When you think about the sale of a client’s home, you may imagine it as a stepping stone for moving on to a larger home or perhaps a forever home in which to retire. For many though, selling a home is a necessity in order to stay afloat financially.
Rather than a cause for celebration, the concept of selling is suddenly imminent as continuing with payments is no longer a budgetary option. A short sale may be what is needed to help a client remain solvent.
In real estate, a short sale might occur when a homeowner is stretched financially and has fallen behind in payments due to extreme hardship.
Usually there is not enough equity in the home and the homeowner now owes more than the current market value. In essence, the homeowner is “short” the money to repay the lender the remaining cost of the loan.
Under such financial distress, it may be too much of a hardship for the homeowner to remain in the house continuing to struggle while unable to make payments. A short sale may be needed thereby selling the home for less than the remaining balance of the mortgage.
There are many steps in the process and both the advantages and disadvantages of this type of sale must be considered by all parties involved.
The Short Sale Process
A short sale is not the answer for every homeowner facing financial struggle. There are 5 steps that must be taken to see if the owner qualifies for a short sale and is prepared for the length of this process.
1. Contact the Lender
Before the lender is consulted, consider asking for a release of information from the homeowner. This will allow you as the agent to communicate with the lender on his or her behalf.
It is important to know that it is not required for a lender to accept a short sale.
It’s best to be prepared ahead of time to prove the homeowner’s financial distress. Whatever the cause, it should be new, unforeseen, and significant such as divorce, job loss, or a health issue.
Speak with someone at the bank who makes decisions, such as an agent with the loss mitigation department. Once you find a lender who is willing to work with you on a short sale, you’re ready for the next step.
2. Begin Gathering Information
In order to write an official proposal, the lender will require some information that shows proof of the homeowner’s financial distress.
Important information to gather includes bank statements, tax returns, pay stubs, and medical bills. If the situation warrants, include a divorce decree or a job termination notice.
Some lenders may require a hardship letter to accompany the documents submitted. A hardship letter should clearly and convincingly explain the reasons why the homeowner is unable to make any further mortgage payments. It should show that the hardship he or she is under cannot be resolved such as a spouse’s death. Details should be included about assets and other debts incurred to show that another loan is highly unlikely.
3. Price the Home and Find a Buyer
As the agent, you’ll need to price the home according to fair market value and as close to the mortgage value as possible to prevent a shortfall. A shortfall occurs when a homeowner’s property is not worth enough to satisfy what is owed on a mortgage. The seller could be liable for taxes on the shortfall to the IRS.
Locate a buyer willing to enter into a short sale, and be sure the buyer understands the sale is dependent on lender approval.
4. Submit Documents to the Lender
Submit the listing agreement, including your commission as the agent, with proof that the buyer is able to purchase the property. Proof might include bank statements or a pre-approval letter from the buyer’s lender.
Submit all the documentation of the homeowner already gathered. Ensure nothing is missing, as it will cause a delay in the short sale process.
5. Wait
The process of reviewing documentation from the homeowner and buyer in a short sales process can be time-consuming, often several weeks.
The lender has to determine if enough money can be recouped through this process. Even with a potential buyer at the ready, the lender may still reject the offer.
Though the short sale has its advantages, this is one of the disadvantages of completing a short sale.
Advantages and Disadvantages to the Seller in a Short Sale
When a house is sold for less than the total amount owed by a homeowner, the situation appears dire, but there are some advantages in choosing a short sale.
For the homeowner selling the property, the consequences of the short sale are less detrimental than the effects of a foreclosure.
- A short sale allows the homeowner to remain in the home until it sells.
- A homeowner’s credit score takes less of a hit than in the case of foreclosure.
- In a short sale, the lender covers the cost of real estate commissions as well as other closing costs typically paid by the seller.
- The seller has a better chance of securing a home loan in the future.
Short sale disadvantages include:
- If a lender denies the short sale application, the bank now has all of the seller’s financial information that was submitted and may use it to demand more money from the homeowner in a foreclosure.
- The buyer may tire of waiting and purchase another property before the short sale is finalized. A new short sale application will need to be filed with a new buyer secured.
- Leaving the Closing without any cash makes finding immediate housing difficult.
- A short sale will negatively affect the seller’s credit score depending on what is reported by the bank.
Avoid These Pitfalls as the Seller’s Agent in a Short Sale
As an agent, the more you know about short sales, the more you are able to help your clients determine if it’s the right choice for them.
A few things that should be considered before going through the lengthy collection of documents for your client to prove financial distress include:
- Determine whether the homeowner is actually in default on payments to the lender. If he or she has yet to miss a payment, it is probably premature to opt for a short sale. In this case, the bank may determine it will recoup more money through foreclosure.
- Find out if there is a cosigner on the mortgage. The bank will probably deny a short sale in this case and hold the cosigner responsible for mortgage payments.
- Don’t try to do a short sale by yourself. Seek assistance from your broker on whether or not an outside professional should be consulted in a short sale as mistakes in the process could be costly or cause the sale to be denied.
Short sales seemed to be a thing of the past. Though much less common since 2008, the short sale might make a comeback as continued effects of a world pandemic are continually felt in a declining job market.
Many are finding themselves laid off or furloughed with no end in sight. With bills continuing to pile up, it’s more common for some individuals to become upside down on mortgage loans and be left with little hope for a quick resolution.
Perhaps a short sale is the best solution for those who are in financial hardship. Knowing the facts will help better prepare you to support your clients who choose this option.