Rama Mehra
San Ramon Real Estate Specialist
The Short Sale Defined and the Short Sale Players:
Hardship, Foreclosure and the Homeowner
In an uncertain real estate market and troubling national economy, too many homeowners are faced with the immense challenge of maintaining their mortgage their mortgage payment by living paycheck to paycheck, taking a large pay cut, having to pay unexpected medical bills, or losing their job entirely. In addition to perhaps having little to no savings and little available credit, the situation can be very grim. According to the Mortgage Bankers Association,, 250,000 families enter into foreclosure every three months, and the most common cause of foreclosure is that the borrower never really had a chance. (http://www.fdic.gov/about/comein/files/foreclosure_statistics.pdf) Having one’s home foreclosed upon, on top of these hardships, only compounds matters by effecting a huge credit hit on the homeowner and making it much more difficult to gain back their lifestyle in addition to causing severe emotional stress.
There are options for homeowners feeling stuck in this situation and faced with certain foreclosure. Some may be able to sell their home with barely enough money to pay off their mortgage. Some may be able to sell their home with barely enough money to pay off their mortgage. Others may be able to refinance, however a majority of homeowners in this situation do not have enough equity to acquire a new loan. Options include reinstatement, loan modification, forbearance, and the list goes on; however, many of these options are a drawn-out process that do little to ease the future financial pressure and foreclosure still looms even if put off for several months. Foreclosure is entirely avoidable, however, through the process of effecting a short sale.
The Short Sale
A short sale is a real estate transaction in which the proceeds from the sale do not cover the balance owed on a loan or loans on the property. Lenders, quite simply, accept a discounted payoff on the loan and allow the sale to close escrow. The bank or mortgage lender will agree to discount the loan due to an economic hardship on the part of the mortgagor, and the homeowner will sell the mortgaged property for less than the outstanding balance of the loan, turn over the proceeds to the lender or bank, most often in full satisfaction of the debt. A short sale is accomplished through negotiation with a bank’s loss mitigation or workout department on the part of the real estate professional, but the lender has the right to approve or disapprove any proposed sale. Main factors contributing to the lender’s decision are the borrower’s financial situation and the current state of the real estate market.
A short sale, in short, is a lender taking a loss to avoid larger costs. It is neither the lender doing the homeowner a favor nor an easy way out for the homeowner, but a process enabled by the real estate professional nor homeowner when they are committed to avoiding foreclosure. It can be likened to a circus, under a not-so-big top in which the animals and acts do not seem inclined to respond to the skilled direction of their leader, the real estate professional.
The main goal of a short sale is to prevent foreclosure; however, the bank’s decision to move forward with a short sale is dependent on whether there will be a smaller financial loss taking the short sale or in the carrying costs associated with foreclosure. Typically, a bank will determine the amount of equity by determining a probable selling price from a broker price opinion (BPO) or appraisal, and decide to approve or deny the short sale based on the offered short sale price difference compared to the costs of foreclosure. Banks will not accept all short sales, and a trained, knowledgeable real estate professional is paramount to the process of getting a short sale approved.
Advantages for the homeowner are avoidance of a foreclosure on their credit history and some partial control of the monetary deficiency. Additionally, the process of a short sale is faster and less costly than a foreclosure. Controlling that deficiency and paying off one’s debt via a short sale is a sure-fire way to sidestep immense financial hardship and get back on one’s feet. While a short sale does adversely affect a person’s credit history, the impact is far less than that of a foreclosure.
Common Short Sale FAQ
How Will the Short Sale Process be Different for a Certified Short Sale Specialist?
Lenders are not required to accept short sale payoffs. Since a short sale payoff is discounted, the transaction will usually be achieved due to the knowledge, skill, and work of the real estate professional. A short sale is accomplished by careful communication with a bank’s loss mitigation department. I have taken the PSC and CDPD courses and invested the time to become a Pre-Foreclosure Specialist Certified agent.I will enable you to identify and work through the unique obstacles that are associated with the short sale negotiations.
Why Would A Homeowner Choose a Short Sale?
A short sale is usually chosen in order to prevent foreclosure. If financial hardship or other circumstances arise, homeowners may not be able to keep their loans current, and eventually their homes will go into foreclosure. The homeowner often wants to avoid foreclosure on their credit history. With a short sale, the homeowner may also be able to resolve the monetary deficiency that goes with a discounted payoff.
Why Would a Bank Accept a Short Sale?
Banks often accept short sale transactions when they believe that the financial amount lost from the discounted payoff is less than the loss associated with a foreclosure. A bank will not have the burden of carrying costs or the trouble of selling the property, so short sales are often a better option if foreclosure is likely.
Do Banks accept all Short Sales?
No. That is why it is critical for you to work with an educated agent who has the experience necessary to work with homeowners and at getting short sales approved. From the presentation of the short sale package to the lender, to working with the lenders’ loss mitigation departments, knowledge is your agent's best weapon to keep the file moving towards approval.
Would a Bank Accept a Short Sale if the Homeowner is Current on Payments?
The answer is, yes. Some lenders are now accepting a Short Sale file for approval on loans that are not delinquent. Other lenders will not accept the file until the loan is delinquent. One way to find out whether your lender will accept a short sale file for approval on a loan that is current is by submitting a short sale file to your lender.
Short Sales- The Players
The Lender
Short Sales work for lenders because they reduce costs on at-risk loans that are delinquent and on their way to defaulting. When a lender approves a short sale, they are avoiding foreclosure costs for themselves as well as costs to local government services such as court actions, inspections, and unpaid water/sewage and property tax bills.
Most lenders have a department (typically called “loss mitigation”) that processes potential short sale transactions. Today, lenders may accept short sale offers or requests for short sales even if a Notice of Default has not been issued or recorded with the locality where the property is located. Given the unprecedented and overwhelming number of losses that lenders have suffered from the current foreclosure crisis, they are now more willing to accept short sales than ever before. This is great news for borrowers who are “under-water” or in other words those who ower more on their mortgage than their property is worth and is having trouble selling to avoid foreclosure because of this.
Lenders have a varying tolerance for short sales and mitigated losses. The majority of lenders have pre-determined criteria for such transactions. Other distressed lenders have pre-determined criteria for such transactions. Other distressed lenders may allow any reasonable offer subject to a loss mitigator’s approval. Multiple levels of approvals and conditions are very common with short sales. Junior liens- such as second mortgages, HELOC lenders, and HOA ( special assessment liens) – may need to approve the short sale. Frequent objectors to short sales include tax liens holders (income, estate or corporate franchise tax- as opposed to real property taxes, which have priority even when unrecorded) and mechanic’s lien holders.
It is possible for junior lien holders to prevent the short sale. If the lender required mortgage insurance on the loan, the insurer will likely also be party to negotiations as they may be asked to pay out a claim to offset the lender’s loss in the short sale. The wide array of parties, parameters and processes involved in a short sale makes it a relatively complex and highly specialized type of real estate transaction contributing the unfortunate reality that short sale deals have a high failure rate and often do not close with enough time to save homowners from foreclosure when they are not handled by a knowledgeable and experienced professional.
The Loss Mitigator
The real estate professional must build a strong relationship with the particular lender’s loss mitigator that is assigned to oversee the short sale. They are the one major obstacle to getting a short sale approved. By maintaining excellent communication, having plenty of face time with the loss mitigator as well as working closely and carefully on the short sale file, the real estate professional can significantly increase his or her chances of pushing the short sale to be approved.
The Title and Escrow Company
The title and escrow company is just as important to a short sale transaction as it is to normal real estate sales. When it comes to the short sale, however, not all title and escrow companies are the same. The real estate professional should use only title and escrow companies that are experienced in the short sale process. When bumps in road to completing a short sale arise, the title and escrow officer will be important in overcoming them through careful communication with the real estate professional and the rest of his or her short sale team.
The Buyer
All real estate transactions require a buyer. They will be in direct contact with the real estate professional, who must assure them that while the short sale may not move quickly through the lender approval process, everything is being done to push the transaction forward. Buyers may lose patience as the process runs into obstacles- the real estate professional must work diligently to maintain their trust that the short sale is continuing in a timely manner.
The Real Estate Professional
A short sale/ pre-foreclosure trained and certified real estate agent is central to the process of executing a short sale. They are responsible for identifying financially distressed homeowners as candidates for a short sale. They are responsible for identifying financially distressed homeowners as candidates for a short sale as well as compiling a file for submission to the lender in hopes of having the short sale approved through their loss mitigation department. The homeowner trusts the professional to work hard to avoid foreclosure via the short sale, and the professional is the linchpin on which the entire process hinges. Even more than just allowing the homeowner to “sell” their house and exit on their own terms, the real estate professional enables the homeowner to save themselves the embarrassment of excessive legal postings or the threat of a visit from the sheriff as well as helping them maintain their dignity in a time of financial hardship.
Schedule a Listing appointment- Are you considering to Short Sell your Home? Fill out the Market Snapshot, which will assist us to get the details of your home. Then we will email you a hardship package and set up a time to discus your options. My belief is to provide you with the guidance for you to make an informed decision.
