Some Do's and Don'ts We've Learned About Short Selling Your Home.

First of all what is a short sale? A short sale is when you need to sell your home but it will not sell for what you owe the bank AND you do not have assets to cover the short fall. In the past we haven't faced this issue much as homes continued to appreciate. Now though we have had some declines in value and in addition many people have been lured into mortgages with very low payments that were not covering the interest owed so their loan principle balance has been going up while the value of the home has gone down.

In cases like this, if you were to sell the home for less than you owe on it - you would be expected to write a check for the difference at the closing table. Not surprisingly though, homes that were financed to 95 or even 100% of their value tend to be done by folks who would not have assets to put in at the time of purchase and certainly don't have them now that they are forced to sell for a loss. So what do you do?

Well one strategy is to work out with your lender or lenders an agreement to Short Sell the property. That means that you work NOT with the banks collections department but with the team at the bank known as "Loss Mitigation". If you provide the bank with an authorization your realtor can even call the bank(s) on your behalf to try to structure this deal. Some banks though will not have any discussion about selling for a loss while the loan is being paid on time so in fact you may need to be two or three months behind. Also you as a seller will have to prove to the bank that you do not have the personal assets to cover the shortfall - which is what they obviously would prefer. Most banks though would prefer a short sale to taking the house to foreclosure, because they tend to net a greater percentage of what is owed in a short sale.

For the seller why would you prefer a Short Sale to letting the home go to foreclosure? A couple very good reasons. First IF you can negotiate a short sale the banks actually file satisfactions of mortgage even though they did not get paid in full. Second - from a credit report perspective a short sale takes a much smaller "hit" on your credit report (about a 100 point hit vs as much as 250 for a foreclosure) AND it "washes" off the report MUCH sooner. Folks have been able to buy another home in as little as 24 months after a short sale.

Once you have had an initial conversation with your lenders regarding short sale you begin marketing the home, slowly reducing the price until you generate interest and offers. But in the case of a short sale any offer to purchase has to be approved not only by the sellers but by the lenders as well. It's important your realtor makes folks aware of this. This really will add a good chunk of time to the transaction. As I am writing this most lender's loss mitigation departments are BURIED and they give themselves 45 or even 60 days to evaluate the offer you have gotten. They will probably have a disinterested 3rd party do a statement of value to make sure they are getting something close to fair. Once they approve the offer then Buyer and Seller will be given some relatively short period of time (15-20 days) to do all the inspections and arrange any financing etc and get to a closing.

OK so for a seller, if the bank approves, it allows you to sell the property for less than you owe and not have to pay back the difference - so it's pretty clear what the seller's advantage is. But what about a buyer - what's in it for the buyer? Generally speaking, for those buyers patient enough to go through the process, they can get a very good value on a home that also tends to have less wear and tear than what happens to a house that goes to foreclosure and is gaveled down on the court house steps. Foreclosures take longer and in many cases seller and lender are not on amicable terms for the last 4-5 months and the property tends to be "let go" a lot more than a short sale. In our experience banks that can realize 65 to 75% of the value of their loan tend to be open to short sale and that can mean a very good value for the buyer.

What's the risk? First off for buyers they need to know, it DOES take longer and when they do get approval and have a home inspection they can expect that the sale will be AS-IS. Since the bank is losing money and the seller has no money you will not be able to come back after the inspection and ask for ANY repairs. So you need to factor that in to your offer. If upon inspection there is just TOO much work required, be sure your agent has written in a chance for you to get out of the contract and get your earnest money back.

For sellers they need to make sure that they speak with their accountant. There are some cases where the money written off by the bank has been declared "income" to the seller in the eyes of the IRS as most debt forgiveness is - and if the bank is sending you a 1099 for the charge off you could have a tax liability.

And lastly what's in it for the Realtors? Well they get to sell a property that might not have sold at all and they may also get their buyer a very good deal while getting their seller out of a very difficult circumstance. A couple words of warning for Realtors as well. First note that the bank will almost always reduce the commission earned. As a seller's agent you want to make sure in the MLS that you make buyers aware that it is a short sale, added time will be required to get any deal done, that the sale is AS IS and that the commission "split" is subject to adjustment by the lender. This last step is key so as not to create a situation where you've committed to share MORE commission than you will be paid. If everyone understands the ground rules going into the deal than there will be less problems going forward.

So is a short sale right for you? Each individual case is different but for many sellers AND buyers it may offer a real opportunity if managed properly. Be sure you use an agent who has DONE short sales - the cost of being the Guinea Pig while your agent learns this process could be dear.