Short Sales

Short Sale vs. Foreclosure

There are countless hardships that can turn home ownership from a joy into a burden. The loss of a job, medical bills, or an unexpected hike in monthly payments can all make a mortgage unaffordable. But ignoring the bills will not make them go away, it will only make them worse.

If a homeowner needs help, there are several approaches that can help. One of these is a Short Sale.

In an approved short sale, the lender agrees to accept less than is owed for the property, and the homeowner is relieved of the debt. A lender may be willing to do this because it spares a lot of hassle and expense involved in executing a foreclosure. And typically, a short sale does far less damage to the homeowner’s credit than a foreclosure does.

What Is and Is Not a Short Sale?

There are a lot of words being thrown around today that require clarification. These include short sales, pre-foreclosure, foreclosure, sub-prime loans, deficiency judgments and taxes on the debt or deficiency.

The information below defines these terms and explains ways to deal with financial distress through short sales. Also outlined are the real differences between short sales and foreclosures so that homeowners can see the true benefits of a short sale.

A bank-owned house, or a Foreclosure, is a not a short sale. A seller deciding to lower the price and take less profit is not a short sale. To have a short sale, one of the parties has to be “shorted;” either the seller or the bank, and for the owner to qualify, a number of criteria must be met (see below).

A “short sale” occurs when the homeowner gets an agreement from the mortgage company to accept less than the full balance of the loan at closing. The homeowner closes on the property and the property is “sold short.” This occurs prior to a property entering the foreclosure process.

How Does A Homeowner Qualify for a Short Sale?

There are four criteria a homeowner must meet to qualify for consideration by the lender for a short sale. These are:

  • There must be a demonstrable financial hardship, e.g., a lost job or material change in the financial situation
  • There must be a monthly shortfall
  • There must be insolvency, meaning that the owner does not have the money to pay down the mortgage
  • And the owners do not have the any assets to sell to pay for the shortfall

Top 7 Reasons to Short Sale

  1. You pay no out of pocket expenses. All short sales are sold as-is, meaning you won’t have to bother spending time and money on tedious home repairs. Your lender also pays for all commissions and services on both sides of the transaction, giving you the least hassle possible in moving on to your next home.
  2. Your credit damage is minimized. A short sale will have a recoverable impact of 80-100 points on one’s credit score, compared to the devastating effect of 250-350 points a foreclosure has on a credit score.
  3. You can buy another home in just two years. Fannie Mae Announcement 8-16 recently set the standard that homeowners who choose to short sale only have to wait two years before buying another home. Foreclose prevents you from owning a home for at least 5 years.
  4. You have an assured sense of relief. Short sales in lieu of loan modifications give homeowners a firm new start. The Department of the Treasury just released a study revealing that 55% of homeowners default again within six months of receiving a loan modification.
  5. You save money and pay less tax. The Mortgage Forgiveness Debt Relief Act of 2007 allows short sale homeowners to not be taxed on the difference between their loan amount and the short sale price. With a foreclosure, you will receive a 1099 for a home you don’t even own.
  6. You have a dignified solution to a difficult problem. A short sale allows you to stay in your home during the negotiation period. A foreclosure can become an embarrassing situation as a bank representative comes by to lock up the doors and windows, change the locks, and put up “bank owned” signs on your property while the local Sheriff is contacted to have you forcibly evicted.

You will have an easier time finding a nicer place to rent. If you choose to rent, a foreclosure and/or eviction are red flags for landlords that will make it very difficult for you to find a place to live in the future. However, while a short sale is being negotiated, homeowners have many more options and can easily select a new place to live at their leisure.

Not all Real Estate Agents are Short Sale Experts!

10 questions to ask your Real Estate Agent before you sign on the dotted line…

  1. Can my Real Estate Agent explain the short sale process to me?
    Answer:
    A qualified short sale Real Estate Agent can clearly and logically help evaluate your situation and explain in detail, the short sale process and create a strategy.
  2. How do I know if my property will qualify for a Short Sale?
    Answer:
    There are specific guidelines that your qualified short sale Real Estate Agent must know and understand so that your property can be accurately evaluated to address your specific situation.
  3. Does my Real Estate Agent know what information I will need to provide the Lender(s)?
    Answer:
    A qualified short sale Real Estate Agent will be able to ask the right questions and provide you with the appropriate paperwork to begin the process of creating a short sale package for the lending institution to review your current financial situation.
  4. Does my Real Estate Agent know what “hardship” categories qualify me as a short sale candidate with the lending institution?
    Answer:
    There are very specific categories that Lenders consider as “qualified hardships.” A short sale real estate specialist will be able to review your situation and inform you of the different types of hardships that most Lenders consider “acceptable”.
  5. Does my Real Estate Agent know how to create an effective short sale strategy?
    Answer:
    A short sale will only be accepted by the lending institution if both your property and you meet the lending institution’s guidelines. With the knowledge and expertise of your short sale Real Estate Agent, every effort will be made to ensure that you have all of the necessary elements documented to qualify for and complete the short sale.
  6. Does my Real Estate Agent have prior experience and specialize in working with homeowners and lending institutions to create a short sale transaction?
    Answer:
    This type of transaction has become a real estate niche. A short sale Real Estate Agent has specialized knowledge and understands the systems required to be successful. You will want to make sure that the Agent you have selected has previous experience and expertise.
  7. Does my Real Estate Agent know how to market my home since efficient timing is essential?
    Answer:
    Most realtors have similar tools for selling you home which include the Multiple Listing Service (MLS), company tours and caravans, open houses, market flyers and brochures. Again, because timing is so crucial, you will want your Real Estate Agent to know about advanced technological services and know how to apply them to the sale of your home. Specialty advertising may include: toll free hotlines, fax-on-demand marketing, and 24-hour access to information on your home.
  8. Does my Real Estate Agent know how to price my home effectively?
    Answer:
    Ask about the current market and how the market is affecting home sale prices. A short sale Real Estate Agent will be able to back up his/her assertions with solid proof by obtaining a comparative market analysis that includes three items: 1) the listing and selling prices for homes in your area; 2) a description of comparable homes and; 3) the length of time the homes have been on the market. This gathered information with give you confidence that your home’s proposed market value (selling price) is set at an accurate pricing range.
  9. Does my Real Estate Agent have a pricing/marketing campaign for 14/30/45 days?
    Answer:
    If your home isn’t seeing much interest by prospective buyers after 14 days, your Agent should promptly be able to provide you with a list of things being done on a regular basis to generate activity. Your Agent should be having regular communication with you on the status of your property vs. you having to continually request updates and make suggestions as to how to sell your home. Your must have a “proactive” Real Estate Agent with professionalism and expertise in this time sensitive short sale market.
  10. How do I know if I am really comfortable with the Real Estate Agent I am selecting?
    Answer:
    This is a great question to think about as a Seller. We have all had times where we made a decision due to pressure, but knew that it wasn’t the right choice. Ask yourself if you trust this Agent and more importantly, do you feel confident in the way this Agent conducts business? Ask for references so that you can be educated with the Agent’s skill level and expertise in selling your home as a short sale. You are dealing with a very emotional issue…selling your home. You need to make sure you are making good business decisions during this trying time.