Short Sale 101

What is a Short Sale?

In the world of Real Estate, a short sale refers to the sale of real property for an amount less than the amount owed on the property. In the short sale scenario, the bank agrees to accept less than the full balance due on the debt, and usually “forgives” all or a large portion of the difference.

How will the Short Sale affect my credit?

Short Sales are still a relatively new concept. Banks have the option of submitting the short sale to the credit bureau as “Paid in Full” or “Settled for less than full balance”. As far as your credit score is concerned, the credit score decrease depends on a number of factors that vary from person to person – credit history, status of other debt payments, current credit score, etc. Some have the idea that this is like a bankruptcy or a foreclosure but that's far from the truth! Instead of focusing on the score impact, we instead like to look at the seller’s ability to repurchase in the future. We have had clients purchase homes in as little as 2 years post short sale. Generally, when foreclosure occurs, this time frame increases to a minimum of 5 years.

If you are currently behind on your mortgage or facing foreclosure, the short sale can actually help your credit! How? Because once you are approved for the short sale, all collection activity will STOP and you will avoid foreclosure!

Who benefits from the Short Sale?

Short sales are a win-win situation. Mortgagors (Lenders), Mortgagees and Realtors all benefit from the successful short sale. Mortgagors get the majority of their money back, Mortgagees get the financial relief they need and are able to sell their property and avoid foreclosure and Realtors can facilitate the transaction and receive compensation (commission) from the Mortgagor upon sale of the property.

Why would banks forgive the difference?

To mitigate their losses, banks often accept a settlement of less than what is owed on the property. When faced with the option of getting the property ‘back’ through foreclosure, a short sale is often a much wiser business decision for the bank.

This sounds too good to be true!

Not really. Things that are “too good to be true” usually don’t make good economic sense. The short sale makes good common and financial sense for the banks who grant them. The fact of the matter is, mortgage companies and banks are NOT in the real estate business. They are in the LENDING business. The last thing they want is that property back.

Can FHA, Conventional or VA loans receive a short sale?

Yes! We have successfully negotiated short sales for each of these loan types.

Why does my property have negative equity?

Here are a few common reasons:

What is Negative Equity?

Also known as being "upside down" negative equity is the difference between the value of a property and the outstanding portion of the loan taken out to pay for that property, when the latter exceeds the former. For example, if your home is worth $100,000 and you owe $150,000 on it, you would have negative equity of $50,000. Negative equity can result from a decline in the value of an asset after it is purchased.

What if I owe what my home is worth?

Even if you owe exactly what your home is worth, you may still need to do a short sale in order to pay for the costs of the sale (Realtor fees, Title Policy and other seller closing costs).

Why not just let my lender foreclose?

NO! What is the first thing banks do when they foreclose on a property? Hand it over to a real estate agent to get rid of it quick! The foreclosure process is a legal process. It involves attorneys and it costs MONEY. Once the bank gets the property back via foreclosure it must often sell it for MUCH LESS than market value PLUS pay attorney fees, realtor commissions and closing costs. It makes more sense for the bank to sell it short instead of foreclosing?

What's worse is even when banks take properties back via foreclosure they often times refuse to forgive you of the obligation to repay the remaining balance! You may be stuck owing money even after losing your property to foreclosure.

How long does it take?

We have successfully negotiated short sales in as little as thirty days while others have taken nine months. On average, short sale approval is received within sixty days.

What if my home is already in foreclosure?

Your foreclosure sale will usually be suspended during the short sale process. That's why it's imperative that you contact us right away!!!

Will my lender send me a 1099 on the debt forgiven?

Yes, you will receive a 1099 on any debt forgiven. However, there are multiple strategies to limiting or eliminating any tax obligation.

In 2007 the U.S. Congress passed the Mortgage Debt Forgiveness Relief Act and it is in effect until 2012. As a result of that Act, borrowers no longer pay taxes on the debt forgiven on their principal residence. So if the property is your primary residence, then no, you should not receive a 1099 for the debt forgiven or have to pay any taxes on the forgive debt. If the home is not your principal residence there are other methods used to limit the tax liability including the claim of “insolvency” as well as the structuring of the sale as an “investment loss”. Please note, only your accountant can advise you on your tax matters!

For more information consult your Tax Accountant and/or visit: http://www.irs.gov/individuals/article/0,,id=179414,00.html

How much commission do you charge?

The real estate commissions on a short sale are paid by your lender and you are not charged those fees.

Do you think I should just do a loan modification instead of a Short Sale?

If you desire to keep your home and can afford to make the monthly payments, then YES you should keep it! In order to qualify for a loan modification, you will need to demonstrate to the bank that you are generating more income than your current monthly expenses. However, please keep in mind that in loan modification only your payments may be reduced. Your lender is not going to reduce your principal balance. Therefore, the true problem, the fact that you are upside down by 30-80%, is not addressed; for most Arizona homeowners loan modification does not make financial sense!

If you believe loan modification may be an option, you will need to call your lender and let them know you want to do a loan modification to see if you qualify for their loan mod program. If you aren’t approved, we can then move forward with a short sale. We can’t work the short sale at the same time you are working with your bank on a loan mod.

Can I lease out my house while we’re waiting on the short sale?

We don’t recommend that you lease your home while waiting on the short sale  to be finalized. Lenders will not be sympathetic to sellers who are collecting rent payments and not making their mortgage payment. Also, homes with tenants are subject to legal rules (tenant rights) and much more difficult to sell.

Why is We Know Urban Realty a good choice to help me with a short sale?

If you are an urban property owner then you already know that your property is unique for Arizona. VERY few real estate agents truly know urban. Not only do we work with a team of short sale negotiators who have successfully completed THOUSANDS of short sale transactions but we are also experts in urban property sales. We completed over 100 urban real estate transactions in 2010 and as of mid 2011 we have already surpassed that number.

We really know our stuff and we get results.

In the last several months alone we have managed short sales in:

We understand that sometimes properties facing one direction in a building are worth less than those facing another direction. We understand that a building like 2211, although practically next door to Optima Biltmore Towers, is valued differently. Believe me, once you have a purchase contract submitted to the bank and the bank's appraiser is determining value, you'll be glad you have someone on your side who REALLY knows urban condo values. Our influence can literally make or break a deal.

What's the next step?

Call me, Will Daly, at 602 989-6788 (my cell phone). I won't pressure you, I promise. We'll talk about your particular situation. If you want even more information about short sales, then I'll provide that to you. If you want to talk about the possibility of renting your property instead of short selling it, we can discuss that too. If you want to sit tight and not do anything, that's ok as well. These are challenging times we live it. Get informed so that you can make informed decisions.