Short Sale Basics
Like it or not the short sale has become a part of the real estate landscape. The two factors that are driving this market are; (1) many homeowners are hurting financially and are in the process or in danger of losing their homes to foreclosure. (2) Mortgage companies are not in the business of owning and selling homes and want to avoid the losses associated with the foreclosure process.The process:
What is a short sale? A short sale is an agreement from a mortgage holder to accept from a mortagee less than the principle owed on a home. When the homeowner takes out a mortgage, they make a promise to pay back a certain amount with interest. During a short sale the homeowner asks the bank to take less.
You may run across advertisements of homes that have words to the effect of “subject to short sale approval”. A short sale is a process that takes time and requires patience and acceptance of uncertainty.
- Homeowner needs to sell their home but the current market does not allow them to attract a buyer willing to pay a price high enough to pay both the costs associated with selling and the amounts owed to the bank.
- In order for a short sale to be a possibility the Seller must be able to prove their financial hardship. These people cannot have the money available to make up the shortfall. Having money in a retirement account or in a college savings plan will usually disqualify a Seller from a short sale. The bank wants to see the writing on the wall, if we can’t make this work we will have to foreclose.
- Once a need and a hardship are established the next step is to establish a price that will attract buyers.
- Once a prospective buyer makes an offer, subject to short sale approval, the process begins. A packet of information is prepared to send to the bank. The packet needs to include at least the following; the purchase offer, a HUD -1 showing where all of the money will go from the transaction, the letter stating hardship and financial records of the seller. Individual banks may require more information. A complete and neat package will insure that your situation is considered in a timely manner.
How much time will it take? The time required for an answer varies. The typical time it takes to receive an answer is 6-8 weeks. During this time the bank varifies all information and completes at least one appraisal. At the end of the wait the bank can approve, reject or send back a counterproposal.
So what happens if the bank approves the short sale? The buyer and seller proceed to closing as usual. The bank then has two options with concern to the shortfall. They can either issue a promissory note to be signed by the Seller stating they are responsible for the shortfall or they can issue a 1099. With the issuance of a 1099 the Seller would need to consider the shortfall income and pay taxes on that amount.
No two short sales are the same and you need experienced real estate professionals in order to help you successfully through the maze.