Welcome to Prudential California Realty's Short Sale Guide for Home Sellers!
If you have any questions regarding Short Sales, we can help! Our Short Sale Specialists are experienced, knowledgeable and available 24/7 to answer your questions and concerns.
What is a Short Sale?
Short Sale: a term used to describe a property sale where the total sale proceeds are less than the total balance due against the property. This includes the cost of the sale (i.e. customary seller closing costs, commissions, repairs, etc.)
Why are Short Sales Common?
The foreclosure rate is soaring in many areas and Northern California is not exempt.
See the chain reaction to the right to better understand why short sales seem common in today's market.
- Large volume of risky ARM's, 0% down payment, Stated Income Loans
- Brought a stream of buyers into the market driving home prices up
- ARM's adjusted and payments increased
- Buyers can't afford the new payment
- High inventory of active properties contribute to declining home prices
- No ability to refinance
- As a result, homeowners face serious financial problems and begin considering other real estate option such as a foreclosure or short sale.
Who is involved in a Short Sale?
Short Sales will require you to work with multiple individuals. Here is a helpful guide to know the role of each individual involved.
We understand this is a difficult time for you. To be successful, your full cooperation is needed.
Mortgage lenders of all types will be faced with a high volume of non-preforming loans on equity deficient properties over the next several years. To a lender, a short sale is purely a matter of money.
One of the most critical players of a Short Sale transaction. A Realtor®, after identifying and qualifying the homeowner as a candidate for a Short Sale, is responsible for navigating through the process with commitment, patience and follow-through.
The Loss Mitigator
A process to avoid foreclosure; the lender tries to help a borrower who has been unable to make loan payments and is in danger of defaulting on a loan.
The Title Company
Escrow officers can identify and solve a wide range of issues that may come up during a Short Sale transaction.
Every real estate transaction needs a Buyer to seal the deal. In the case of a Short Sale, you need the right Buyer - one who has the patience to stick through the obstacles that most Short Sales face.
Why do banks participate in Short Sales?
- Banks participate in Short Sales to help homeowners and themselves prevent foreclosures.
- Banks cooperate to avoid the costs associated with foreclosing, and thus the managing and reselling of (REO (Real Estate Owned) asset.
- Compared to foreclosures, Short Sales are less costly, less time-consuming and more likely to see completion.
- The over supply of foreclosure properties is a financial burden against the banks. Banks cannot afford to take back all of the foreclosed homes.
What are some of the benefits from a Short Sale?
- The Seller, Homeowner: The seller avoids the credit disaster of losing a home to foreclosure. It's viewed as the "responsible choice."
- The Lender: By completing the Short Sale, the lender reduces the actual loss and eliminates the exposure to risk that goes with acquiring a property through foreclosure.
- The Buyer: The buyer that hangs in through the Short Sale process can get a property at a below market price.
What is Loss Mitigation?
It's a concept made up of two components:
Limiting actual costs and expenses incurred by the lender on "at risk loans." Reducing the lenders exposure to risks tied to real estate ownership. Each lender approaches Loss Mitigation with their own set of goals and priorities. Some will move aggressively to cut losses and limit risk by pushing Short Sale files to conclusion quickly. Others will proceed with caution on Short Sale files, placing a high priority on approving only those files with horrendous hardships and desperate financial circumstances. It all comes down to how a particular lender views the idea of mitigating loss.
It's a Department - it's the place where your file ends up when you ask a lender to agree to a Short Sale.
Each Loss Mitigation Department will operate with slightly different policies and protocols. Sometimes you'll be assigned just one case manager that you'll speak with all the time, other departments have a pool of case managers that work on all files in that department. Each style of operation has advantages and disadvantages, but always remember that the Loss Mitigator has a position of authority and you will be most successful if you can accept that Loss Mitigators style and approach.
Understanding Your Options
Depending on the sellers situation, there are many options to consider before attempting a short sale.
- Contact the Lender
- Turn the Home into a Rental
- Deed in Lieu of Foreclosure
- File Bankruptcy
- Stop Making Payments
- List the Property & Negotiate Short Sale
Contact the lender. The seller should contact their lender as soon as trouble arises. A lender may be willing to make accommodations if a borrower finds himself or herself in a difficult financial situation, particularly if it is temporary. The key is to let the lender know up front, before the problem becomes too serious to work out with the lender. Lenders may allow borrowers to:
- Reduce the Payment
- Defer a Payment
- Change the loan terms which includes renegotiating the interest rate, monthly payment amount or maturity date, or waiving late payment charges.
If payments cannot be made in a timely fashion, lenders may extend the "grace period" and work with the borrower. Lenders may even agree to delay filing a Notice of Default if, among other things, they feel they are informed about the borrower's intentions. This may make it easier to sell the property, and may preserve the borrower's credit.
Turn it into a Rental. Is there the possibility of renting the property and paying the difference between rent and the mortgage payment and looking for other living options for the borrower.
Deed in Lieu of Foreclosure. The borrower voluntarily delivers title to the lender and the lender accepts it in full satisfaction of the debt. The lender then owns the property and can dispose of it as it sees fit. This effectively avoids the whole foreclosure process and if the lender agrees to this, the homeowner would have to vacate the property and again, there could be significant tax implications to the homeowner as well as their credit being compromised.
File Bankruptcy. If the borrower declares bankruptcy, the foreclosure process is temporarily put on hold. However, the lender may request the bankruptcy court to lift the automatic stay with respect to the lender's loan and resort to it's remedies under state law, including foreclosure, if the lender can show justification to proceed. Some borrowers think bankruptcy offers the best way out, but the borrower's credit may be seriously impacted for many years.
Stop making payments altogether and stay in the property until the property goes through the foreclosure process. The timeline can vary, but generally, the timeline does not begin until the lender feels they have exhausted all avenues for curing the payment delinquency. Normally, this happens after the borrower has missed three monthly mortgage payments and the Notice of Intent to Foreclose has expired.
The borrower has probably been contacted by the lender several times prior to beginning the foreclosure process. The official foreclosure process then begins by the lender contacting a Trustee and instructing them to file a Notice of Default. (Once the NOD has been recorded it takes 120 days to complete the foreclosure process.) This could take anywhere from 6-9 months, possibly longer. The homeowner's credit will be severely affected, however, they may have been able to stay in the house for many months saving their money by not making the mortgage payment to prepare for relocation once evicted.
List the property – Get an offer and negotiate the short sale with the lender(s). There is no guarantee that this will be successful and no guarantee how much time and energy will be put into the process. If this is the choice that is determined to be the least disruptive and the lesser of all other choices, then contact a Realtor who is a Short Sale Specialist to move forward.
A Short Sale may have the least adverse effect on the borrow's credit status. A borrower's credit may be adversely affected in any of the following:
- Short Sale
- Notice of Default being recorder
- Deed in Lieu of Foreclosure
Short Sale Start-Up Checklist
Below is a list of what lenders are requesting:
- Seller application:
o Full Name
o Social Security Number
o Employment Information Including Salary
o 401k and Years of Employment
o Bank Accounts Including Other Investments (i.e. stocks, mutual funds, other real estate, etc.)
- Copies of your most recent paycheck stubs
- Copies of your last tax return
- Hardship letter explaining why the borrower is no longer able to make the payments and any documentation to support their claim.
- Listing contract showing the house is on the market.
- Listing contract showing the terms of the contract.