By Moe Bedard
If you find yourself in a difficult real estate situation where your home and loan is upside-down, don’t fret, a short sale might just be the answer to help cure your mortgage woes. In today’s market, it is imperative that you take a step back from all of the noise to reflect upon your situation. At each point in your financial history, you made decisions that you believed would best help you realize your goals. Because nobody has perfect foresight into their future income status, or the property market generally, it is only natural to re-evaluate your current debt situation when things change unexpectedly. One option for home owners is short sale negotiations, which may allow you to sell your home to satisfy the existing loan.
First and foremost, it’s important that you act as your own primary advocate in this situation – put your best foot forward because short sales only work when fully agreed to by both the borrower and the lender (your mortgage holder). Understand that, given today’s extraordinary market environment, even high profile individuals are often in a position where there is a gap between what they can afford and what they believed they could afford in the future. Take the case of well-known TV personality Ed McMahon: his Beverly Hills home faced foreclosure due to unexpected changes in property values, interest rates and his own personal income (see Business Week).
In order to satisfy the requirements of the home loan, Mr. McMahon has been working to reach an agreement with a 3rd party to clear a short sale to satisfy his mortgage. Like Mr. McMahon, you may find it initially difficult to find a market clearing transaction to satisfy your lender, but remember: just as hard work and persistence allowed you to afford a home in the first place, diligence can help you overcome obstacles to find the best way to address to your current home loan.
A short sale MUST be accepted by your current lender or servicer in order to proceed with the sale of your home. It is considered a privilege and not a right. So, with that said, one must be prepared to provide proof and evidence that they qualify and deserve a short sale by their lender. Getting a lender to approve a short sale is primarily a question of economics. You have to provide hard numbers to show that the amount of money a bank will realize on the short sale is better than the amount it may recoup from foreclosing on the property and selling the property.
Your short sale submission package should include:
1. Hardship Letter – explaining the circumstances that make it impossible for them to pay the full amount of the loan. The seller needs to be able to show true financial hardship. Someone with the assets or the income to pay is unlikely to be considered
2. Proof of employment or unemployment – W-2 forms from employers (or a letter explaining the seller is unemployed).
3. Proof of income – bank statements, two years of tax returns, and other financial documents outlining income and debt obligations. Most lenders will ask if you have an access to a retirement fund, investment fund, 401’s, stocks, and how much is accessible and why if these funds are not accessible has to be provided in a written statement.
4. Comparative Market Analysis or CMA, Broker Price Opinion or BPO (Mini appraisal). The bank will need comparable sales data or a broker’s price opinion showing the current estimated of value of your home. Be very thorough with your analysis with Closed and then Active listings. Closed comparable sales are of course what they are looking for above all, but if you cannot find any sold in the last 3 months in the exact same complex or street or block due to the sluggish market, be very detailed with your analysis and calculate by square footage, age, size, views, frontage and upgrades, amenities etc..
5. Listing Agreement or Proof of Listing and The Listing Agreement in a Short Sale: Any offer is contingent primarily upon the Lender’s approval and secondarily on the buyer’s acceptance. The Listing has to be executed and advertised on the Multiple Listing Service (MLS) prior to sending your package for short sale consideration to the Loss Mitigation Specialist.
Tip: In preparing the package, be careful about discrepancies between the seller’s income and the income used to obtain the loan. A big gap may indicate mortgage fraud, unless employment circumstances have drastically changed
Other Items you want to include in your short sale package:
- Cover Letter
- Authorization to Release Information
- 2 months bank statements
- Supporting Hardship Info – HOA liens, medical/disability statements etc.
- Repair Estimate for the Property
- Contract
- Net Sheet
- First mortgage holder may ask for a payoff amount from the 2nd
- Second mortgage holder may ask for a payoff amount from the 1st
- Lender may ask for an Initial Title Report
- FHA and VA may have their own forms and special requirements as well
Ultimately, a short sale can be understood as a negotiation to recognize a changed environment from when the loan was originally signed. Any offer to buy the property must be evaluated by the lender, who is in a favorable position of being able to determine whether to accept such an agreement. Because of this, it’s crucially important that you present your property in the best possible light, just as you would in selling your home directly. Never accept the least common denominator as the only solution to the issue. By working hard as an advocate for your own cause, you can make a solid case to the lender that a short sale might be in both parties’ best interest.
Negotiating Deficiency is Key When Attempting a Short Sale:
With a short sale, the lender has three possible ways to handle the deficiency balance, which is the portion of the mortgage debt not covered by the sale of the home. First, the lender can attempt to collect the deficiency balance from the seller after the property has closed. Second, the lender may require the seller to sign an unsecured promissory note for the deficiency balance as a condition of agreeing to the short sale. If the new note is for less than the balance of the original debt, the difference would be considered canceled, or forgiven, debt. Third, the lender may agree to cancel the entire deficiency balance. You must negotiate for the release of both the property lien and the underlying personal debt secured by the note. If you fail to do this, the lender may not forgive the personal debt and it will become a collection.
In short sales, just as in any negotiation, it’s important to put yourself in the lender’s position and try to understand their approach. The decision they make is based upon the opportunity cost of holding onto the property after foreclosure and then determining what to do with the asset. If they believe that the stated property value is low then it will make it more difficult to clear a short sale. Because of this, it’s important to present the property as a potential investment to other buyers, putting your value proposition at the center to generate the highest possible offer. The higher the offer, the more likely your bank will be open to accepting a short sale. It is wise to consult with an Attorney or Real Estate Agent who is familiar with short sale negotiation and has significant experience working with lenders. Keep in mind that Attorney’s fees or Realtor fees come out of the lender’s net proceeds; therefore, you should not have to pay out of your own pocket for an Attorney or Realtor to assist you with the transaction
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