Some comments on Short Sales

If you want to sell real estate that you own, just contact me and I will get it on the market and get it sold.  That is clean and straightforward. It’s the traditional scenario for selling property.

However, this is anything but a traditional market right now. Many people are learning that they owe more on their mortgages than their houses are worth presently. This is referred to as being “upside down” or “underwater”.  As reported in the last posting, it is estimated that 56% of Polk County home mortgages were underwater at the end of the second quarter.

If you are seriously behind in your mortgage payment, one option is foreclosure, which I discussed in the previous post. Let the bank take it back.

A second option is a “short sale”.  In a short sale, the lender on the house being sold agrees to take less than is owed. This avoids the time and great expense (to the lender) of having to take the property through foreclosure, then re-sell it on the open market. I’ve read that it costs a lender an average of $58,000 to foreclose on a property, so you can see how expensive that process it. Plus, since the mortgage was underwater, there is no doubt that there will be a loss when it finally sells. So add the amount of the loss upon sale and the $58,000 foreclosure expense together and you have a fairly good guess as to the total loss to the lender. You would think a lender would like to avoid this, if it is possible. You would think that if the lender is presented with a reasonable short sale opportunity, the lender would leap at it.

You would be wrong, unfortunately. Most do not. In fact, most do their best to thwart a short sale. Please, do not send a comment and ask why!! Because there is no answer. They work counter to their best interests. Ask any Realtor you know and he or she will tell you story after story of cases they know in which the lender was offered a short sale at a price but refused and foreclosed instead. Then, many months later, the house sold for a lot less, sometimes in the range of more than $100,000 less. In fact, I know of one that is happening right now where the mortgage and fees totalled more than $285,000;  the final sale price is $119,900. I can document that fact.

Clearly, may lienholders often work against their own best interests. They are in control of a process that has few clear and well-established procedures. Probably only about 1 in 4 attempted short sales actually go through to completion.

As with anything, there are advantages and disadvantages to a short sale:

Advantage to Seller –  Your credit is dented but not nearly as much as having a foreclosure.  You can buy another home sooner.  Once approved, you’ll have a good idea of when closing and change of possession will occur.

Paperwork – The paperwork varies, and any omission can create lengthy delays.  Convincing evidence of the current market value should be included, plus evidence to convince the lender that if they don’t approve it, foreclosure is certain.  The buyer needs to provide a pre-approval letter so the lender knows that there is a high likelihood that if they agree to this sale, it has a good chance of actually going through.

Getting Approval – That can take one to two months.  One problem is that the lien holder may be Fannie Mae, but the loan may be serviced by Chase or Bank of America. You have to deal with their loan mitigation department, who in turn deals with Fannie Mae’s representatives.  The staff in the loan mitigation departments are typically overworked and under trained, and they are not inclined to return phone calls. They often lose the paperwork you have supplied — even more than once. It has been reported that Fannie Mae will not approve a short sale unless you are actually behind in your payments.

Contract Conditioned upon Approval of Short Sale – From the buyer’s standpoint, the lienholder’s approval is conditional and the contract is conditioned upon that fact.  This enables the lienholder to approve a higher offer right up to closing.  So the buyer may spend money on inspections and other things, wait months for approval only to lose the deal at the last minute to a higher bidder.

Possible Income Tax on Amount Forgiven - After closing the seller will probably get a 1099 form showing what is called “cancellation of debt income”.  However, if the property was your primary residence or if you are what the IRS calls “technically insolvent”, you are exempt from paying income tax on this “income”.  Check this with your tax advisor or click on http://www.irs.gov/individuals/article/0,,id=179414,00.html.

The Coldwell Banker affiliate, Sunbelt Title Service, has established a help service to aid CB Realtors and their clients with completing short sales.  They provide assistance to the Realtor  in cases of non-responsiveness from servicers, or where the mortgage insurer or second lienholder has imposed a closing condition not possible for the borrower to meet. The Mid-Florida Regional Multiple Listing Service has also established a short sale help desk. The fact that these two large real estate service organizations are offering this service pro-activly position underscores the severity of the problem.

The new government’s HAFA program was intended to solve some of these problems.  I will discuss this program in more detail in a subsequent post.

And, please, watch out for the scams.  A scammer will tell you that you don’t need a Realtor, you can do it yourself, you can sell your house over one weekend, you don’t care at what price since it is the bank’s loss, not yours, etc., etc., etc.  All you have to do is buy their video.  Oh yes, and perhaps pay them a few thousand dollars to handle the negotiations with the bank.  A word to the wise: DO NOT BELIEVE IT!

If only it were as simple as the scammers make it sound. You absolutely need professionals who are skilled in this area on your side as you slog through this quagmire.

Call me. I can help, and I have other resources at my disposal. You should not try this alone.