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Listing a Home as a Short Sale
Should I List my Home as a Short Sale?
Listing your home as a short sale is better than a foreclosure, but it does have a negative effect on
your credit score. Sellers who are upside down in their homes and who need to sell their homes are faced
with 5 options:
- Foreclosure
- Sell the home & bring money to the closing table
- Rent the home & wait for appreciation
- Ask the lender for loss mitigation (i.e. re-structuring of payments)
- Attempt a Short Sale & ask for debt forgiveness.
Determining if a short sale is your best option is something you should discuss with a real estate
professional. If you would like to set up an appointment to speak with a member of Charleston Resource, Inc.
about your specific home, please call (843) 532-4220 or email
Support@CharlestonResource.com.
What is a Short Sale?
A short sale is a pre-foreclosure sale where the homeowners attempt to sell their home for less money than
they owe to the bank in hopes that the bank will forgive their debt. This situation is quite common in
today’s market because prices of homes have fallen from the 2005 & 2006 market highs. Homeowners who bought
during the market high, or who took out a 2nd mortgage based on the 2005 & 2006 market value of their home
will owe more for their home than it is worth in today’s market. If they were to sell at today’s market
price, they would have to come to the closing table with a significant amount of money to make up the
difference. For this reason, they will ask the bank to accept an amount ‘short’ of what they owe; hence
the name “Short Sale”.
Why Would the Lender Agree to a Short Sale?
Lenders operate under one simple rule: Maximize profits and minimize losses. The lenders have found that
they will save and average of $14,000 per transaction if they allow the homeowners to do a short sale
rather than foreclosing on the home. With both a short sale and a foreclosure, the lender will lose money.
However, they will lose less money if they allow the short sale. Here’s why:
The FORECLOSURE process is a long process which usually lasts longer than 6 months. During the foreclosure
process, the homeowners are not making payments to the lender. The paperwork of the foreclosure and
the processing of this paperwork cost the lender money. Once they foreclose on the home, the time spent
finding a REALTOR to market and sell the foreclosed home cost the lender money. The market time that
the home sits on the market cost the lender money. And the process of evaluating the offers on
the foreclosed home cost the lender money. Additionally, once the lender is in possession of the foreclosed
home, they now have increased liability. Perhaps the home is vandalized, or squatters move in, or
a plumbing leak happens. All of these events could cost the lender money. In the end, the lender
will be able to sell the home for today’s market value.
With a short sale, the lender reduces it’s liability because they never actually own the home. They also
reduce their holding costs because the short sale process is shorter than the foreclosure process. And,
in the end, a short sale results in the home being sold for today’s market value. Therefore, the lender
should elect to allow a short sale whenever they face the decision between foreclosing on the homeowner or
allowing the homeowner to conduct a short sale.
How Long Does it Take to Close a Short Sale?
The term “short sale” is very deceptive. If it were to be named based on the amount of time it takes
to close this transaction, they most likely would be named “extremely long sales”. Based on the experience
of closing short sale transactions in the Charleston area, the REALTORS at CharlestonResource.com estimate
the average short sale transaction to take between 3 and 4 months to close. In some cases, these sales
can take over 6 months to close.
What are the Steps in the Short Sale Process?
The short sale process starts with the seller. Once the seller determines they can no longer make payments
on the home (due to a job transfer, unexpected unemployment, a bad investment decision, or any number of
other reasons) they will attempt to short sell the home rather than succumb to a foreclosure.
At this point, the seller should hire a REALTOR who is knowledgeable about the short sale process and who
can assist them in preparing the needed documents for the short sale to their lender(s). If you have
questions about short sales, please contact Charleston Resource, Inc. at
Support@CharlestonResource.com.
Once the seller and their REALTOR have contacted the lender and provided the lender with the necessary
documentation to begin the short sale process, the seller’s REALTOR will list the home. Potential buyers
will view the home just as they view traditional homes for sale. Once a buyer submits an offer on
the short sale home, the seller should consider if they believe their lender will accept the buyer’s
offer before they sign the offer and submit it to their lender. The seller’s REALTOR, if knowledgeable
about short sales, will be able to assist the seller in deciding if the offer has a good chance of being
accepted by the lender. If the seller believes their lender will accept the offer, they ratify the contract
and submit the offer to their lender for review.
The lender usually takes a long time to assign a negotiator to the short sale. Once the short sale has
an assigned negotiator, the negotiator sends an appraiser to the property to determine the market value.
This value is referred to as the Broker Price Opinion (BPO). Once the lender has the BPO back from
the appraiser, they typically take a very long time before they respond with an acceptance or a rejection
to the short sale offer. If they reject the short sale offer, most often they will submit a counter offer
to the buyer. The buyer does not have the option to counter offer again at this point. They can either
elect to accept the lender’s counter offer, or to reject the counter offer and find a different home
to purchase.
The lenders are ridged and controlling in the short sale process, which makes sense because they are
the ones who are losing thousands of dollars on the transaction. Buyers and sellers of short sales often
become frustrated with the amount of time the process takes.
How often do Short Sale Transactions Actually Close?
REALTORS who are experienced with short sales, such as the REALTORS at Charleston Resource, Inc., have
a much higher success rate in getting short sale transactions to close than REALTORS who are inexperienced
with these transactions. The process is long and laborious, and there are many parties involved. The best
short sale negotiators will be able to close 60% of their short sale transactions. The poor short sale
negotiators will close less than 30% of their short sales transactions. As a seller of a short sale,
this means that even if you work with the best and most experienced REALTORS and negotiators to help you
close your short sale home, 40% of the time, the lender will elect to foreclose on the house anyway.
Does a Short Sale Affect the Seller’s Credit Score?
Although there are no guarantees, a successful short sale should eliminate the debt owed to the bank,
minimize your tax liability, and keep the foreclosure off your credit. In most cases, short sales do
negatively affect a seller’s credit score, but they do not stay on the credit report near as long as
a foreclosure. Foreclosures show up as FORECLOSURE, and can stay on your record for seven years. Anytime
you apply for a new loan or have your credit run, the foreclosure will show up and is usually a required
disclosure you must make on most credit and job applications. A short sale is listed as SETTLED DEBT, and
is much less harmful to your credit. Please consult CharlestonResource.com for more information.
What Liability do I Have When Doing a Short Sale?
In a short sale, it is possible the bank could 1099 you for the difference in what you sell your property
for and what you owed. This means the IRS could consider the difference as income, and you could be taxed
on that income. The bank might also ask you to pay a portion of the difference back in the form of an
unsecured note, which is similar to an I.O.U. It is a negotiation, and we employ tactics to have the bank
consider the debt settled.
What is the Difference Between a Satisfaction of a Lien vs. a Release?
A satisfaction is a total release from the debt owed. A release is when the lender releases the lien from
the property to allow the home to be sold, but the borrower may still be required to repay the balance of
the debt.
What is a Deficiency Judgment?
A Deficiency Judgment can arise when the bank sells the house at foreclosure auction. The bank can sell
the house at auction for any amount less than the total amount owing of the debt plus fees. A deficiency
judgment can arise if the bank sells the house for less than the mortgage debt. The lender then holds you
responsible for the unpaid portion of the loan. For instance, if you owe $100,000 to the mortgage servicer
and they see proceeds after the auction of $55,000, the remaining difference of $45,000 can be moved into
a judgment against you. This will also appear on your credit report along with the foreclosure.
Some lenders will choose the deficiency judgment while others may pursue a path to write off the loan.
If they choose to write off the loan, the lender may issue a 1099 form which you will have to pay taxes on
for the calendar year.
What is a Deed in Lieu?
A Deed in Lieu is when the property is deeded back to the lender with the approval of the borrower prior
to foreclosure. This process may still leave a negative impact on the borrower’s credit.
What is Loss Mitigation?
Loss Mitigation is a process to avoid foreclosure; the lender tries to help a borrower who has been unable
to make loan payments and is in danger of defaulting on his or her loan.
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What is a Loan Modification? A mortgage modification is a loss mitigation option that allows a borrower
to refinance and/or extend the term of the mortgage loan and reduce the monthly payments.
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What is a Forbearance Plan? A forbearance plan is a loss mitigation option where the lender arranges
a revised repayment plan for the borrower that may include a temporary reduction or suspension of
monthly loan payments.
Determining if a short sale is your best option is something you should discuss with a real estate
professional. If you would like to set up an appointment to speak with a member of Charleston Resource, Inc.
about your specific home, please call (843) 532-4220 or email
Support@CharlestonResource.com.
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