You may be one of many local homeowners owning a home or rental property which has declined in market value to such an extent that the current market value is much less than your mortgage debt on the property. You are “under water,” or “upside down.”
We can help. Let us explain how.
The price collapse in the housing market caused by the bursting of the speculative bubble that grew from easy money, loose lending practices, overbuilding, and years of rampant speculation is causing homeowners like you, lenders, and mortgage insurers to suffer billions of dollars in losses.
The lenders themselves, and the “lender / insurer of last resort”—Uncle Sam, are now cutting their losses.
Among other efforts aimed at reducing losses, “Short Sales” are being encouraged.
Perhaps you should cut your losses too!
You may benefit from restructuring your situation by doing a short sale. Frankly, on both individual and national levels, recognition of the negative equity and matching indebtedness to fair market value is part of what’s needed to rationalize the credit and housing markets.
Foreclosure is a disaster for everyone, homeowner and lender alike. There is no sense going to foreclosure when your property could be sold. If you are facing foreclosure or behind on your mortgage, it usually makes sense for you to get the property sold. This will allow you to restructure and hopefully get out of the precarious situation.
You may benefit from taking immediate and sensible action to keep your situation from deteriorating to an unmanageable level. You don’t want that to happen and your lender does not want that to happen either. It is far more costly for both borrower and mortgage company when you've reached the point where you are financially unable to meet your obligations.
Most folks think that they cannot sell a property on which they owe more than the property would net at sale. That is not true. You can, and perhaps should, sell the property.
The term “Short Sale” is used to describe a sale where the debt owed against a property combined with the costs of its sale exceeds the property’s market value. Upon sale, the lender accepts net proceeds of sale as full and final settlement of the mortgage, and releases its lien. The amount of debt in excess of proceeds from sale is called the “Deficiency.”
Another type of Short Sale is called a “Short Payoff.” In a Short Payoff, the lender accepts proceeds of sale, and releases its lien, but the Homeowner pays some or all of the Deficiency under lenient terms and goes forward with a greatly reduced and modified debt.
When the necessity for doing a Short Sale has been precipitated by a “Hardship,” such as death, job loss, divorce, relocation, medical problems, etc. and you are financially unable to pay the “Deficiency,” your lender generally forgives or “cancels” the remaining debt not satisfied by the sale.
It is a business decision. Your lender looks carefully at your financial position. If your situation has become dire, you are months behind, have little or no money or assets, and no immediate likelihood of a change for the better, the lender has little to gain by asking you to pay the deficiency.
When you do have assets and income, but still need to restructure for simple prudency’s sake—where YOU are making a business decision, the lender is likely to ask you to pay some or all of the deficiency. But, if this is the case, the terms for doing so will usually be very lenient, and you’ll have a much smaller debt going forward. (You get a write off versus the debt, too—see your Tax Adviser.)
Some homeowners who wish to do Short Sales are very sensitive about their personal credit. They may be Federal Agents, work for Government Contractors, have Security Clearances, or for whatever reason wish to maintain pristine credit.
A Short Payoff has no negative impact on one’s credit file.
An important consideration in a Short Sale is whether your mortgage is "recourse" or "nonrecourse." Most mortgages used to purchase a residence are nonrecourse, secured only by the home.
But mortgages from refinancing a previous mortgage, most second mortgages, and Home Equity Lines (HELOCs) are usually recourse. If a debt is "recourse," you are personally liable for the debt. If the debt is "nonrecourse," the debt is only secured by the property, and you are not personally liable for the balance.
Whether debt is recourse or nonrecourse, the decision a lender makes in pursuing payment is always a business decision based on the circumstances of the case. The lender will typically allow the sale of the house. Then the lender will make a decision about how to handle the Deficiency.
Short Sales do close. It takes longer than a normal real estate sale because the lender must examine the borrower’s financial position, assure that the property (its collateral) is being sold at fair market value, and account internally to its Management, its Investors, Mortgage Insurers, and Regulators. Additionally, with the depressed market, the case load handled by the lender’s personnel—its “Loss Mitigators,” is quite large.
In doing a short sale, when the debt is cancelled, the cancelled amount becomes ordinary income to you, but “The Mortgage Forgiveness Debt Relief Act of 2007” keeps you from having to pay taxes if the sale is of your personal residence.
If you’re an investor, you’ll likely not pay taxes if your debts exceed your assets and you are therefore “technically insolvent.” If you’ve realized a loss on the property, you may also be entitled to deduct it under "Code Section 1231" (We’re Realtors, not Tax Advisers, so see your Tax Professional on these questions.)
Short Sales are precipitated by hardship. “Hardship” is an event or series of events that are generally beyond your control and that resulted in a reduction in your income and/or increase in your expenses. From the lender’s point of view, it is not simply that the property’s market value has declined. Typical hardships are job loss or transfer, decline in income from employment or self-employment because of market changes, medical problems, divorce, death, etc. The lender wants an explanation of what happened. This is referred to as a “Hardship Letter.” It should be a brief, to the point, narration of the facts. Also, keep in mind that you are asking them for a favor. Plead your case and ask them to graciously to consider your property for a short sale. The Loss Mitigators reading these files are busy and overloaded, so simplicity and brevity in all matters are critical to your success.
If you choose to do a Short Sale, we ask that you formally list the property with us here at RE/MAX Heartland by signing an Exclusive Right to Sell Agreement.
We will price your home based on analysis of recently completed Sales of Comparable Properties in your neighborhood. Pricing will reflect the fact that your property is a “Distress Sale.” It’s being sold “Short” on the mortgage. It is aggressive liquidation at just below true “Fair Market Value” for sale within thirty days. Your property must compete with other distress sales like foreclosures on basis of price, even though it may be in much better condition.
That better condition makes your property very attractive, even though your buyer must wait much longer to close. Buyers want “Move-in Ready” property. It is also better if you move out. Vacant properties are much easier to sell.
Our exclusive right to sell listing agreement addresses how much the sales commission will be and the standard part states that you will be obligated to pay us a commission in the event we are successful in bringing about the sale of your home.
However, in your situation you will also have a “Short Sale Addendum” that further modifies our agreement.
The Short Sale Addendum is necessitated because the amount owed on the property exceeds the “net” amount that we can reasonably expect to generate after the payment of all closing costs and sales commissions. You won’t receive any money from the sale. You owe more than the property is worth, so you cannot pay commissions.
Any contract offers will be submitted to you for your approval and upon your approval they will be submitted to your lender. Your lender must approve the total transaction, including all sales commissions and other closing costs to be paid. Our commission will be reflected on the final settlement statement as approved by your lender. The Buyer is bringing money to the closing table to buy your property. All costs are paid from those funds. There may be instances when our total commission as approved by your lender is less than originally stated in the listing agreement. In such an instance, we will not hold you responsible for any difference.
“Your lender must approve the total transaction, including all sales commissions and other closing costs to be paid.” Although you are the “Seller,” because of the circumstances surrounding a Short Sale, the lender typically pays all costs. If you’re seriously behind on HOA dues, or Property Taxes and you have the means, the lender will expect you to pay those. All liens against the property must be cleared. If you lack the means, the lender will pay everything. So the “Costs” of doing a Short Sale are minimal. (The costs of NOT doing one might be enormous!)
RE/MAX Heartland operates in the Greater Kansas City Area and many of it's outlying suburban regions. We hold valid state licenses and are members of the local Board of Realtors.
We list the property with the local M.L.S. (Multiple Listing Service) insuring that your property has fair exposure to all potential buyers/investors. That listing contains phrases such as “Subject to Potential Short Sale” and “Subject to Third Party (Your Bank) Approval.” Such required phraseology makes it clear that the loan is being settled for less than is owed, and that a longer settlement period is warranted.
Any sales contract / purchase agreement entered into must state that the purchase price is contingent upon lender’s written approval (“Third Party Approval”) of a short sale if there will not be sufficient funds to pay the lien on the secured property in full. This is required by our regulations and local rules.
NEGOTIATION WITH YOUR LENDER:
If your mortgage is in default, collection activities, including foreclosure proceedings will most likely continue until you receive an offer and we submit your “Short Sale Package” to the lender. We often stop foreclosure by submitting an offer with your package. But, we need time. It’s very difficult at the last moment to stop foreclosure.
Time is of the utmost essence in handling all aspects of communication and documentation.
Be DECISIVE. Start with the end in mind. You are restructuring a debt.
You either have a real hardship, or you don't. If you have a real hardship, and do not have the means to pay the "Deficiency," the difference between what is owed and net proceeds from the sale, it is probable that the lender will cancel the entire debt and forgive the deficiency.
If you do have the ability to pay the deficiency as evidenced by your financial information form, i.e. you have a solid income and some assets, it is likely that the lender is going to require that you pay some or all of the deficiency. It may require you to sign an unsecured note, on very lenient terms for the short amount.
Many folks immediately think "My goodness, I'll no longer have the house, but I'll still have 20%-35% of the original debt! Why would I do that?" Well, if you went through foreclosure, the lender could still seek collection of the deficiency, and the same is true in a short sale. This is particularly the case with second mortgages, HELOCS, and refinanced first mortgages. They are recourse notes.
So you must decide whether, or not, you want to hold on to the big debt and the depreciating asset and continue to struggle, or get rid of the depreciating asset and the struggle while accepting that things didn’t work out along with a much reduced completely unsecured debt on lenient
terms and probably a very low interest rate.
It's important to understand this up front and not wait until you're in the final stages of negotiation, when your buyer has been waiting two months, and everyone has expended a lot of effort on your behalf.
You signed a contract to pay a debt that was used by you to purchase an asset. It so happens that the market has turned against you and that asset has depreciated. It is very likely going to depreciate more for the next couple of years. When you have an $1800 per month mortgage that you're having trouble paying, and reduce the payment to $400 per month at zero percent over 15 years by signing an unsecured note, you are in a much better financial position. And that is far less painful than incurring the damage inflicted by foreclosure, continued depreciation and living in hope of a market turnaround.
Negotiating a Short Sale is an art requiring utmost patience. We need to "set the stage" right up front. What is our goal in this transaction? What is possible? We're going to tell the Lender in our cover letter exactly what we want to accomplish. So we need to be very clear on what your situation is currently and what outcome you seek.
With all due respect, the lenders are for good reasons and bad ones, very bureaucratic. They do not return calls or respond to faxes in a timely manner. They are insistent, even in the direst circumstances, upon use of their forms and procedures, even when it is clearly not in their best interest, or yours. They lose files. Their personnel turn over frequently. Sometimes it's necessary to start completely over.
Since it is necessary to have a written bona fide Offer to Purchase in order to submit a completed “Short Sale Package” to initiate the Short Sale process, we sometimes submit an Investor Offer right away to expedite the process. Such an offer may be necessary in particular to bring about delay or stoppage of the foreclosure process. Investor Offers are “wholesale” offers. The Investor is hoping to get the lender to sell below market value. This seldom happens. But if it does, your Investor can re-sell to another buyer at a profit.
Our communication with your Lender / Servicer is fully authorized to cover marketing activities for the property and the terms and conditions of the Sales Contract, as well as all aspects of your financial situation. All of your personal financial information is held in strictest confidence except in communication with your Lender. The fact that you are doing a disclosed short sale does make it a material fact that will affect the timeliness of the sale (ex. Closing Date & Possession Date). It would be totally unfair to potential buyers and Buyer Representatives not to give this disclosure up front due to the many uncertainties of a short sale transaction.
We are responsible for informing the selling Real Estate Agent and your buyer about how the short sale is progressing. Communication is critical to keeping your buyer in place through the process to a successful closing.
Any Short Sale will be reported by the Lender to the IRS as may be required by IRS regulations. You must consult with your tax advisor regarding any tax implications of a short sale transaction. We cannot give legal or tax advice.
The “Short Sale Package” (which we will submit to your Lender(s) / Servicer) includes all documents typically requested from you as Borrower and from us as the listing Real Estate Agents and your representatives. Frequently, the lender requests the same information, but on their form. The lender also requests “updates” of such items as bank statements and pay stubs month by month.
Required Documents: (Your “checklist”)
SALE OF THE PROPERTY:
Once we receive an offer, it is sent to you for “ratification,” your signature approving the offer. Any additional offers received are “backup” offers. The MLS listing is changed to “Contract Pending” with a “Kick Out” contingency—i.e. financing, home inspection, appraisal, etc. Additional offers are still welcome. We submit the entire package to your lender(s.)
The lender typically orders a “second opinion” Appraisal or Broker Price Opinion (BPO) in two weeks to thirty days. Once received, they compare it to the sales price to assure that they’re receiving a “fair market value” sale. They may counter offer at a higher price. If they do, we now know exactly what they’ll accept. If you have several offers, all are given opportunity to submit their “Highest and Best” offer. Once a price is agreed upon, you and your buyer proceed to settlement. Since your not receiving any money back at closing, you will most likely simply endorse paperwork.
IN THE MEANTIME, WHAT SHOULD YOU DO?
Move on with your life. You are restructuring. You are de-leveraging. You are settling a loan and restructuring a debt that was too large—so large that it was ruining you financially. You will no longer be obligated to pay that big mortgage. You should move. Your house will show better if it’s vacant anyway. You can at least begin to move. (We may get an offer before you have time to move!) You will be in position to reduce your housing costs by a third or one half.
If you have tenants, or roommates - they MUST move. You must handle this matter. We cannot do it effectively. We have no control over your tenants. We have found that tenants have no incentive to be cooperative with your desire to sell your home. They don't wish to help you at all. They will make it inconvenient to show the property. They'll leave the property disorganized, messy and dirty. Just let them know that their lease is terminated in foreclosure, and that it is better for all concerned that they make arrangements to find a new home.
You can pay down or off the credit cards and other bills. You can get back on your feet. That’s what this all about. This housing market is probably going to be depressed for several years.
You will have time to recover financially. Your credit will NOT be majorly damaged. You will be in position to buy your next home for half what you paid for the home you short sold, if you wish. You will be eligible for a government-backed mortgage twenty-four months after the close of your short sale.
You’ll be a much wiser buyer and in a much stronger position.
At that time, it would be our honor and privilege to serve as your “Buyer’s Representatives” in purchasing your next home. You will have emerged a Winner!
It is our privilege to serve you now, and we deeply appreciate the opportunity and your business. Thank you and very best luck!
Anita Covert, John Covert Jr., Nita Criswell, Dixie King, & Annette Davis
REO & Short Sale Specialist Group
Anita Covert Team
Office (816) 285-8805
14500 E. 42nd St., Suite 100
Independence, MO 64055
Licensed in the State of Missouri