Short Sales - What are they and do they work?

Pick up the newspaper or turn on the TV and you'll hear lots of talk about foreclosures and short sales.  Unfortunately, there's so much confusion and mis-information regarding short sales that I was compelled to become educated and make this an area of expertise to truly help homeowners in trouble.

What is a Short Sale?

If you owe more on your property than it's worth, but your lender agrees to accept a lower amount as payment in full.  This allows the lender to avoid the foreclosure process, saving them thousands of dollars and avoiding having real estate holdings that diminish their ability to lend money to others.

The most important thing to know as a homeowner is, if you've missed at least one payment, you must act and do something.  I cannot emphasize this enough.  It's human nature to feel embarrassed, ashamed and not want to confide in someone or seek help.  You need to know you're not alone, there are ways to minimize the damage to your credit, and help you (and your family, in many cases) move on with their lives, but this is a time-sensitive situation.

Can I, the homeowner, negotiate a Short Sale with my lender directly?

Unfortunately, no.  The banks require that a third party professional (a real estate agent) handle the transaction for you.  It's important to know that when you're behind in payments and call the bank, you're only talking to the credit or collections department.  These folks have no interest in helping you out of your situation, they are only there to extract more money from you.

How do I qualify for a Short Sale?

While each lender's criteria differs, the general qualifiations are:

1) Behind on payments
2) Legitimate hardship (job loss, medical condition/expenses, divorce, etc.)
3) Little to no equity (usually 8% or less)

I've heard that Short Sales are a waste of time, is that true?

Great question!  Personally, I'm pretty adamant about not showing Short Sales to potential buyers.  Why?  Because many listing agents do not know how to negotiate a short sale with the bank.  In their zeal to take a listing, they pick a number out of thin air (usually way too low) to attract potential buyers.  The problem is that Short Sales have specific criteria and unless you are working with an agent who is trained to submit the paperwork, in advance, and calculate the selling price correctly, the short sale will not work.  Most buyers in today's market are looking for their primary residence, and don't want to wait 8-10 weeks for a response from the bank, while they miss out on another opportunity.  Work with a Realtor who knows the right questions to ask the listing agent, to see if the listing price is realistic and the groundwork has been established with the lender.

It's also important to note that Short Sales are not a good opportunity for most investors as the ratios the banks work on don't leave the profit margin that investors look for.   A trained Short Sale agent will guide you through the process (as a seller) to minimize long response times by your lender, and help you move on with your life in a reasonable amount of time.

How much will a Short Sale cost me, as a homeowner?

There is no cost to sell your home as a Short Sale.  All fees including the Realtor's commissions are paid by the lender.  In order for a short sale to successfully be completed, you as the seller will walk away with $0.00.   The government has enacted "The Mortgage Forgiveness Debt Relief Act of 2007" which allows you to not pay taxes on the amount that your home was "short" in payment to your lender.  For the full language, please click here.

What about my credit?  Will I ever be able to buy a home again?

Having a short sale will effect your credit score, but less than a foreclosure will.  Usually, a short sale will reduce your credit score by 80-100 points, where a foreclosure will bring your score down 250-280 points, on average.  Many people are able to buy a home two years after a successful short sale.  In a foreclosure, you will usually have to wait 4 years before you can purchase again.

Why would a bank want to negotiate a Short Sale?  Wouldn't they just want to foreclose?

You ask really good questions.  It is very expensive for a bank to foreclose on a home.  Negotiating a Short Sale is a win-win for everyone, as the home is usually left in better condition and the process is much shorter.

Once a home is foreclosed upon by the bank, it usually costs the bank 25-30% of the loan value for the hard costs associated with re-selling the home, and that doesn't include the amount they lost on the loan for non-payment.  The bank is responsible for the maintenance, HOA dues, property taxes, insurance and repairs on the home.  In addition, the bank is penalized for every home they take back, as they must keep (on average) 5-6 times the value of the properties they have on their books.  This diminishes their ability to lend money to other individuals.

My friend/relative just became a Real Estate agent, and they want to do this for me.

That's great.  As long as you start the process with someone who knows how to handle the transaction, you've made a good decision.  Make sure to ask them if they know the steps in getting the short sale paperwork completed before they list your home in the MLS.  Do they know the difference between an FHA, VA and Conventional loan short sale?  Can they negotiate the sale when you have a first and a second loan to two different lenders?

If someone wants to list your home before the lender's paperwork is submitted, you may want to reconsider who you are using.  Short Sales are a science and have a logic all their own.  Again, it doesn't cost you a penny, so why not use someone trained to handle the process for you?

Do you have a question I haven't covered?

If you think you may qualify as a Short Sale, or have other questions/concerns I can answer, please feel free to call me for a confidential interview over the phone.  There is no need to be embarrassed and time is of the essence.  Once you miss a payment on your home the clock starts ticking, and it's like a time bomb.  It will go off, and you will not be in control.  I can be reached any time at 702-301-4878.

Here's another resource to avoid foreclosure,

Stop Foreclosure On Your Home

Don't get scammed by someone who says they can help you when they can't, watch this video:

Foreclosure Scam (English) - Click HERE

Foreclosure Scam (Spanish) - Click HERE