There is a lot of talk of short sales in the media lately, most of it is editorial hype from reporters who have no idea what they are talking about but however like to hear the sound of their own voice.
A short sale is simply this. When the lender who holds a mortgage over a piece of property agrees to take less than the mortgage amount to allow a sale to take place a short sale is the outcome.
The borrower owes the bank $200,000.00
The bank agrees to allow a sale for $150,000.00
The short sale amount is $ 50,000.00
If the short sale is negotiated properly in the borrowers favor the $50,000.00 shortfall or deficiency will be forgiven.
As with all things in life there are two sides to the story. In this case the lender and the borrower. However because the bank has a battery of attorneys and loss mitigation staff and apparently needs no help from me this article is written from the perspective of the borrower.
Things to note before you proceed:
- Before you will be eligible to negotiate a short sale with your lender you will need to be behind on your mortgage payment. How far behind varies with individual lenders.
- Your lender will not be negotiating with you because they want to they are dealing with you because anything is better than another foreclosure on their books. The regulators don’t like a balance sheet heavy with foreclosures. The banks don’t like the regulators snooping around their books.
- The typical loss mitigation department of a lender is swamped. The staff are overworked and most probably underpaid. They are not easy to deal with. It is not you personally it is the huge workload.
- This means that if your paperwork is not complete or shoddy that it will conveniently disappear.
- The person negotiating with the bank on the borrowers behalf does not necessarily need to be a short sale expert, the process is simple and anyone with intelligence will learn it quickly. The number one paramount quality required to successfully negotiate a short sale is resilience. The paperwork that is faxed to the bank will be lost, misplaced and lost again. If your negotiators idea of a short sale is to put a complete package together, fax it to the lenders loss mitigation department and wait for a response then your house will be sold at a foreclosure auction.
- The perfect recipe for a successful short sale is a complete package and daily communications with the loss mitigation department.
- Every page of every document faxed to the bank should have the mortgage account number written in sharpie in large format in the margin. If you don’t make it simple for the loss mitigation department they will file your paperwork somewhere out of sight and deal with someone who is facilitation them. People get wrapped up in the process and forget that success is in the detail. The loan is delinquent, the bank wants it off their books, they need you to facilitate them and whether it is short sale or auction you will facilitate them.
- Call the next day to make sure all faxed, mailed or emailed documents have been received by the proper person. If not re send.
How to put a short sale package together.
A short sale package consist of:
- A limited power of attorney naming the negotiator containing the loan number and the last four digits of the borrowers social. This is as simple as I “borrower” give power of attorney to “the negotiator “to discuss my loan “#” with “the bank”. Signed, dated and last four of social added. Until this is with the lender they will only talk to the borrower.
- Hardship letter written by the borrower explaining why they have fallen behind and why they will be unable to bring the loan current and maintain the payments.
- Income and expense statement for the borrower. Some banks will have their own form so it is a good idea to contact the banks loss mitigation department before you start the process and ask for a short sale package to be mailed or faxed to the negotiator.
- The lender will almost always ask for a copy of current tax return, pay slips and recent w2’s to prove income or lack thereof.
- Proposed HUD statement showing the distribution of the closing proceeds.
- Listing agreement showing that the property is on the market.
- Fully executed Offer to Purchase or P&S Agreement showing that the offer is subject to third party approval.
After initial submission of package wait for three days to allow the package to assimilate into the system before calling to make contact with loss mitigation
If possible get the email address of the decision maker. Most loss mitigation departments don’t allow their loss mitigator’s to take phone calls from negotiators, so you will be talking to a $10 dollar and hour phone bank whose goal in life is payday. If you can get your mitigator’s email you have made the most important step in ensuring success.
In the past realtors could get 6% now the norm is getting closer to 4%.
Also remember that bankruptcy and short sale don’t mix. If the borrower files a bankruptcy the bank is stayed from all debt collection activities. And yes short sale is considered debt collection. So a bankruptcy virtually ensures the death of a short sale.
The borrower should remember every day that the short sale deficiency is considered a loss by the bank and the IRS. Conversely from the borrower’s perspective it is considered a gain by the IRS if not by the borrower. If after the short sale is complete and a new owner is in your home and you have moved on, the bank decides to send you a 1099 for the deficiency amount then you will be obliged to pay the IRS taxes for this gain. It is imperative that you tell the negotiator in no uncertain terms that the success of the short sale is dependent on the lender agreeing to forgive any deficiency and not 1099 you for any amount. Do not repeat do not accept a word of mouth promise. Have this in writing from the bank or included in the agreement signed by the bank. Without your willingness to proceed the short sale cannot proceed.
Remember that you are getting very little out of this. You are the one walking away from your home with nothing. The reason for the proposed HUD is to ensure that you the borrower gains in no way from the short sale.
However your realtor is getting paid. The negotiators on both sides are getting paid. The bank is getting a bad loan off their books and the regulators out of their hair. The buyer is getting a bargain. The buyer’s realtor is getting paid. The buyer’s mortgage broker is getting paid. His home inspector is getting paid. Everyone is getting something so make sure you are getting something.
Your piece of the pie is no deficiency amount and no 1099. The only reason for you to even bother regardless of what the hungry realtors tell you is no deficiency, no 1099.
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