What is A Short Sale?

A short sale is an agreement with a lender allowing for the sale of a property to a third party for less than the amount owed on the mortgage. Under this agreement, the lender accepts less than the amount owed and releases the borrower from the mortgage, thereby preventing foreclosure.

If you are one of the many homeowners or buyers of vacant land for investment purposes who have fallen, or are “planning on” falling behind on your mortgage payments and you don't see any way to avoid foreclosure, a short sale offers you the least painful way to resolve the situation.

What's in it for a seller?

Obviously, the ideal scenario would be that you magically catch up on your mortgage payments and keep your home or your vacant land investment property. But for an increasing number of Americans, that is not a realistic possibility, so it's to your advantage to take an active role. This is what a short sale is all about -- resolving the problem, as opposed to simply hiding from your lender and hoping the issue will go away or, worse, walking away from the property.

As a seller, there are cons to a short sale. Obviously, you will lose your home or vacant land investment property -- but that will happen anyway when the bank forecloses. You will also walk away without a cent in profit from the sale.  And, your credit score will take a hit.

However, because you are making a good faith effort, the lender typically looks more favorably on you, and usually is willing to help you minimize the damage to your credit score. You are also spared the stress and embarrassment of a long drawn-out foreclosure process. Remember, too, that every short sale is a negotiated agreement between the owner and the lender. In a foreclosure, the lender can always pursue the seller for a deficiency judgment to recoup the difference between what it was owed and what it actually collected. In a short sale you usually are able to get the lender to accept the sale as "payment in full without pursuit of any deficiency judgment."

Two short-sale killers

Before you even start considering getting involved in a short sale, there are two situations in which an attempt at a short sale is almost certain to fail.

The lender's motivation

Why would your lender let you walk away from the home and forgive the shortfall on your loan? To save time and money. Foreclosures are expensive and time-consuming for lenders. Once the lender realizes that a foreclosure is inevitable, a short sale may seem like the lesser of two evils. Plus, short sales help the lender look good on paper -- the property was never listed as an actual foreclosure, which helps the lender's numbers.

In a January survey of senior loan officers conducted by the Federal Reserve Board, more than 65 percent of those surveyed said they anticipate steps such as short sales or deed-in-lieu of foreclosures to be at least somewhat significant loss-mitigation steps at their banks for 2008 and 2009.

Convincing the lender

There's no guarantee, but if you have evidence to back you up, a lender will typically agree to a short sale.

But don't think it's going to be easy. It's going to take some proof and a great deal of work convincing the lenders. To make your case, you, the buyer and your agent, Todd D. Lindgren of Selling Paradise Reality work together to assemble the following package.

1. An authorization letter.  You have to sign this -- and usually have it notarized -- giving the lender permission to discuss the mortgage situation with a potential buyer or an agent.

2. A hardship letter. You have to show that your financial situation is not great. You'll have to be 60 to 90 days behind in your house or vacant land investment properties payments and have no significant cash, savings, retirement plans, stocks and bonds that you can use to catch up or reduce your debt. Working together we will show that your situation is irreversible – and that you will have no way to bring your mortgage current in the foreseeable future. We will ask you to supply as much evidence and documentation as possible, such as divorce papers, evidence of job loss, delinquent accounts, utility shut-off notices, car repossession paperwork, your last two years' tax returns, recent pay stubs and recent bank statements. Include any mitigating circumstances, such as medical problems or the loss of a job. The more convincing and sympathetic -- yet truthful -- the letter is, the more likely your lender will agree.

3. A statement of the property's value. This can be an appraisal, a CMA - certified market analysis (which we provide) or a BPO broker's price opinion. The lower the estimate of the property's current market value, the better it will be for you. We want to show the lender that they will not be able to sell your home or vacant land investment property for enough money to satisfy the loan. It may not be pleasant, but we will make the home or vacant land investment property look as bad as possible on paper. We will include things such as an abundance of homes or vacant lots on your street or neighborhood for sale -- especially in foreclosure. Other pertinent information we will include is the number of rundown or unkempt homes nearby, increasing crime rate, high taxes, insurance rates and low-rated schools. We prepare a written summary of your property's condition, including a thorough and detailed list of any negatives, such as maintenance problems and evidence of disrepair. This can be tough emotionally. This is, after all, your family home or your carefully chosen vacant land investment property, but this is a necessary part of the process. The longer a lender must hold onto a property the more expensive it becomes. If the lender realizes the property will bring them nothing but headaches, it will be more likely to OK a short sale.  It's critical to come in with the lowest -- yet sound and ethical -- valuation possible. If you can get a really low CMA or BPO and put that in your offer you have a great chance."

4. A purchase offer or contract. It's a bird-in-the-hand issue for the lender. A signed contract with a sizable earnest money deposit at a specified price can look far better to the lender than a long foreclosure process, ongoing costs and no guarantee at the end of the road. What's more, lenders will not entertain tentative offers. You're not going to get the chance to ask the bank. Listings, pending sales and last year's sales are meaningless. It's all about what willing buyers are willing to pay to willing sellers. If there has been no actual sales volume, there are no comparables, so there is a lot of room for a low BPO when the sales that have occurred were forced, foreclosure sales and everything's for sale but nothing is selling."

5. A settlement statement. To go along with the proposed price, this statement -- also called a net sheet -- details exactly how much the lender will end up with and exactly how much of a loss it will be taking. It includes the purchase price, the closing costs and any other costs or fees involved in the transfer of the property. The Loss Mitigation Closing Agents that work with Todd D. Lindgren and Selling Paradise Realty on your short sale will get this prepared for you.

Finding a buyer  Before you even thought about a short sale, you probably had your home or vacant land investment property on the market, hoping to sell it for a small profit, pay off the mortgage and stave off foreclosure.

But that hasn't worked -- possibly because you're "upside down" -- you owe more than the house is actually worth today.

While you may now be seriously thinking about or just learning about a short sale, you're still seeking the same thing -- a buyer. Some homeowners and vacant land owners would like to get a tentative OK from the lender before seeking a buyer, but this doesn't happen in most cases -- the lender won't tell you it will accept any less than what it is owed and also probably won't even discuss this until you're 60 or 90 days behind in your payments. Any lender is more likely to agree if a buyer is already in place and you have a legitimate, signed offer with a sizable deposit.

There are a few things you can do to find a buyer. You can go the "For sale by owner" route with a sign on your lawn and classified ads locally and online. Explain to anyone that responds that you are seeking a short sale arrangement.

Consider, however that a short sale is not a do-it-yourself project and this is one time you should seriously consider getting a real estate agent that is a short sale and REO (bank foreclosure) specialist who has a track record with short sales, foreclosures and bank-owned properties. Professional Real estate agent, Todd D. Lindgren with Selling Paradise Realty maintains a contact list of both national and international investors and buyers for properties in the area where your home or vacant land investment property is located.

Important details

1. In some cases, the lender may send you a 1099 tax form, which will list the "shortfall" (the amount the lender has forgiven) as income to the seller. Don't be alarmed: The Mortgage Forgiveness Debt Relief Act of 2007 gave short sellers a big tax break by changing the way the forgiven amount was viewed for tax purposes. Prior to passage of the act, that amount was considered as income for the borrower and was subject to tax. However, the new law removed that tax liability.

2. If you have more than one mortgage or more than one lender, remember they all have to approve the short sale. Make sure your sales contract includes all lenders' approval in writing. Lenders holding second or third mortgages probably will get nothing if the property is foreclosed, so at least in a short sale they have a chance of recouping some of their investment.

3. Some states allow deficiency judgments, in which a lender can pursue the borrower for any remaining balance of the loan. This usually only applies to cases where the home is sold at auction or as an REO, a real estate owned property, by the lender. In a typical short sale agreement, the lender agrees to waive this right. Make certain you're protected from this in the short-sale agreement.  Todd D. Lindgren and Selling Paradise Realty use strong language in their agreements with the bank on your behalf and almost every settlement works out in our clients favor. 

We typically get the bank to sign off on your behalf that:

A.      The offer is contingent on the listing broker and sellers approving the Lenders settlement.

B.       The lender agrees not to pursue ant type of deficiency judgment or any other money from the borrower / seller after settlement.

C.       The lender agrees to only report “paid as Agreed” on borrower’s credit report.

D.      The lender will no ask borrower for a note for any of the deficiency.

This is the essence of a short sale!