Short Sale 101, Basics Of A Short Sale, Short Sales Can Be Fun!, Short Sale In Your Future?

If the value of your home has declined below the amount you owe on ityou are said

to be "upside down" or "underwater"! Both terms conjure up negative thoughts, and, rightly so. With all the due diligence you put into the purchase, and all the business acumen, actuarial smarts, underwriting/appraising and brokerage experience put into the lender's decision to accept the home as collateralit's a strange thing indeed that the deal went south. But, it did go south. In fact nearly 20 million homeowners in the US are facing this scenario right now. It's psychologically bad for all of them. It's financially bad for those who must sell because of a job loss, reduction in pay, divorce, death or other reason. For them, it's a financial disaster.

A short sale can be an good solution for you. Of course, your lender has to approve the deal as they have accepted the home as collateral for the loan. The right questions to ask are 1) How it works, 2) What becomes of the shortfall amount, 3) What tax liabilities will there be and 4) how can I be protected from future deficiency suits. Let's start with number one.

How Short Sales Work

The short sale is conducted in exactly the same manner as a traditional sale, with one important additional step. When a suitable buyer is found your "application for a short payoff" is submitted, along with the offer, to the lender. The application includes an explanation of the hardship that led you to this situation.

The HUD-1 also explains how junior lienholders (2nd Mortgages, HELOCs, Mechanics liens, tax liens, etc.) will be resolved.

The lender's Loss Mitigation department evaluates the application. They get their assessment of the value of the home and the buyer. Generally, this process takes about 30 days but it can take much longer. The longest short sale I have worked on took 26 months. The fastest one took 60 days from listing to close.

People seem to be getting more familiar and more comfortable with short sales. However, some misconceptions still exist. These are the most common.

Myth 1 - Lenders prefer forecloure to short sales

This is a common error. The reality is that banks do not want to foreclose on your property because the process is lengthy and costly. After all, the lender has to sell the property on the market eventually. Banks lose less through a short sale than a foreclosure.

2. Short Sales are only approved for homeowners who are in Default

Once the case, it is no longer. Lenders are looking for verifiable hardship and monthly cash flow shortfall. Beyond that the deal hinges on determining the current market price and finding a qualified buyer.

Myth 3 Short Sales take so long that the hme is often lost in foreclosure before approved

Many homeowners fail to pursue short sales believing that they take too long and that they won't have enough time to complete them before foreclosure period ends. Actually, lenders extend the foreclosure process to have enough time to evaluate your short sale deal. I have succeeded in short sales when we submitted the deal for the first time just 2 days before the trustee sale.

Lenders appreciate the advantage of a sort sale. Not only is it better for them financially and politically, it is better for the owner (faster credit score recovery) and better for the community (vacant, foreclosed REO homes). Therefore lenders typically welcome a short sale application as an alternative to foreclosing and will delay the foreclosure process to evaluate your application.

Myth 4 - Selling Short is Embarrassing

As many as 50% of homes with mortgages in the U.S. will be upside-down by 2011. Short sales are becoming common even in the high-end neighborhood where "responsible" people live! Get over it.

Myth #5 - Buyers are Not Interested in Short Sales

Actually, smart buyers and agents know that the best deals are in the short sales. Although they take longer to conclude than normal deals, the opportunity to get the best deal is more important to the best and smartest buyers and agents.

Short sales are an important tool, helping our housing market adjust to the new economic realities. They will continue to be a major factor for years to come.

by: Mike Rockwood

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