Short Sale Fundamentals
What is a Short Sale?
A Short Sale is a sale of real property where the net proceeds from the sale are insufficient to satisfy the total of all mortgages/liens encumbering the property and where the seller does not contribute sufficient funds to satisfy said liens.
It would be prudent for a seller to obtain legal, credit and tax advice before committing to a short sale. Potential short sellers are advised that any action other than full payment of the mortgage note may result in serious negative credit and possibly tax consequences.
What are the basic steps involved in a Short Sale?
The fair market value of the property is less than the total of all mortgages and liens.
The seller is experiencing a valid hardship that makes it impossible or impractical to keep the property.
The seller is willing to cooperate with a real estate broker in order to effectuate the short sale.
The lender is willing to consider a short sale.
The property is listed with a licensed real estate broker and advertised in the local Multiple Listing Service (“MLS”).
A buyer makes an offer that is accepted by the seller.
The lender is provided with a short sale package consisting of certain information and documentation.
The lender approves the short sale and the transaction closes with no proceeds to the seller.
What are the details of each step in the Short Sale process?
The fair market value of the property is less than the total of all mortgages and liens. The lender will need to be convinced that there is no possibility that the property will sell for a price high enough to satisfy all of the mortgages and liens outstanding. Since buyers typically treat short sales as distressed properties, they usually yield prices below that of non-distressed properties.
The seller is experiencing a valid hardship that makes it impossible or impractical to keep the property. What is a valid hardship? Most lenders consider issues such as unemployment, reduction of income, job transfer, illness, death of a homeowner and natural disasters to be valid hardships. A decline in the value of a home is not a valid hardship.
The seller is willing to cooperate with a real estate broker in order to effectuate the short sale. The seller must be willing to provide certain financial information in a timely manner for delivery to the lender.
The lender is willing to consider a short sale. The lender’s loss mitigation department is contacted in order to determine whether a short sale is feasible. Additionally, a list of required documents is obtained from the lender. Should there be more than one mortgage, additional lenders will need to be contacted.
The property is listed with a licensed real estate broker and advertised in the local Multiple Listing Service (“MLS”). Ideally, the list price should be based on the fair market value of the property, not the unpaid balance of the mortgage. The price should be adjusted if there is insufficient interest from available buyers. The property should be aggressively marketed and listed in the local MLS.
A buyer makes an offer that is accepted by the seller. The buyer should be preapproved by a lender or be able to provide proof of funds to complete the transaction. The terms of the offer should not include any unusual contingencies or requests for credits to the buyer for repairs or closing costs. Once the offer is signed by both parties, the property is “in contract” and is contingent upon the lender’s approval.
The lender is provided with a short sale package consisting of certain information and documentation. A typical package consists of the following:
• Fully executed purchase contract.
• Real estate listing agreement.
• Buyer’s preapproval letter or evidence of funds to close, such as a bank statement.
• Preliminary HUD-1 Settlement Statement showing the net proceeds to the lender.
• Hardship letter describing the seller’s circumstances and why the lender should accept the short sale.
• Seller’s personal financial statement.
• Federal income tax returns for the last two years.
• Completed IRS Form 4506-T, “Request for Transcript of Tax Return.”
• Paystubs covering the last 30 days.
• Year-to-Date Income Statement /Profit and Loss Statement if self-employed.
• Bank statements covering the last two months.
• Comparative market analysis (CMA) with supporting sales data.
Once the short sale package is submitted, the loss mitigation department should be contacted on a regular basis to ensure that the process is moving forward. If the lender requests any additional information, it should be delivered promptly, otherwise the process may be delayed.
The lender approves the short sale and the transaction closes with no proceeds to the seller. The lender may:
• Not respond to the offer. If this occurs, contact the loss mitigation department and inquire as to why there was no response.
• Deny the offer and demand a higher amount of net proceeds or not indicate what amount would be acceptable. If a specific net amount is not specified, contact the lender’s negotiator and attempt to obtain this information. The lender may ask for the seller to contribute to any shortfall or to sign a promissory note as a condition of approving the short sale. If the seller is unable or unwilling to agree to the lender’s demands, the buyer may choose to pay the additional sums requested by the lender or simply terminate the purchase agreement.
• If the lender approves the offer, a payoff letter will be issued stating that the lender will accept a minimum amount of net proceeds no later than a certain date. Should the estimate of net proceeds shown on the preliminary HUD-1 Settlement Statement be inaccurate, the lender may demand that the seller and/or buyer pay the excess amounts in question. After the closing is complete, follow up to ensure that the lender issues a satisfaction of mortgage and that foreclosure proceedings, if any, have been set aside.
If you think your property is not worth the mortgage, please contact our office and we will be happy to help you. We work with top attorneys in Miami who specialize in facilitating and negotiating short sales. Should you have further questions regarding short sales, please call us at 1.305.336.0457 or email us at Lana@OneSothebysRealty.com.