How To Do Your Own Short Sale
How to do Your Own Short Sale:Note: Before doing a short sale on your property, you should consult with an attorney to explore your options.
Completing a short sale can be a long, stressful and complicated process. By definition, the term “short sale” is deceiving. Nothing about the process is “short”. It simply means the bank must accept a “short” payoff for the transaction to happen. Although most short sales are done with loans that are already in default, it is not impossible to do a short sale without missing any payments. In either case, if your finances are strained, you may want to arrange for a forbearance while you are completing the short sale. This will postpone your payments without default or foreclosure long enough to get the short sale completed. If you are in foreclosure, make sure you tell the representative or processor you are in a forbearance. We’ll go into this in more detail later.
The only way to short sale your house is through a sale. You will need to do several things to accomplish this. Keep in mind that any house will sell in any market for the right price. Determining that price is an important part of this process. You will need some help from a realtor to get an accurate estimate on the asking price you should have on your house. Click here to see an example of a short sale approval letter from a lender.
In case you don’t already know some basics, here’s the deal: If you are in default on your loan, your lender must send you a 30-day notice prior to public notice of a trustee or sheriff sale. After the notice, you have 90 days before the actual foreclosure auction where you lose your house to the highest bidder. Some auction dates can be postponed if you are in the foreclosure process or other workout programs or bankruptcy, you may be able to convince the lender to postpone the foreclosure sale. Whether you have one mortgage, two, or more, the subordinate liens are eliminated from the sale at the auction if the highest bid isn’t enough to cover all the liens. Any of the lien holder’s against your property can foreclose if they are in default, but it is the senior. liens that must be paid first. Foreclosing lien holders place a minimum bid for the amount they legally require after payoff and any foreclosure attorney fees. Then that minimum bid is either increased by bidders at the auction or no one bids at all, and the property is reverted back to the foreclosing lien holder and becomes an REO (Real Estate Owned by the bank). It should be noted that typically REO properties are sold at big discounts by the lenders after the auction. You would think that this would motivate lenders to work with you and accept any amount that is above what they could expect to net from an REO sale, but this logic doesn’t always apply. Some lenders are compensated by insurance, write offs or bailouts.
If one of the subordinate lien holders is foreclosing, they would then need to pay off the Senior lien holder(s) after the sale to get clear title to the property. This information is valuable to know when negotiating with the bank, even though they hear it multiple times every day, it is an inevitable element to the equation that must be considered. Here’s why: when you are negotiating with a 2nd lien holder and it’s obvious that the property value isn’t enough to justify the payoff of even the 1st lien holder, then the 2nd would unlikely receive anything at all from the auction. Therefore logic would tell you that if the 2nd lien holder could receive any money at all through the short sale, it would be better than losing the property leverage through auction. We say property leverage because subordinate lien holders can reserve the right to pursue you for any deficiency judgment they lose through the foreclosure sale. In other words, if the first mortgage is foreclosing and the 2nd doesn’t get paid in full through the foreclosure sale, they can pursue the deficiency from you after the property is sold at auction.
You have to work a budget to determine if it would be better for you to do a workout with your lender or to short sale your property. If you can continue to afford the payments and want to stay in your home, you might want to work with your lender to restructure your loan, do a loan modification, refinance your loan, or file for bankruptcy. Many lenders are open to working with you these days. Keep in mind that if you file for bankruptcy within one year after the sale of your property, and then default on the bankruptcy, the transaction can be audited by the bankruptcy court. Some bankruptcy trustees may go after the commissions in the transaction or any amount that the buyer netted if they sold the property soon after they bought it from you.
If you get a call from the collections department, it’s very unlikely they have any information on your short sale process so don’t be discouraged. This can seem crazy, after you have done a lot of work to get your short sale started and the collections representative calling you has no idea about your situation. Most lenders have a collections department, customer service department, loss mitigation department, short sale department, a foreclosure department and an REO department (see definitions). During your short sale process, you may be transferred from one department to another, depending on the stage of your file.
In a short sale, if the sale price is lower than the amount required to pay off the 1st mortgage, they will be required to short sale along with the 2nd. In that case, the banks in the 1st position will be, in essence, paying for whatever amount is going to the 2nd. The bank in the 1st position may have a maximum amount they are willing to allow to go to the 2nd or even 3rd lien holders. In addition, banks have a minimum amount they can accept when they are in the 2nd or 3rd lien position. Even though they would likely not get one penny if the property is lost at auction, they may have guidelines they are required to abide by and they would rather write off the loss than accept less than their minimum. If the subordinate (2nd or 3rd) lien holder(s) require more than the 1st is willing to pay, you can negotiate a note, payable outside of escrow. This could be paid before closing, at closing or even on a payment plan after the closing of the sale of your property. Click here to see an example.
Once you have gotten the bank(s) to agree to a short sale, they will send you a short sale approval letter. You should request the maximum amount of time they allow on this letter to close, so that your buyer will have time to get their financing in order. If for some reason you lose that buyer, you would need time to find a backup buyer quickly. Also, if your buyer is assigning their contract to another buyer, that buyer would need to be identified and get their financing in order in time to close by the deadline your lender indicates on the short sale approval letter.
Regarding tax implications; you should speak with your accountant or tax advisor to learn about the possible taxes you might be required to pay as a result of the short sale. In the Debt Forgiveness Act of 2007, it relieved the federal tax burden of the forgiven debt on owner occupy properties. Before that bill, homeowners were taxed on the forgiven debt as if it were income.
