What is a Short Sale and Should I Consider This When Selling My Property?

You may have been hearing about Short Sales and wondering what this is all about.  I’ll try to give you a brief explanation about how short sales work.

If you want to sell your property and the mortgage balance (or balances) is more than the value of your property, you might be in a short sale situation.

Basically, you’ll need to get the principal balance of your mortgage(s), add to that figure what your expenses to sell would be, and if that is more than the current market value of your property, you probably will need to consider a short sale.

This is how a short sale works:  You would list your property with a Realtor just like you normally would, usually near market value or just under market value.  The Realtor will help you determine market value and what your expenses to sell will be. If you are in a short sale situation, the seller will need to contact their lender(s) and explain their situation and ask if they will consider doing a short sale.  You will never get a definite answer at this point, but usually a statement about whether they will consider a short sale or not.  If they say they will consider it, then go ahead and list it as a short sale.  Your Realtor will have to disclose in the Multiple Listing Service that this is a short sale.  You will also have to write a letter to your mortgage company (or companies) advising them that they are authorized to deal with your Realtor. Be sure your Realtor is given a copy of this letter.  You will also need to prepare a financial statement, showing your monthly income, monthly expenses, and assets, as well as a letter explaining your circumstances.

When an offer on your property comes in, your Realtor will present the offer to you. If you accept the offer, your Realtor will then get the offer to the mortgage company (or companies) together with the letter authorizing them to deal with your Realtor, your financial statement, an estimate of expenses to sell, and your letter of circumstances.  A processor will be assigned the file and it will be processed to see if they will accept the short sale contract.  Basically, you are asking the lender to settle for the amount that will be leftover after the expenses to sell are paid. You can expect that it will take anywhere from 4 weeks to 3 months to get a response from the lender. Usually during this time the lender will have some kind of an appraisal of the property done to determine current market value.  Some of the small local lenders are quite easy to work with on short sales but the larger national lenders are overwhelmed with the number of short sale contracts they have to deal with at this time and it takes longer.  It is important for your Realtor to stay in close touch with the processor who has been assigned. It is also important that your buyer knows they will have to be patient and that a considerable time frame will be involved to get an answer. Please be aware that almost certainly the listing and sales commission to the agent(s) will be cut by the lender as part of the short sale approval. It is possible the lender might come back with a rejection or even a counter-offer, in which case both seller and buyer need to consider this carefully and decide if they should go forward to not.

Sometimes, an approval will come back from the lender subject to the seller signing a promissory note for all or a portion of the forgiven amount to be paid back in monthly installments over a long time period.  I have frequently seen these to be at 0% interest or very low interest. A promissory note such as this is usually an unsecured note and the full mortgage amount would be satisfied in the public record so the buyer can be given clear title to the property.

If you are able to arrive at an agreement, the sale will be closed as usual by a title company or attorney’s office. Usually the lender will specify a deadline for closing as part of their approval of the process. 

It is important to know that in a short sale situation, there are no guarantees, there is a lot of hard work, and everyone must have a great deal of patience. A short sale is certainly not the greatest of alternatives but sometimes it is the only choice that makes sense, short of walking away and letting the lender foreclose.  If you are currently facing foreclosure, usually if a short sale contract is in the works, the lender will give the time necessary to work through the short sale before foreclosing. Lenders really don’t want your property, as this costs them a great deal of money to hold the property, maintain it, and sell it.

A short sale will negatively impact the seller’s credit rating, but it won’t be as bad as a foreclosure or a bankruptcy.

Please contact Alice Ohme at Wagner Realty for further information about short sales or to list your property.