What Everyone Needs to Know About Short Sales
By DOUGLAS G. FRANK, Staff Writer
This is the first part in an exclusive two-part series on the short sale process. This first part has valuable information for homeowners interested in short-selling their property. Check back next Thursday for part two, where I will cover what to look for when buying a short sale.
If you haven’t heard about short sales yet, then you have most likely been living under a rock for the past five years. But it’s okay. I’m guilty too.
Well, not guilty in the ignorant sense. But I did ignore short sales for the first few years for a number of reasons that are still relevant today, and I will go over that briefly. What changed, you might ask? Well, I realized that two-thirds of the properties going on the market were distressed properties (i.e. foreclosures or short sales), and that I was closing myself out of that much of an active marketplace, so I quickly changed my ways.
But I vowed to do it right. Mainly, I didn’t want to get sued down the road. But believe it or not, I also believe that in a majority of cases, it is the right thing for the homeowner.
Short sale properties are properties on the market that will sell for less than the homeowner owes on the mortgage(s). When you foreclose on a property, or any loan for that matter, you give the lender the right to repossess your property in lieu of payments. However, when you short sell, you settle the mortgage for the sales price of the property. The bank takes its own steps to make sure the sell price is current market value, so a settlement is usually reached.
When you settle, it doesn’t show up on your credit report as a foreclosure, it just says “paid in full as settled”. A settlement is a significantly less severe ding on your credit than a foreclosure. But, you will still have to wait a few years before getting another mortgage.
The “catch”, which kept me from pursuing short sales from 2008-2010, was that many states did not have separate law for recourse in collecting the deficient balance in a short sale. In the state that I work in, there is a “Non-Recourse” law on the books for foreclosures specifically, but short sales fell under the thumb of “secured debt”. That means, by law, a lender can come after you for the remainder balance of the debt for up to 6 years. If I wasn’t aware of that, and I was blindly peddling short sales, I could be accused of negligence and fraud. Enter lawsuit.
Well, a lot of things changed over the first couple of years. The federal government introduced 2 measures aimed at distressed properties. First, the Mortgage Forgiveness Debt Relief Act was introduced to keep people from being financially responsible for paying taxes on income received from the forgiveness of debt on a residence. When you foreclose or settle a debt, the amount (or difference in a short sale) gets written off and reported to the IRS as income to you. Then you’ll get a 1099 in the mail for $100,000+, making you shit bricks instantly and frantically call whatever tax/CPA/financially-smarter-than-you friend freaking out. Thanks to this relief act, these poor souls don’t have to pay a dime in taxes, as long as certain criteria are met.
Second, Congress introduced the Making Home Affordable program, which has several programs to help distressed homeowners. One of them is called HAFA – Home Affordable Foreclosure Alternatives – program. Under HAFA, any homeowner who meets the criteria can get a guarantee from the government from lenders collecting on the deficient balance of a short sale, and even pocket $3000 for moving costs and other expenses. The criteria includes having 1 or 2 non government mortgages which must have been used for purchase money only, a clear, demonstrated hardship, and other smaller criteria.
Homeowners interested in seeing if they qualify for a HAFA program could call their lender or local Short Sale Specialist.
It is important when deciding to short sell your home that you have all your facts in order. Real Estate Agents are not lawyers, and are not qualified to give financial advice. I highly suggest you contact a lawyer first if you are facing foreclosure or a short sale. A lawyer would be able to review all your options, and give you the best advice for your situation.
A few warnings, because, as you know, in the end I have to be a cynic:
First, check out your Real Estate Agent. He or she may have “Short Sale Specialist” printed next to their name, but that doesn’t mean they know what they are doing. Ask who will be doing the negotiations on your behalf. Ask how many short sales they negotiate on a regular basis. Watch out for any “up-front fees”. There should be NONE. In a short sale, the agent gets his commission paid by the lender.
Also, here’s a shout out for the new guys: Everybody needs a start sometime. If you have an agent who is very knowledgeable but has very little experience in short sales, it is up to you whether or not to use them. But rest assured, your short sale may be the only thing they are working on at the moment, so you can be sure your transaction will get their utmost attention. Just make sure they are either partnered with or using someone, such as a lawyer or a title company, to negotiate with the bank.
The agent should present you with a list of paperwork needed to process your short sale. If they do not do this, this is a major red flag. Getting all of your paperwork up front is essential to completing a timely short sale. If they don’t do this, be ready for a lot of back and forth, endless calls and requests from your agent, and a short sale that could take up to 6 months.
Finally I’ll leave you with this. The major danger of a short sale is that SHORT SALES DO NOT STOP A FORCLOSURE UNTIL THE SHORT SALE CLOSES. Many people have been under contract thinking that they are about to get a deal done, only to find that the auction came and went and the bank now owns the property. The collection departments never, ever, ever talk to the short sale departments, without a reason to. It is up to a skilled negotiator to make sure all parties are informed, and that foreclosure is negated. And there is never a guarantee that a home will sell, making a foreclosure inevitable anyway. So please choose your options carefully.
Next time I will discuss the buying side of a short sale process, and the many headaches involved.
And that’s my giving a damn.
Douglas is a concerned citizen, and practices real estate in the Southwestern region of the United States.
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