There are so many aspects of short sales that as a professional I take for granted. A lot of buyers and seller's have questions about them, so I have decided to go over just a few things about short sales that you may or may not know.
A seller must typically have stopped making payments on the loan. Many times a bank will not even talk to a seller unless they have stopped making payments. This is a sticky situation for us as real estate agents. We do not have the legal or tax background of an attorney or an accountant, so we cannot make a judgement or give professional advice whether or not our client should stop making payments. Always consult your tax and/or legal consultant before making a decision if a bank is pressuring a seller about this.
The depth of the discount on the sale must be substantiated with insight into the current market value. A Broker Price Opinion (called a BPO in the industry) is used to help the lender make a decision about whether or not a short sale is a viable option. A BPO is very similar to a Comparative Market Analysis (CMA) in that it uses current active listings and sales usually within a six month period and within a certain radius of the subject property.
The short sale must first be negotiated between the buyer and seller and then it must be approved by the lender. The lender is not obligated to enter into negotiating or agreeing to a short sale. With the current market climate of properties being taken over by the banks, many lenders are finding short sales are a viable way to prevent properties from becoming an REO property ("real estate owned" by the bank).
Depending on whether or not the property is the seller's primary residence, a seller may be obligated to pay a promissary note and/or pay taxes on a 1099 for the difference of the short sale. Because of the number of speculators in the market over the last four years, many seller's in a short sale may face this situation. The Mortgage Debt Forgiveness Act that was signed into law in December 2007 does help seller's who short sale their primary residence and who have not done a cash out refinance for items other than certain provable home improvements. In other words this is for folks who were caught in the wave and for one reason or another are not financially able to keep their homes and need a way out.
Before considering a short sale it is always important to speak with your banks first. There are many debt reduction and loan modification programs available now. Always start with talking to your bank first and then a professional real estate agent. Thank you for thinking of me when you think of real estate! www.eTemeculaRealEstate.com Susan Manning, Rancon Real Estate 951-551-7790
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Sounds so confusing and what a mess for everyone involved.
Yes, I am sure it sounds confusing to someone who does not work with short sales on a regular basis. But, they can be a viable source of business which may also be helping a seller get out of a bad situation and a buyer get into a good one if everything works out.
Susan, great post. Supposedly Lenders will now look at a short sale even if the buyer is not yet late, but anticipates that they will have trouble staying current i.e. job loss, medical reason etc. The borrower will need a solid hardship letter explaining the situation.
Susan these days it is hard to get a short sale approved because the lenders are really having a problem with the proposed sales price - but some lenders are up on the market value decline and short sale works smoothly. lol
Thank you ladies for your input. Each short sale is kinda like a child. Each one is different no matter how well you think you may "parent" them. I guess it is part of our job to stay optimistic, stay educated, and say a couple hail Mary's.
Ken: Thank you for the heads up. I think it is really important to have as much education as possible and then its still good to refresh you thinking. SM
SUSAN--You should also mention that every Realtor should make it mandatory for themselves to be present when the BPO is done. This is the time to explain your pricing and acutally do a small presentation for the person doing the BPO. It is often that I have been able to justify the pricing and contract at this time making the approval a much smoother endeavor.
Sidney: I don't think it should be "mandatory"! That's what sets the excellent agents above the rest! Personally I take the lockbox off and make showing instructions Appointment Only so that I know who is going in the house. I usually have a CMA ready to go for the appraiser or BPO agent. Matter of fact, I've been waiting for a couple calls this week......SM
Just goes to show how complicated this is. I have had sellers contact me that have not yet missed payments. This to me seems like a good time for the bank to work on a short sale before the seller is six months behind.
GENE-In that case what you should do is sit down with you client and see what the finances are like. If you can show the lender that the payments are being made but it is soon going to become unlikely they will be able to continue making the payments then the lender will usually accept a short sale even though there are no delinquent payments. It is very important that there are no accounts with large sums of money because will not qulify them for consideration of a short sale.
The lender is not going to take a hit on a mortgage, that as far as they know, is not in jeopardy of going into default. That needs to be shown to them first.
Sidney: Exactly, the client will have to prove to be "insolvent" or having more debt than assets, cash, stocks, etc.
Gene: Keep in mind that loan modification may be an option as well even before short sale too!
Thank you gentleman for the reminders. SM