Frequently asked Short Sale questions via Dom Naidoo

Happy Monday everyone! I hope you had a great Thanksgiving holiday and are ready for the week ahead. I recently attended another seminar for short sales and distressed properties and was amazing at the constantly changing short sale laws and programs for homeowners. Here is some information I retrieved from the seminar:

FREQUENTLY ASKED QUESTIONS

THE SELLER’S PERSPECTIVE

1. What is a short sale?

A short sale is a sales transaction in which the seller’s lender(s) agrees to accept

a payoff of less than the balance due on the loan and, in most cases, agree to

pay the associated costs of sale.

2. Do lenders always agree to pay the costs of sale?

No!  Short sale transactions do not follow a standard “blueprint.”  Each

transaction is evaluated based on the extent of loss, seller financial position and

market conditions.

3. How long does the average short sale take?

It can take anywhere from 28 days to six months or longer once the lender is in

receipt of a fully executed offer. The process frequently moves slowly. Currently,

many lenders are working to revamp their systems to speed up and streamline

the procedure.

4. If a short sale transaction can take up to six months, why do they call it a

“short sale”?

Clearly an oxymoron!  Or you could look at it this way: the value and therefore

the contract price are “shorter” than the loan amount.

The truth is a short sale has multiple phases that may affect the transaction time

frame.  Depending on market trends, price positioning, and other factors, it can

take up to 180 days or more for a property to sell. Once the negotiations between

buyer and seller are complete, the short sale proposal is sent to the lender who

will evaluate it from a financial perspective. In addition, the homeowner must

establish eligibility for the short sale by showing some level of hardship by

providing supporting documentation such as, paycheck stubs, bank statements,

tax returns, and other detailed financial and/or other documentation.

Understandably, this process takes time!

5. What are the basic eligibility requirements for short sale consideration?

As mentioned in number four above; homeowners typically have to prove some

level of hardship.  Hardships may vary in nature ranging from financial, marital

status, relocation, military deployment, salary reductions and so on.  Your

Realtor® can assist you in contacting your lender(s) to determine their specific

criteria.  Be honest and thorough in your assessment of your current situation.

6. Can you explain the difference between a “strategic” and a “non-strategic”

short sale?

A short sale (or default) may be considered strategic if the homeowner decides to

sell the property or stop making payments merely because the property has lost

equity or because they just no longer want to make payments and/or keep the

property.  Strategic short sales may be less likely to receive lender approval.

A non-strategic short sale (or default) occurs when the homeowner no longer has

the financial wherewithal to continue making payments and maintain the

property.

7. Do I have to be in default (behind in my payments) to be considered a

candidate for a short sale?

No!  It is imperative that every homeowner understand that failing to make their

payments may seriously damage their credit.  In addition, after the prescribed

legal time period and with proper legal notice, the lender may exercise their right

to foreclose and you could lose your home!

8. How do I determine if a short sale is right for me?

Homeowners ought to be aware of their options before considering a short sale.

Other alternatives include: Loan Modification, Refinance, Forbearance,

Repayment Plan, Deed-in-Lieu of Foreclosure, Deed-for-Lease™, Foreclosure,

and Bankruptcy.  Non-profit counselors are available to advise homeowners on

the advantages and disadvantages of each of the foregoing options.  A directory

of counselors may be obtained at www.hud.gov.  Your tax, financial and legal

advisors ought to be an integral part of the decision making process.

9. Why would a lender agree to a short sale?

There are various reasons why a lender may agree to a short sale. The

foreclosure process takes time, and as is often said, “time is money.”

The expense to the lender is a significant factor. Foreclosure costs may include:

internal fees and expenses, eviction, repairs and maintenance of the property,

security, as well as Home Owners Association (HOA) dues and utilities.  These

factors, combined with the federal and state government’s push to halt

foreclosures, make it easy to see why a short sale may be in the lender’s best

interest.

10. Is a short sale still an option if foreclosure has already taken place on my

home?

For the most part, the answer is no. Once the lender has completed the

foreclosure process, a short sale is not a viable option.  For that reason, it is vital

that homeowners understand the importance of early communication with the

lender. Don’t wait until it is too late. Speak to your lender, and let him or her know

that you are having financial or other difficulties.  If you want to retain ownership

of your home, you may be able to work with your lender to explore alternatives to

foreclosure. However, there are RARE circumstances that may allow for a

reversal of trustee sale in order to put a short sale back on track.

11. If my Realtor® and I are successful in achieving short sale approval from

all lenders do I remain responsible for the deficiency realized as result of

the short sale?

In California, if a lender (note holder) agrees to a short sale in writing, they are

prohibited from pursuing the homeowner (“mortgagor”) for a deficiency judgment.

The governing law is found is CA Civil Code Section 580(e) and is a result of the

passage of Senate Bills 931 and 458.  Under this law all loans recorded against

residential property with one to four units are essentially deficiency proof. If a

short sale is agreed to by the lender(s).  It is important to note the following: (i) in

the event of fraud the law does not protect the mortgagor (ii) in the event of

waste against the property the law does not protect the mortgagor (iii) if the

mortgagor is a Limited Liability Company, Limited Partnership or a corporation

the law does not apply.  Please consult real estate attorney for a full analysis of

the law.

12. I have a second mortgage on my home. Does this make me ineligible for a

short sale?

In many cases, a short sale can be achieved on properties with multiple loans.

Depending on the extent of the loss to the junior lien holder (second trust deed),

short sales are possible. When multiple loans are recorded against the property

the process becomes more challenging.  Proposals for short sale consideration

should be submitted to all lenders, including Mortgage Insurer (if any), at the

onset.

13. Once I have an offer on my home, what happens next?

Your REALTOR® will assist you in negotiating the best price and terms.  Once

the negotiations between buyer and seller are complete; the offer and all

supporting documentation should be packaged and submitted to the lender’s loss

mitigation department.  Follow-up and ongoing communication is a significant

factor in a successful short sale.Revised 8.19.11

14. Will I have to pay capital gains taxes if I sell a property as a short sale?

A short sale has no bearing on the calculation of capital gains taxes. However,

there are other tax liabilities that must be evaluated.  Seek the advice of tax,

financial and legal advisors before agreeing to a short sale.  For additional

information, you may visit www.irs.gov to learn more about taxation of short

sales.

15. Will a short sale affect my credit?

Yes. Your tax advisor will be able to address your specific situation.

*Any homeowner considering a short sale should consult with legal,

financial and tax advisors.

A directory of non-profit counselors is available at www.hud.gov