San Diego Short Sales - San Diego Home Preservation

What is a Short Sale ? 

A short sale is one where title has transferred; where the sales price was insufficient to pay the total of all liens and costs of sale; and where the seller did not bring sufficient liquid assets to the closing to cure all deficiencies.  

National Association of Realtors Definition defined by a Short Sale Work Group

What is a “ Potential Short Sale ”? 

A potential short sale is one where the listing agent reasonably believes the purchase price may not be enough to cover payment of all liens and costs of sale and the seller is unwilling or unable to bring sufficient liquid assets to the closing.

National Association of Realtors Definition defined by a Short Sale Work Group

San Diego Short Sale – San Diego Home Preservation

Usually we get an email from this web site or a phone call from a past client or someone who is in foreclosure. We then answer any questions they have over the phone as best we can and then set up an appointment to see the home or condo and gather information from the homeowner considering a short sale. Some of the questions we will ask and paperwork we will gather is to find out how much is owed on the property and whether the seller is in default on any mortgage liens, taxes, or association dues. We will ask for copies of the most recent mortgage statements including second mortgages and lines of credit. We will need the most recent property tax statement and association dues bill. We also ask the homeowner to gather up additional paperwork.

We will complete free of charge a CMA or Comparative Market Analysis on what your home will sell for in the current San Diego real estate market. We will use Active, Pending “homes in escrow”, and Sold homes or condos to value your property.

Sellers need to be aware that they will have to find out whether the loan(s) they have might be subject to a deficiency in a short sale are “Recourse” or Non-recourse”. In a recourse loan, the borrower retains personal liability for any deficiency after a sale or foreclosure. The lender has “recourse” to the personal assets of the borrower to make up any deficiency. In a non-recourse loan the lender is limited to whatever funds are available from its security interest in the property itself, and cannot force the borrower to repay any deficiency. Each state has its own rules and in some states a loan can be either recourse or non-recourse depending on factors such as whether it was a purchase money loan or a refinance. These are legal question and we recommend professional legal, credit, and tax advice. A short sale should never be the first choice because it carries with it serious negative credit and, possibly, tax consequences. Potential short sellers are advised that any action they take other than full payment of the mortgage note will have negative credit consequences. Sellers are encouraged to consult with a HUD-approved credit counseling agency prior to making any decisions. Sellers should be cautioned that when selecting a credit counselor to carefully check the credentials of the agency as not every credit counselor or foreclosure rescue specialist is going to be HUD-approved. 
 

What are the options available to the seller? In rough order of “least damage to credit” to “most damage to credit” they are:

*Keep the Property. If the seller is unhappy that the property value is less than the loan balance, but is otherwise under no pressure to sell, keeping the property can be the best solution. Even if there is some short term financial distress, it need not result in loss of the property. Ask if there are family members or other resources that can carry the seller through if there is some financial stress. Because of the lack of equity, a refinance may not be possible, but be aware of any special “hardship refinance” programs a particular lender may offer including the Making Home Affordable refinancing and loan modification programs of the Obama Administration. The various programs change frequently. If the sellers must move, could they rent the property (even at a negative cash flow) and sell it later in a better San Diego Real Estate market?

*Sell the Property and Bring Cash to Close Escrow. This might not sound appealing, but it can be a good choice for sellers who are in a financial position to pay a deficiency from other liquid assets. This approach avoids the credit damage that even a successful short sale will cause. An alternative in some circumstances is for the seller to agree to convert any deficiency into a personal note, or a note on another property owned by the seller.

*Attempt a Workout with the Lender. Some lenders may want to speak with the borrower directly about all options before they will consider approving a short sale. Lenders are increasingly interested in helping financially distressed homeowners stay in their homes, and are required to do so if participating in the Making Home Affordable programs. Workouts are not real estate transactions. We offer a referral to an Attorney to help you with a Loan Modification.

*Offer the Lender a “Deed in Lieu of Foreclosure”. If the seller owes more money than the property is worth, is unable to make payments, and is likely to lose the property in foreclosure in the near future, offering to trade the property to the lender in exchange for the cancellation of the note might make sense. The lender can obtain the property much sooner and may feel that the mitigation of loss is worth the cancellation of the note. Like workouts, this is a contract negotiation, and should be undertaken only after consulting with an attorney.

*Offer the Lender a “Short Sale”.  This is when you would hire a licensed agent to sell your home and negotiate with the lender on your behalf to take less money than what is owed on your loan. Note that the lender is not a principal in the transaction. The agent represents the seller, not the lender. In a short sale, the offer is negotiated with the seller, just as in a traditional sale. The offer is then submitted to the lender, not for an “acceptance” but for approval of the terms and net proceeds. Be aware that, on occasion, lenders have “approved” short sales that included personal notes for the deficiency.
 

The elements of a successful short sale are generally these:

The property is worth less than is owed.

The seller has some hardship that makes it impossible or extremely impractical for the seller to keep the property.

The seller is cooperative and willing to work with a real estate broker to package the short sale and provide financial documents to the Lender.

The lender is contacted and expresses willingness to entertain a short sale.

The property is listed, with appropriate caveats and protections for the seller, properly priced, and effectively marketed.

The lender is presented with an offer, accepted by the seller, along with a completed short sale package and narrative explaining why the short sale is necessary and desirable.

The lender approves the offer and escrow closes as usual. No proceeds go to the seller.

There are tax consequences associated with these options, some of which have changed under the Mortgage Forgiveness Debt Relief Act of 2007, as amended by P.L. 110-343 (10/3/08). Up to $2 million of qualifying mortgage debt forgiven on the taxpayer’s principal residence from January 1 through December 31, 2012 will not be treated as income for the taxpayer, subject to various restrictions. The limit is $1 million for a married person filing a separate return. Mortgage debt reduced (forgiven) through restructuring, such as a workout or a short sale, as well as mortgage debt forgiven in connection with a foreclosure, all qualify for the tax exclusion. The Act applies only to principal residences, not vacation homes or investment property. Also the exclusion applies only to “acquisition indebtedness”, which is generally defined as debt used to originally build, purchase, or improve a property. Although short sales tend to minimize the difference between what is owed and the proceeds turned over to the lender, thereby minimizing the taxable income potentially accruing to the seller, the possibility remains. Sellers should be advised to consult with tax or legal counsel regarding the impact of the new law and other tax rules on their circumstances.

*Allow the Property to go to Foreclosure. Usually this is the worst option. It does the most damage to a property owner’s credit. There are circumstances, however, in which it might make sense for a property owner who has no other resources with which to obtain housing to simply stay in the property as long as possible.

Short Selling your San Diego Home – A Typical Workflow

Assuming that after full reflection and consultation with appropriate legal, credit, and tax professionals, and consultation with the lender, the homeowner decides that a short sale makes the best sense. What are the factors that will lead to a successful short sale?

The elements of a successful short sale are typically:

The property is worth less then is owed. This is established by us doing a careful CMA or BPO, taking into account that the market may be declining. Short sales are considered by buyers to be distressed properties, and will typically command somewhat less than a non-distressed price.

The seller has some hardship that makes it impossible or extremely impractical for the seller to keep the property. What are hardships as defined by most lenders? Most lenders focus on and require “changed financial circumstances”. Loss of job, unusual medical costs, death of an owner, natural disasters, even extended military service for reservists, can be hardships. There should be a nexus between the hardship and the need to sell. A job loss leading to a problem paying the mortgage is obvious, but an illness might require a family to move closer to specialized medical help, so even without an unbearable financial hardship, the homeowner simply cannot stay. Lenders do not consider a decline in value alone to be a hardship.

The seller is cooperative and willing to work with a real estate broker to package the short sale. The seller will be asked by the creditor to reveal all details of the seller’s financial situation. If there is a formal short sale application, the seller will have to complete it. This can be embarrassing, and some sellers simply won’t do it. Sellers wanting to do a short sale will have to do what is required they do by the lender. If a seller is uncooperative, we will not be able to help them.

Important Note: Many troubled loans today are “subprime loans” and/or “stated income loans”. Any representations of the seller’s financial status that were made on the initial loan application will be scrutinized in the short sale application process. Sellers may expose themselves to charges of loan fraud if the short sale application information they provide is inconsistent with the material provided on the initial loan application. In other words, if the seller represented on the original loan application that his income was $10,000/month, but on the short sale application represents that his income recently dropped from a high of $5,000/month to $3,000/month, this will raise the question of loan fraud. If the seller is concerned or has questions, it is advisable for the seller to consult with an attorney before completing a short sale application.

We will contact the lender and expresses willingness to entertain a short sale. We will ask to speak with the “loss mitigation” department. Once the short sale package is submitted to the lender they will usually assign a negotiator to handle the short sale. We will have the homeowner fill out an authorization letter from them verifying that we have permission to speak with the lender on the seller’s behalf. The negotiator will ask for all documents and paperwork needed on the file. We will need to have the seller gather up all other documents that the lender requests. The lender may ask your listing agent and other area brokers to do a Broker Price Opinion (BPO) to verify the home valuation. If there is more than one loan subject to a shortfall, we will need to contact multiple lenders and go through the same process. Some lenders are proactive and will immediately send the short sale requirements to you. Others will be non-committal. Even institutions go into denial when faced with bad news. Unless the lender indicates that it will categorically refuse a short sale under any circumstance (a rare occurrence), we will proceed with the next steps.

The property is listed with appropriate caveats and protections for the seller, properly priced, and effectively marketed.

An offer or offers are received. The lender is presented with an offer, accepted by the seller, along with completed short sale package, hardship letter, and narrative explaining why the short sale is necessary and desirable. Every lender is different, and each short sale package can be different as well.

The bank will want to see most of and usually all of the following.

The Completed Hardship Letter, Short Sale Package, and Narrative

A hardship letter written by the seller describing the seller’s circumstances. The seller should be as persuasive as possible in describing why the seller is in no position to continue with his or her financial obligations to the lender. This letter can make or break the short sale. The reasons given by the seller should be compelling and the seller should be both honest and frank in their disclosures to the lender. Include corroborating material. If the seller was fired, include the termination letter. If the seller has medical bills, summarize them. If the seller is ill or disabled, the seller should explain how that has made it impossible for the seller to keep the property. If there are tax problems, the seller should describe and document them. If the property was damaged and not covered by insurance, as in several recent natural disasters, the seller should document the damage and the denial of the claim.

A copy of the purchase contract and all supporting documents signed by both the buyer and seller.

Written proof of the buyer's ability to purchase the property, i.e., completed loan applications, pre-approval by a lender or evidence of cash on hand (a current bank statement).

A copy of the certified escrow instructions.

A preliminary title report.

An estimated net/closing statement (HUD-1) certified by an escrow officer who is acceptable to the lender. It is very important that this estimate be as complete and accurate as possible. Many lenders will reference the closing statement in their acceptance or rejection. You may receive an approval that states “Lender will accept net proceeds of no less than $273,565 no later than November 30, 2009”. If the estimate of net proceeds is wrong for any reason, you may have to attempt to renegotiate with the lender.

A completed and signed personal financial worksheet. This will include assets such as other real estate, stocks, bonds, 401Ks, etc.

Tax returns for the previous two years.

Employment paycheck stubs for the past two months.

Profit and Loss statement (if the seller is self-employed)

Bank statements for the past two to three months.

A completed Short Sale Application if the lender provides one. Some do not.

Our CMA/BPO with supporting sales data. We want to show that the offer we are presenting is the best market price offer the lender is likely to receive.

The Lender Response and the Close of Escrow

The lender can do one of several things.

Ignore the offer. (This happens.)

Refuse the offer, either with or without an indication of what net proceeds would be acceptable.

Asks the seller to bring some or the entire shortfall to escrow. This is a typical first response. If the seller is unable or unwilling to do so, we will need to contact the lender immediately with a letter from the seller to that effect. This is where an experienced short sale agent or department uses their tools to negotiate with the lender.

Approve the offer.

Much of this information was used from the National Association of Realtors web site Realtor.org.

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