Short Sales have been in the news for many months, but there must still be quite a bit of confusion about them because Darcy and I get asked more than once a week, what is a short sale? I guess the simplest answer is to say selling a property for less than is owed on that property, in other words you are “shorting” the mortgage company.
The next logical question would be can anyone do a Short Sale? The answer really does depend on the homeowner’s circumstances. Just because you’re upside down in the what the house is worth in today’s market compared to what you owe on it doesn’t mean that you will qualify for a Short Sale. You have to write a letter to the mortgage company proving that you’re in a hardship. That hardship can be financial or a need to move, for example a job transfer requires that you move to another city or state. Remember, the bank has to approve a short sale.
Are there any other requirements from the bank? Yes, they will probably want to look at your expenditures, your income statements and most likely your tax returns to justify any financial hardship. Additionally, they (the mortgage holder) will have to approve any purchase contract written on your property. What this means is that once they (the mortgage holder) gives you approval for a short sale and you put your house on the sales market; any offer that you get, the mortgage company has to agree to the purchase contract terms. The mortgage company may reject a contract that the seller approves, that is well within their right’s as the mortgage holder agreeing to accept less than is owed. They may also write a counter offer to the buyer. This level of contract approval is known as Third Party Approval.
Can Anyone Purchase my house as a short sale? No, it has to be an arms length transaction from the seller. What this means is that the seller cannot profit in any way from a short sale, nor can any their close relatives. For example, your brother cannot buy your house just because it’s a great deal. More so if you’re a real estate agent, most banks will not allow the agent to collect a commission on their own Short Sale, nor the Short Sale of an immediate family member. Other than that, yes, anyone else can buy your short sale.
Is There a Minimum Price that Mortgage Companies will Take? That is a tough question to answer, from my perspective, there appears to be no rhyme nor reason to the prices that mortgage companies accept. The reality is that it really depends on whether there was mortgage insurance on the mortgage. The trainings that I have done on Short Sales have taught us that if there is mortgage insurance and the mortgage company takes less than 63% of what is owed on the mortgage in a short sale, the mortgage insurance will not pay the mortgage company. So it is in the best interest of mortgage company to foreclose and even accept a lower offer after foreclosing on a property than they refused in a short sale. The mortgage insurance pays out after a foreclosure, so the amount that the mortgage company receives in foreclosed home doesn’t matter as much to the mortgage company because the mortgage insurance will make up the difference. The actual prices that they will accept depend on price evaluations done either by appraisers or profession real estate agent, based on comparable sales.
What Happens if there are Junior Liens (mortgages) on the Property? A junior lien is a 2nd, 3rd or what ever number of mortgage that you may have on your property. My experience has been when there is a a Junior Lien, the property will most likely go to foreclosure. Most of the banks or mortgage companies that are junior lien holders want to get paid, and they really don’t often work well with the primary mortgage holder to agree to accept what the primary mortgage company offers to pay them on their liens. Any lien holder can veto a Short Sale, which can make it very difficult to get a Short Sale completed.
If is called a Short Sale, does that mean that the deal closes more quickly? In short, NO! Sorry, the mortgage companies are getting a lot better. Many of them are getting deals closed in the same amount of time as a conventional sale. That is one of the good things that has been happening as things have gone along. We have seen some short sales take months to close.
Are there ramifications of a Short Sale? Yes, and you really need to discuss this with an attorney and or a CPA or tax accountant. I know that attorneys and accountants are expensive, but it the Short Sale process is something that is an evolving process. Changes happen quite frequently, and there are legal and tax ramifications that may vary from State to State. In all honesty, this may save you a lot of money in the long run, so it is a good investment.
If you have further questions you can give either Darcy or myself a call. We will answer it if we can!
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