Short Sale FAQs

I am so bothered by all of the misinformation out there concerning short sales and foreclosures.  I run into very similar inaccuracies all the time, so thought I would share some common questions and answers here.

I will have a deficiency judgment no matter what option I choose, right?   The Maryland/DC/Virginia jurisdictions are deficiency states, meaning the lender has the ability to pursue a judgment for any loss they incur against a homeowner after a foreclosure. In contrast, short sales provide the seller with at least a bite at the apple of getting the deficiency waived.  Of course, the short sale bank can withhold this waiver, but with persistence and aggressive negotiating tactics, many homeowners who complete a short sale will walk away owing nothing.

Here’s the reality: A bank loses much less money on a short sale than a foreclosure.  They have legal costs, carry costs, marketing risk, repairs and property preservation teams to pay, property ownership risk, etc.  It may take 18 months in some areas around Maryland and DC before the lender has clear title and can resell the property!  Imagine what kind of market we may be in at that point, or what kind of condition a property may have after that much vacancy!  Due to all of this risk and down-side potential, lenders have an incentive to do short sales and are very willing to work with homeowners, including when pushed hard enough, to waive the deficiency.

A foreclosure is just a temporary credit blip, right, and it’s no different than a short sale?   Foreclosures stay on your credit report for 7 years, whereas creditors may not even notice a short sale after two years, or even at all if you remain current.  Freddie and Fannie guidelines dictate significantly harsher treatment for a foreclosure or deed in lieu of foreclosure than for a short sale.  There’s good reason for this: typically homeowners who complete a short sale are more proactive and more likely to have gotten caught up in the real estate boom or forced to move due to something outside of their control, like a job transfer, than those who become so delinquent as to let the house foreclose.  As such, one can justify the latter group as being more credit worthy and therefore less deserving of a continuing derogatory credit reporting, than the former.  Not surprisingly, Fannie’s current standards are for homeowners who have completed a short sale to wait for three years to buy another house.  In contrast, the cooling off period is at least five years for a post-foreclosure buyer.

 

How long does a short sale take?

There are many people who will tell you that short sales take too long – like 6-8 months – and that no buyer will wait for the bank to make a decision.  No doubt, short sales can take that long if the agent or negotiator is inexperienced or outmatched.  Our short sales typically range from 30 to 45 days, frequently less. This is what we do: our niche is this segment of the market, and we have worked on hundreds of files with every major lender. The proof is in the pudding – can you get your deal approved 95+% of the time, or not?  It’s an easy question, and makes most people tingle because they know the answer is not flattering. When we are engaged, we have an entire process and system, and employ different people who are specialized at doing just their piece of the puzzle – marketing, processing, escalating files to senior bankers, etc.  When it all adds up, the result is a winning solution for you.

I heard that there is an industry average of only 10% of short sales getting approved – why?

We have a 95+% acceptance rate.  Others fail generally because they lack persistence.  They bow down to the feet of the lenders, regardless of what they demand: Twenty thousand dollars more in purchase price?  No problem – I’ll just list the house for that much (but never get a buyer!).  Or they give up at the first road block: Seller contribution towards sales proceeds of $15,000? Oh, we can’t do that; I guess we can’t do a short sale now.  We’ve had to reverse foreclosures, get sale dates postponed in 24 hours or less, and find the identity of the real investor and escalate to them rather than dealing with the professional negotiators at the servicers.  We hear ‘no’ on average 3 times per deal, but the difference is that it only takes one ‘yes’ to get the deal done, and we don’t stop until the fourth go round.

 

 

When should I start thinking about a short sale?  There are two easy answers: (i) it depends, and (ii) as soon as possible!  Many people decide to do a short sale when they lose their job, have their loan modification denied, have to move as a result of a job transfer or otherwise can’t afford their mortgage payment.  In other words, there is a triggering event that forces your hand.  Conversely, more proactive people realize the benefit in not waiting until the last minute, and begin considering alternatives like a short sale before they default.  It is certainly true that the more time you give yourself and the real estate professionals you employ to assist you, the better the chance that some sort of pre-foreclosure work out assistance will actually materialize.

 

 

Can I still do a short sale if I have multiple liens?  Yes. Each lienholder must sign off on the short sale, but it is certainly possible to get it done.  We are working right now on a property that has THREE mortgages!  Each lienholder will take a haircut, but it is in all of their interest to avoid the foreclosure, as everyone ends up with more proceeds (keep in mind, the junior liens get NOTHING once a foreclosure occurs, unless they file a separate lawsuit against the homeowner and become a regular unsecured creditor).  It is easier when the same servicer has all of the liens, since they handle any back and forth between the investors, if they are different.

 

What are your fees to process a short sale? We do not charge anything to help you with a short sale. Your lender pays all the costs.  We do ask you to keep up with certain things like condo/homeowner association bills and utilities, as lenders are loath to pay these items, and their nonpayment will lead to serious structuring issues at closing.

 

Do I need to be behind on my mortgage payments to qualify for a short sale?  Generally the answer is “No.” You can usually do a short sale without missing a payment.  Lenders universally require a real hardship such as unemployment, divorce or job transfer.  Also, certain loans, investors or mortgage insurers require that you miss a payment.  FHA, for example, states that you must be at least 31 days delinquent at the time the property settles.

 

What is the tax treatment of a short sale?  The Mortgage Forgiveness Debt Relief Act of 2007 exempts almost all homeowners from Section 108 cancellation of indebtedness income.  Primary residences are excluded so long as the currently existing debt was used to purchase the house.  If the primary residence exemption doesn’t apply, the insolvency exception almost always provide adequate coverage.  Please listen to the webinar on this site for more details, and then if you still have questions, feel free to consult a CPA or other tax advisor.

 

If you have more questions, please listen to the webinar under the Get Started With a Short Sale tab in this site. If you still have concerns after that, feel free to give us a call or log on to the Contact Us button on this site.  We’ll be happy to get in touch with you and address any specific concerns you have.