We, at Lakes Area Realty, appreciate you choosing us as your real estate professionals. We hope to help you better understand the foreclosure process and how we can assist your needs. Please keep in mind, we are Realtor assisting you in successfully short selling your home. We have a proven track record. However, we are not attorneys or accountants and cannot give legal or financial advice.
What is a Short Sale?
A short sale is when a lender agrees to accept a sales price of less than what is owed on the mortgage(s) to avoid a full foreclosure process. Banks will typically only consider a short sale on properties with little or no equity and late payments. However, late payments are NOT a necessity for a short sale to be approved. We can help you determine if missed payments are necessary. For instance, if you are being involuntarily for employment, missed payment may not be necessary.
Why would a bank accept a short sale?
The primary reason is short sale typically sell for more money than a foreclosed property. A short sale property may sell for 80% of fair market value, whereas a foreclosure may sell at 60-70% of fair market value. Furthermore, short sale properties are typically in better condition than foreclosed properties.
From a business perspective, foreclosures are extremely expensive for banks. Banks do not want to own real estate, they are in business to lend money and make money on the interest of the loan. Federal guidelines require that banks must reserve money for all of their nonperforming assets such as foreclosures and loans in default. Banks prefer to cut their losses and take a discount rather than to continue losing money on a bad loan.
What is the benefit for me to sell short versus foreclose?
The result of a successful short sale is that you will avoid a foreclosure and minimize the negative effect on your credit report. The typical credit hit from a short sale is about 50 points and will only impact your credit for about 2 years. A foreclosure will impact your credit over 200 points and will remain on your credit report for 7 years.
Another reason to sell short is that Lakes Area Realty will negotiate with the bank to pay your half of the closing costs associated with selling the home and all of the real estate agent’s commissions. Lakes Area Realty will get paid directly from the bank. Short sales are used as a way to avoid foreclosure when all other alternatives have been exhausted.
Will you still owe the bank money after a short sale?
One of two things can occur with the amount that the mortgage is sold “short”. One possibility is that the mortgage company will forgive the debt. The other alternative is the mortgage company will issue “deficiency judgment.”
If the mortgage company “forgive the debt”, the amount you sold short may be declared as income by means of a 1099. This income can have various effects on your taxes. Depending on whether the home was an investment property or your primary residence makes a difference on how this income is treated. We recommend you consult with your accountant on your specific tax ramifications.
If the mortgage company does not forgive the debt, they may pursue deficiency judgment. Our goal is to get the bank to agree to accept “payment in full without pursuit of any deficiency judgment.”
Example: If the bank is owed $120k and agrees to accept $90k on a short sale. The lender sends the borrower(s) an IRS 1099 form showing $30,000 of taxable debt-forgiveness income. The defaulting borrower(s) on a short sale walks away with nothing. However, the borrower gets rid of their mortgage obligation without a foreclosure on their credit record in the majority of the cases.
A deficiency judgment can be sought by the bank for the shortage on the actual amount received versus the amount that was due. Using the example above, the judgment would be recorded against the homeowner for $30k.
Keep in mind, if you decide not to short sale your property and to let it go directly back to the bank, the same judgment can be sought when the bank sells it for less through their REO department for less than the amount owed.
When we negotiate with your bank, we will require the bank to waive its right to a deficiency judgment. Sometimes we’re successful and sometimes we are not. Remember, that if your property does go to the foreclosure sale, the same result may occur.
Does a short sale cost me any money?
There is no cost to you for you to use the Lakes Area Realty to help with your short sale. The only cost you will have to incur is if the city you live in requires a truth in housing inspection. Some cities require by law that a truth in housing report be completed before a property is listed or sold, the cost is approximately $150. Also, depending on which of the closing costs the bank pays, you may be responsible for a $295 fee at closing. That fee is collected ONLY if we are successful in negotiating your short sale.
How long does the process take?
Typically, short sales will take two to four months from the time Lakes Area Realty receives the completed short sale package until we reach a successful agreement with the bank. Please be patient, we are at the mercy of the bank. We would love to take care of your problem in two weeks, but the process takes much time. The banks have gotten better at processing short sale over the past few years and there are steps we can take to either lengthen or shorten the process, depending on your personal situation.
How much work does it take for me?
Only about two to three of your time. We just need you to gather some paperwork and make copies to give to Lakes Area Realty. After we have received all the documents necessary, we begin to market your property for sale. When we get an offer, you will need to approve the purchase agreement. The bank will ask for updated documents while the process the short sale, so be sure to hang on to recent pay stubs and bank statements. When the short sale is approved, you don’t even need to show up at closing. We can have the documents signed ahead of time so you don’t need to take time off of work or away from the family on closing day.
Why does my property need to be listed with Lakes Area Realty?
The banks require the property be listed on the MLS and available to the general public to ensure the highest possible sales price. Also, showing market time to the bank will greatly increase the chances of a successful short sale. We will begin marketing the property at fair market value. After 2 weeks, we will begin to lower the price until we get showings and an offer. We continue to reduce the list price every few weeks, depending on showings, until we receive an offer. We then review the offer with you, have you sign it, and submit it to the bank’s short sale department.
I’m ready to get started, what’s the process?
Carefully read the following pages and gather all the necessary paperwork. Specifically,
- Write Hardship letter
- Sign 3rd Party authorization form
- Provide financial statement-signed by client(s)
- Provide most recent mortgage statement (s) – for both mortgages.
- Provide copies of last two (2) years tax returns
- Provide most recent two (2) pay stubs. If not employed or self employed, write and sign a letter stating that fact.
- Provide past two (2) month’s bank statements
- Copy of your property Listing Agreement from Realtor (don’t worry if you didn’t list your house)
- Provide copy of Foreclosure Notice – if available.
Hopefully this information helps. Lakes Area Realty understands that this is a very stressful situation. We will do what we can to help you understand what is happening with your home and the short sale process.
Please fill out the below contact form to receive documents that Lakes Area Realty will need to get started on a short sale for your property. Please gather all paperwork and make photo copies of the financial documents to give to the real estate agent.
Please keep in mind, we are not accountants or attorneys. Ultimately, you will want to consult with your attorney or accountant as to your particular situation regarding the tax and legal implications of a short sale.
Thanks again for considering Lakes Area Realty.