The Art of the Deal The Short Sale
"Short Sale" refers to the sale of a property in which the sale price is insufficient to pay off all encumbrances and pay the expenses of sale. If the lender is convinced that the owner, for various reasons, is unable to continue making the payments, the lender will often agree to take less that the full amount owed to allow the sale to close escrow. The incentive for the bank to approve a short sale is to have the property sell before the loan becomes a problem account on their books.
If you are considering a short sale, there could be drawbacks. For your protection, all borrowers should seek legal advice from a competent real estate lawyer. Also, call your CPA to discuss short sale tax ramifications. A new federal law could unleash a torrent of short sales as struggling borrowers facing foreclosure unload their over-mortgaged homes to avoid huge tax bills on capital gains.
HR 3648, or the Mortgage Forgiveness Debt Relief Act, signed by the President on Dec. 20, 2007, helps people whose homes are in foreclosure by canceling taxes on any mortgage debt that has been forgiven by their lender. The government previously viewed the difference between the debt and the value of the home as taxable "income." Now it does not.
If you are considering a short sale, you should:
• Call the Lender
Call the lender and ask to speak to the "Loss Mitigation Department" of the bank. The bank will be very firm at first and may be difficult to deal with, be direct they will loosen up.
• Submit Letter of Authorization
In order for any party, other than the owner of record, to request specific property information and speak to the lender, the owner of the property must first submit a Letter of Authorization. Letter must be printed on the letterhead of the property owner with property address, loan reference number and your listing agents name and number. The name of the person signing the letter must be printed below the signature. If the person signing the letter is not the name on records, the signer must identify their position and/or relationship to the owner of record. The signature must belong to the property owner. Letters of authorization do not have to be notarized.
• Preliminary Net Sheet
Banks want to see how much money they are going to net with your offer. Providing a Net Sheet with your offer will provide the bank with the numbers they need to see.
• Hardship Letter
Most lenders will request a hardship letter that details the reasons a homeowner has not made his or her mortgage payments. This is a bit strange because the borrower who is in default must prove that he or she is broke and unable to afford the payments. The more sympathetic the letter, the better.
• Proof of Income and Assets
It is best to be truthful and honest about your financial situation and disclose assets. Lenders will want to know if you have savings accounts, money market accounts, stocks or bonds, negotiable instruments, cash or other real estate or anything of tangible value. Lenders are not in the charity business and often require assurance that the debtor cannot pay back any of the debt that it is forgiving.
• Copies of Bank Statements
If your bank statements reflect unaccountable deposits, large cash withdrawals or an unusual number of checks, it's probably a good idea to explain each of those line items to the lender. In addition, the lender might want you to account for each and every deposit so it can determine whether deposits will continue.
• Market Analysis
You definitely want to do your homework and provide the bank with at least 3 to 5 comparables of properties in the area that have sold in the last 12 months, preferably the last 6 months. In doing this you want to try to get as close to the subject property that you can and ensure that you provide the most accurate information. I have found that it is also helpful to be able to show the number of days on market and any and all down payment assistance or seller concessions given in the sale.
• Purchase Agreement & Listing Agreement
The lender will require a copy of the listing agreement and a fully execute offer accepted by the seller. Be prepared that the lender will negotiate all fees, termite, home protection policy, etc.
When you purchased your home, you surely did not envision yourself in this situation. Unforeseen circumstances, such as a job loss, readjusting mortgage rates and illness to name a few, can put you in a position you never imagined. It is imperative that you look at all options, including bankruptcy, foreclosure and the short sale before you select the one that will work best for you.
By Diane Tuman
- Last edited October 12 2012
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