Listing a short sale is a difficult step to take so it’s best to have all the information to make sure that it’s even possible (or advisable) for your situation. Here’s a run down of what may take.
What is a Short Sale?
The short answer, no pun intended, is that a short sale is the sale of real estate where the owner owes more to the bank than the property is worth. Thus, the owner is shorting the bank upon sale.
Selling a Home Short
A homeowner can’t just up and decide to sell a home for less than the bank is owed on it. Lenders, and investors in mortgages, don’t take kindly to getting stiffed for tens of thousands of dollars. So how does one go about trying to sell a home that’s worth less than the debt to the bank?
Prove an inability to make payments
You will to have to prove to the lender that you can no longer make the payments. The bank will require you to submit financial statements that demonstrate inability can not pay the mortgage. Not just that you don’t want or like making payments on a house that isn’t worth what what you paid for it – but that you can’t make the payments.
Provide a reason for the hardship
Let’s say for the sake of argument that Joe has a legitimate hardship – lost job, medical expenses out of control, something along those lines. Depending on his lender (or lenders), he may or may not have to actually get an offer on his home before the lender will take a serious look at approving him for a short sale. Unfortunately, there is no standardized short sale approval process – it varies from lender to lender and sometimes even within the same lending institution.
Prove the property is worth less than owed
The bank will need a professional to show that the house isn’t worth the indebted amount. They will not take the homeowner’s word for it. The best method to accomplish this would be to have a trained real estate agent provide a CMA and then list the property at a true market value and wait for a buyer or to establish a market history.
Consult a real estate professional for help in listing your home for a short sale. And make it an agent experienced in short sales. It is also not a bad idea to consult a tax professional, and quite possibly an attorney. It’s not a good idea to attempt to go “For Sale By Owner” on a short sale. There’s no point in that, given that you won’t pocket a nickel on a short sale. Your agent, while working for you, will be paid for their services by the lender.
Allow the lender to decide
Let’s say your lender has indicated they may be receptive to a short sale. Yes, it really is up to them. They are the ones after all that will be taking the loss. They will have to approve any short sale offer that comes across the table. Once your house is listed and you receive an offer it will need to be presented to the lender for final approval (where you will need to provide all the above documentation again) and then it goes through a more standard closing transaction scenario.
A Short Sale Example
Let’s say Joe Homeowner bought a home in 2009 for $300,000. He put 20% down, which amounts to $60,000, and he got a mortgage for the other $240,000. So Joe owes the bank $240,000. (Yes, he’s paid down some of that $240K principal in the five years he’s owned the home, but not much. For the sake of simplicity, let’s just say he owes $240K).
Now Joe wants to sell his home. So he calls his trusty real estate professional who tells Joe that his home will probably sell for $200,000.
But wait, Joe owes the bank $240,000. How can he sell his home for $200,000?
Well, he could sell the home for $200K, and write the bank a check for the other $40K. This probably won’t sit well with Joe, but it is an option (assuming he has 40 grand lying around).
Or, he could sell his home short – sell it for less than he owes to the lender.
The lender however, won’t like this.
They will ask for Joe’s bank statements, proof of hardship, expense and expense statements, and verification of intent as well as a market analysis. Once they agree to the short sale Joe will need to get his property listed.
When an offer is presented to Joe he signs the offer and agrees to sell (with an addendum stating the bank must also agree). Then Joe’s agent will present this offer to the bank. Along with the offer the bank will require Joe to submit updated documents (bank statements, income and expense statement, etc) before they approve the offer.
Upon the bank providing a letter of short sale acceptance (which will come with its terms) the sale will move on to closing as would a typical transaction.
Get help with Short Sales
Please don’t try to take a short cut on short sales. Get professional help. If you, or someone you know, is considering this process, get in touch with Calibre Real Estate. We are trained and have extensive experience in negotiating residential short sale transactions.