By definition, a short sale occurs when your lender agrees to accept less than what is owed on your home. It can be a relatively straightforward process, or it can entail complicated negotiations involving an attorney. The way your bank negotiates a short sale has everything to do with the type of loan you have, whether you have ever refinanced your loan, and which investor owns your loan. For instance, if you have a Chase portfolio loan there may be some crazy cash incentives available to sellers. If you have a recourse vs. a non-recourse loan, your lender may require a cash settlement or promissory note.
In order for a lender to accept a short payoff, there must be a hardship of some sort. In many cases that takes the form of a financial hardship - reduced hours, unemployment, medical expenses, etc. There can also be other non-financial hardships - change in neighborhood condition, forced relocation, divorce, etc. When the hardship is not financial, the lender may ask for a cash settlement or promissory note.
As others have said, the impact to your credit is less than a foreclosure and your ability to obtain a new mortgage is accelerated depending on your circumstance. It is not necessary for you to miss payments in order to be eligible for a short sale as long as you can show your lender "risk of imminent default", however most servicers will tell you that they require at least one missed payment. This and all other requirements are investor dependent.
Don't forget about tax implications. After a foreclosure or short sale, your lender will issue you a 1099-C. The amount of debt that has been forgiven will be reported to you as income. The IRS has specific guidelines under which the tax on that phantom income can be forgiven. It's called "The Mortgage Forgiveness Debt Relief Act" and you can read more about it here: http://www.irs.gov/individuals/article/0,,id=179414,00.html. You should contact an accountant or research this issue to determine whether you will owe taxes on forgiven debt. Most of my clients are able to have this tax burden forgiven.
TAX FORGIVENESS ON FORECLOSURES AND SHORT SALES EXPIRES ON DECECEMBER 31, 2012. DON'T MISS THIS DEADLINE!
An attorney will be invaluable if we run into an obstacle with the lender. Make sure that whoever you hire has partner attorneys and accountants who can provide you with the proper legal and financial consultations. Remember that by "approving" your short sale, the lender isn't necessarily giving up its claim to the remaining mortgage balance. A lot of sellers fell into this trap early on. Sometimes, especially with recourse loans, the lender approves the sale but retains the right to pursue the borrower for the remaining mortgage balance. In such cases, the lender may come back to sue you you up to 6 years after the sale. Nobody wants that unpleasant surprise! There is specific language you must look for in the lender's written short sale approval to ensure you receive full and complete release from your mortgage. We get that release on all of our short sales, and in cases where the lender is stubborn, we can involve our partner attorney to achieve the desired results.
Speaking of attorneys, you don't need to spend $1,500 or $2,000+ that some attorneys charge. Our partner attorney, if she is needed, typically charges $350-$800 depending on the complexity of the negotiation. Her involvement is needed in a minority of cases now that lenders have streamlined and standardized their short sale processes. DO NOT pay an agent an up front retainer fee - only an attorney can legally charge such a fee. Please interview at least three agents and list your home with the most experienced agent. Ask agents how many short sales they close annually, what is their success rate (number of listings taken vs number that actually close escrow - ask it just like that or agents may take liberties with their numbers), do they have partner attorneys and accountants, do they have any inside connections with lenders, etc.
Daniella and I close an average of 100 short sales and foreclosures annually, have partner attorneys and accountants to provide you with critical consultations, enjoy a high 90% success rate on our short sales, and never charge buyers or sellers of short sales for our services. We are top 3% in the valley according to the Phoenix Business Journal and work at the #1 brokerage in the valley where we are top 1% producers. We would be happy to discuss your individual situation and give you a realistic assessment of your chances for success. We will assist you with all aspects of the short sale process, including completing your paperwork and following up with your lender.
While short sales can be complicated, having an expert team on your side means the difference between success and failure. Please give me a call if you would like to discuss your needs in more detail at (480) 302-9659. Have a great weekend!
If you are buying, short sales represent excellent values. The most important aspect of buying a short sale, believe it or not, is the competency of the listing agent (seller's representative). Once you decide on an experienced buyer's agent who knows and understands short sales - preferably from a team that also works with REO/foreclosures - that agent need to qualify the listing agent by asking some key questions. The seller's loan type, hardship, number of loans, and willingness to settle with their lender will all play a major role in whether the sale will be successful. The last thing you want is to spend 3-6 months waiting, only for the deal to fall through because the seller is not willing to pay a settlement, sign a promissory note, or have the file cancelled because the listing agent did not submit the proper documents and forms in a timely manner.
Expect multiple offers within 1-2 days of listing. Also be aware that unless it is a "pre-approved" short sale, the list price has no relationship to whether the seller's lender will actually accept that price. Don't worry about all those cash offers, as very often the seller doesn't care whether or not the buyer is utilizing financing. The seller wants to go with the buyer most likely to follow-thru on the deal, not necessarily the one with cash or even the highest price.
There are many angles here. Daniella and I would be happy to help you through the short sale jungle, as they represent the majority of listings in our current market. Give us a call at (480) 302-9650. Have a great weekend!
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Either way, do your homework. There are lots of great online articles on the subject. If you are looking for an agent to help you, you probably want to make sure they have at least 20 successful SS transactions under their belt. Designations (CDPE, CSSN, etc) are fine, but nothing beats real-world experience!