Wednesday, January 16, 2008

Should A Homeowner Attempt A Short Sale?

First, understand what a short sale really means.

A short sale means that you are asking the lender to accept less than their payoff in order to facilitate a sale of a home. This is done to avoid foreclosure. In this situation the home owner owes more for the home than what the home is worth. In this situation the homeowner MUST sell. Of course, if the home was worth more than is owed there wouldn't be a problem.

Homeowners, the worst mistake you can make is to bury your head in the sand, hoping the problem will go away.

First, realize that foreclosing is a rather expensive proposition for the lender. That isn't the lender's core business. They are in the business of making loans. They don't want the house back.

Before a lender approves a short sale they have to determine two things.

1. Can the owner afford to continue making payments? If, yes there is no reason for lenders to lose money.

2. If they approve the short sale will they wind up in the same position if they foreclose and then sell the property.

3. It is important to note this statement. THE SELLER MUST NOT RECEIVE ANY SALE PROCEEDS FOR THEMSELVES.

It is important to note if there a junior lien holder? If so the chance for a large discount is possible because if the property is foreclosed on the junior note holder they get nothing.

Your head head is probably full of questions. Any property owner considering a short sale should seek competent advice from an attorney and Realtor.

Short sales are relatively new arrangement and not part of a Realtor's basic training, however, there are many that have handled short sales prior to your situation. Call around and ask if they have handled short sales. It is interesting to note that lenders will pay reasonable selling commission so Realtors have an incentive to get involved.

The basic requirement for a short sale are a Listing Agreement with a Relator and a Sales Contract form a buyer which are submitted to the lender along with a Hardship Letter from property owner explaining why they cannot continue to pay the mortgage. Be sure in include documents supporting this claim. This would include tax returns and bank statements. Photos of the home and comparable home prices in the neighborhood will also help. Remember the lender could be in another state and not familiar with local conditions.

If the submitted package is complete the lender will order a Broker's Price Opinion (BPO). This is the key that will unlock the process and allow it to go forward. If that opinion is too high the lender will not accept a low offer. Your Realtor must meet with the agent doing the BPO and offer supporting information why the offer should be accepted for the amount indicated. Lenders will often accept an offer 10% lower than the BPO.

The sales contract should state clearly that the offer is contingent on the Lender accepting the purchase price in full. Also it must include that the Seller is forgiven the deficiency on the mortgage. Remember that the Seller does receive a 1099 on the forgiven part of the mortgage and that there are some provisions in the tax code for offsetting income due to insolvency.

This is probably your single largest asset. Do you really want to do a short sale on your own?? This process is jammed pack with pitfalls and should be handled by an experienced person.

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