A short sale could be a better deal than bankruptcy or foreclosure, but it can also sap your time, wither your credit score and well, cost you money.
To produce a down and dirty primer on short sales, we went to Intero Real Estate Services in Silicon Valley and checked in with other real estate and consumer professionals to get the experts to show us -- and you -- the ropes.
A short sale occurs when your lender agrees to accept a lower price on your home than the current mortgage balance, provided you meet the lender's requirements and have a qualified buyer.
"Search for a buyer, especially those who have expressed an interest in buying short sale properties. The buyer must be willing to deal with extended deadlines and additional demands made by your lender," said Julie Larsen Wyss, a RealtyU graduate and holder of its new Certified Short-Sale Professional (CSP) designation.
"Your lender is the key to a successful short sale transaction and it will need to feel confident in the new buyer," added Wyss, also a real estate broker associate with Intero Real Estate Services in San Jose, CA. She's also founder/broker of Vista Mortgage Solutions.
While recent cash incentives for you and your lender make short sales more enticing these days, incentives alone won't get the job done.
To go the distance on a short sale, you must document you are a hardship case -- but not because you falsified the original loan documents.
It can be a win-win scenario -- the bank reduces a portion of "bad debt," avoids foreclosure costs and keeps the home occupied, while you shed a housing payment you can't afford.
"If done right, the short sale is a winning proposition for all, including the lender because the costs involved are certainly lower than that of foreclosing," said Nancy Osborne, chief operating officer of Erate.com, a Santa Clara, CA-based financial information publisher and interest rate tracker.
Don't come up short, prove your case
To prove your case, you'll need to spend some time on a cover letter explaining your hardship and provide full financial disclosure; the original purchase contract; a balance sheet of your income and expenses; asset statements, proof of income; bank statements; two years of tax returns; and a professional who knows the ropes.
"Simply stating, 'My house is worth less than the loan and I don’t want to pay any more,' will not be acceptable. Lenders would rather foreclose than develop a reputation as an easy target," said Zdenka Mahan, a real estate agent with Intero in Saratoga, CA.
Along with the required documentation, you stand the best chance of getting through the two- to seven-month short sale ordeal if the home is marketable; the second mortgage holder (if there is one) gets a cut or otherwise goes along with the deal; the same lender holds all mortgages; and there is enough time before foreclosure (at least about 4 months).
"A major reason why a short sale fails is the length of time it takes to get the lender’s approval. Long delays frequently cause the buyer to drop out of escrow and buy another home," said Mahan, a short-sale experienced "Downtown San Jose (CA) Specialist."
Buyers can also suffer lost opportunity.
"Buyers risk the opportunity cost of losing out on another property if they are tied up in a long, protracted short sale negotiation which could potentially go on for months," said Osborne.
"The burden to make the deal work falls largely on the seller's shoulders and their ability to do their homework up front, making things as easy as possible for a potential buyer," Osborne added.
A short sale works in your favor if your mortgage debt is secured by your home and was used to acquire, construct or substantially improve your home.
Short sales that stop short
Wyss says don't count on a short sale if you can't prove hardship; you are current on your mortgage; are in bankruptcy; have recently completed a cash-out refinance or have a lien with a third party.
Because a short sale forgives a portion of the debt owed, that portion could be considered as taxable income and you should seek the advice of a tax attorney, certified public accountant, enrolled agent or other person fully schooled in the tax ramifications of a short sale.
According to FICO, the leading credit scoring system provider, there also may be some credit score implications.
While a short sale won't be as damaging as a foreclosure or bankruptcy, expect some negative impact. Variables include how the lender reports the deal and what's already on your credit report. Negatives compound.
Consumer Reports' Money Advisor suggests that before you enter a mortgage modification or short sale, ask how the lender will report it so you can weigh your priorities.
If you need the break, take the deal sooner rather than later, even if it will hurt your credit score. Negatives on your credit file are removed after seven years. The sooner you get the clock ticking, the better.
Get a short sale team for the long haul
Wyss says the best approach to a short sale is by contracting with a real estate professional familiar with the transaction. As well as RealtyU's CSP designation the National Association of Realtors offers a Short Sales and Foreclosure Certification Program (SFR).
However, the designations aren't a guarantee you've found the most experienced short sale agent. Some agents without the designation are just as experienced, if not more so. Others are less experienced. Get referrals from friends, family members, co-workers and others you trust who have worked with an agent experienced in short sales or have a close friend with a satisfactory experience.
"A real estate agent needs to put together the most comprehensive short sale proposal possible to minimize the back-and-forth delays," said Mahan.
You may also need legal and tax counsel. A solid professional team is best for determining the viability of the sale, assembling the package and pricing and listing the property to find a buyer.
Wyss says determine your home's marketing position from comparative market analyses (CMA) used to price your home.
"If your home's value is significantly less than debt tied to the property, you are a candidate for a short sale. Position your home so that it sells quickly, but at a high enough price so the lender will agree to the terms," says Wyss.
Keep in mind, you don't control the final decision.
You aren't selling a home on the open market so much as you are selling your case to the lender.
"Lenders are under no obligation to accept a short sale and the terms will be examined closely by the lender," Wyss added.