they need and are able to sell their property and avoid foreclosure, and Buyers can purchase a property at a fair price in condition that is often times in better condition than the competing bank owned (REO) properties.
Why would banks forgive the difference?
To mitigate their losses, banks often accept a settlement of less than what is owed on the property. When faced with the option of getting the property ‘back’ through foreclosure, a short sale often makes a much wiser business decision for the bank. You see, when a lender takes a property back at foreclosure auction, they will often realize only about 30% to 45% return of the money owed to them. In a short sale they usually realize a much larger return which makes it a much better deal for them.
This sounds too good to be true, is it?
Not really. Things that are ‘too good to be true’ usually don’t make good economic sense. The short sale makes good common and financial sense for the banks who grant them. The fact of the matter is, lenders, mortgage companies and banks are NOT in the real estate business. They are in the LENDING business. The last thing they want is that property back. So as a result, they will often be willing to accept a short sale transaction especially of the seller is in eminent danger of going into default or losing the property to foreclosure.
Can FHA, Conventional or VA loans receive a short sale?
Yes! Short sales get negotiated all the time for each of these loan types and even loans held by private parties.
Why does my property have negative equity?
Here are a few common reasons:
- Person bought at the height of the market and the market has now declined or they may have paid more than the property was worth.
- The area has become less desirable for any number of reasons, so property prices have declined.
- Person purchased the home with little or no money down and wants to sell within a few years of purchase… and the property price has not increased during that time. Therefore, costs associated with selling the property may create a balance due at closing.
- Person refinanced the home (with a high appraisal value) and now has little or no equity.
- Person bought in a brand new subdivision or recently developed area that has not been fully developed or has not appreciated (or has depreciated) in price.
- An owner had equity at one time and refinanced, pulled out the equity for personal reasons or money issues, thereby putting the property into a negative equity position.
- The market is soft because there is too much builder (new home) inventory or too many existing homes on the market (buyer’s market)
What is Negative Equity?
Also known as being "upside down" negative equity is the difference between the price of an asset and the outstanding portion of the loan taken out to pay for the asset, when the latter exceeds the former. For example, if your car is worth $10,000 and you owe $15,000 on it, you would have a negative equity of $5,000. Negative equity can result from a decline in the price of an asset after it is purchased.
Some areas decline in prices. In other areas, prices may remain flat so that the properties in that area do not appreciate. If a seller wants to sell within 3-6 years of purchasing their property, they may be in a situation where they have negative equity.
What if I owe what my home is worth?
Even if you owe exactly what your home is worth, you may still need to do a short sale in order to pay for the costs of the sale such as but not limited to brokerage fees, Title Policy, HOA transfer costs and other closing costs associated with selling a property.
Why not just let my lender foreclose?
NO! (That was me screaming!) What is the first thing banks do when they foreclose on a property? Hand it over to a real estate agent to get rid of it quick! The foreclosure process is a legal process. It involves attorneys and it costs MONEY. In Nevada, Non-Judicial Foreclosure is the process that is used. It happens by following a statutory procedure, if not monitored and dealt with, it can be concluded quickly resulting in a foreclosure. Once they get the property back via foreclosure they must often sell it for MUCH LESS than market value and pay Realtor commissions and all customary closing costs resulting in a deficiency between the total amount realized by the bank at sale and the total amount owed. The lender could quickly file for a deficiency judgment and unlike a short sale, you don’t even get an opportunity to discuss it with them. Doesn’t it make more sense for them to take at or a little below fair market value before foreclosing?
And, even when they do sell it through foreclosure... this does NOT remove your obligation to repay the remaining balance! It is not wiped away!!!
What if I'm not behind on my payments?
Short sales work – even if you’ve never missed a payment! Yes, I know… short sales have gotten a stigma of being only available for folks who are in foreclosure. But short sales can be successfully negotiated for folks who have never missed a mortgage payment! They just happen to be in a negative equity position with a potential of foreclosure, and need the short sale in order to sell their home and prevent it.
How long does it take?
Short sale approval can take 60 days or longer. Once approval is received, most escrows take approximately 45 days to close depending upon the buyer’s financing terms.
What if my home is already in foreclosure?
Your foreclosure sale can often be suspended during the short sale process if we act quickly. That's why it's imperative that you contact us right away!!!
Will my lender send me a 1099 on the debt forgiven?
While I always recommend to people considering a short sale that they should speak with a qualified tax professional such as Carla Dirk, CPA. I also think it is important to know that in 2007 the U.S. Congress passed the Mortgage Debt Forgiveness Relief Act and it is in effect until 2012. As a result of that act, borrowers no longer pay taxes on the debt forgiven on their primary residence. So if the property is your primary residence, then no, you should not receive a 1099 for the debt forgiven or have to pay any taxes on the forgive debt.
For investment property, the lender does have the right to report to the IRS the amount they have “Forgiven” in a Short Sale transaction, the amount of the resulting tax will be far less than the debt forgiven. For example, if you did get a 1099 for $30,000 forgiven that could potentially result in additional taxes of $1,300 for that year depending upon your personal tax situation. Paying the resulting tax is far superior to paying the difference of the debt. Also, if the property is lost to foreclosure, that foreclosure could have a much more devastating effect on you than the amount of the 1099 and subsequent taxes that could be owed.
For more information go here:
The Mortgage Forgiveness Debt Relief Act and Debt Cancellation
How much will the short sale cost me?
We do not charge any additional fees for assistance with short sales. The real estate commission and other costs will generally be paid by your lender.
Can I get any money at the close of escrow?
Lenders generally require that sellers not receive any proceeds of sale when the escrow closes. However, many of the lenders have all agreed to participate in the federally sponsored Home Affordable Foreclosure Avoidance program known as H.A.F.A. Within this program, sellers may be paid up to $3000 as relocation assistance and compensation for cooperating in the short sale process.
What kind of marketing will you do on my property?
I have been licensed since 1987 and have successfully sold over 1000 properties including many short sales. We are ranked among the Top 1% of all REALTORS® in the Greater Las Vegas Association of REALTORS.
For our regular listings, we do employ an extensive marketing strategy however we have found that traditional marketing mediums (flyers, virtual tours, open houses, showing feedback surveys, etc) are not effective at generating offers on short sale listings.
What generates success on our short sale listings is over 90% dependent on the property’s PRICE. We review the pricing and make adjustments at least monthly and sometimes every week until an offer is generated.
In addition to pricing, we employ a strong internet marketing presence. We have teamed up with REALTOR.com, Zillow, Trulia, ListHub and KWLS to market your property on 100’s of web sites.
If there are very few calls or buyers looking at your property, we may take an even more aggressive position until we get an offer. Depending on the market and absorption rates, we can typically generate an offer within 60 days, unless the property is very unique.
How about a loan modification instead of a Short Sale?
If you desire to keep your home and can afford to make the monthly payments, then YES you should keep it! In order to qualify for a loan modification, you will need to demonstrate to the bank that you are generating more income than your current monthly expenses and that you are capable of maintaining the monthly payments and expenses without fear of going delinquent.
Is this the case? If so, you will need to call your lender and let them know you want to do a loan modification, and see if they will qualify you for their loan mod program. If you aren’t approved, we can then move forward with a short sale. We can’t work the short sale at the same time you are working with your bank on a loan mod.
We often refer our clients and friends to a local Non-Profit, HUD Approved, Housing Counseling Agency. They get paid from Federal Grants so they do not charge anyone for their services, they are HUD approved which means they have a direct line to many of the lenders who will make decisions about loan modifications. We Can Refer You To A Loan Modification Agency By Clicking On This Link.
Can I lease out my house while waiting for the short sale?
We don’t recommend that you lease your home while waiting on the short sale to be finalized. Lenders will not be sympathetic to sellers who are collecting rent payments and not making their mortgage payment. Also, homes with tenants are subject to legal rules (tenant rights) and much more difficult to show and to sell. In addition, if you have an FHA loan that must go short sale, they require that you be an occupant of that property. Leaving for a reason other than a job relocation could be considered abandonment.
How will the list price of my home be decided?
The market determines price. To determine prices based upon the market I will initially we will complete a Broker’s Price Opinion, very similar to the opinions I provide the lenders for their REO properties. Once we have an offer, we will submit the offer to the bank. The lenders will often commission another Broker Price Opinion from an independent agent not associated with our transaction.
Once we convince the bank to agree to accept the short sale on your home, they will hire their own independent appraiser who will come out and view your home, and set a valuation, based on its condition. They must agree with the appraiser’s determination of value as it compares to the price agreed to with the buyer in the purchase agreement.
In order to get the process going quickly, we will need to send you our short sale package and get all of the necessary information we need back from you first, before we even put up the sign, place the lockbox or begin the marketing.
What needs to be done for my property to sell quickly?
We generally don’t recommend that you do anything to the home that will cost you money, but sometimes that is the only option. The truth is, since you won’t be netting anything from the sale, the last thing you probably want to do is spend more money on a home you no longer can afford so we avoid that unless there are not any other options. For that reason, we will be selling your home as-is. Our only suggestion is to clear out as much clutter as you can. The lender will price your home according to its condition which could benefit your cause in the long run. | 
