The Skinny on Short Sales | By Matt Williams
June 2009
With the real estate market in free fall for the last couple of years, it’s no wonder that short sales are the new new thing. Briefly put, a short sale occurs when you sell a property for less than the principal amount you owe on your mortgage. If you still owe $500,000 in principal on the mortgage and the value of the house has dropped to $250,000, that’s a “deficiency” of $250,000. In this market, we’re not talking small change!
Not just anybody can partake. To complete a short sale, you need your mortgage lender’s permission. Circumstances vary. If there are junior lenders involved in your property (you took out either a second mortgage or a home equity line of credit), these parties must also approve. And if your lender sold the mortgage and it was lumped with other mortgages and turned into a security, you will also need the approval of the investor in that bond.
To get that approval, you will need to furnish the loss mitigation (or “workout”) department at your lender with your financials. Basically, you need to prove that you are financially distressed before the lender will even consider discussing a short sale.
Here’s how it works. Technically, you are in default if your mortgage payment is late by one day. Generally, though, lenders are not quick to foreclose. Common practice is that when you haven’t paid your mortgage for 90 days, the lender will send you a foreclosure notice. Even so, the auction of your house will probably not take place for another six months.
There is a period of time when you can negotiate a short sale. Historically, that has been after you’ve defaulted but before the bank tries to foreclose. And that’s the way it was up until about nine months ago. Now, as a real estate agent, I’m hearing that some lenders are changing their tune and will begin discussing a short sale sooner—even before you are in default.
Keep in mind that even though the lender can face losses on the deal (against which it must reserve a proper amount on its books,) time is money. As long as a house stays vacant, there are still taxes to pay and lawns to mow. In this environment, multiply those fees by 200,000 (or whatever the number of houses the bank has facing foreclosure,) and you get the picture.
In short, a lender is probably better off negotiating a short sale rather than hanging onto the property and hoping it can be sold at a better price later.
Even if you are successful in negotiating a short sale, however, be forewarned. Your troubles may not be entirely over. Depending on an individual’s financial situation, the lender will either get a judgment for the deficiency, work out a payment plan for what is called a “signature loan” for the amount of the deficiency, or write it off. All three of these possibilities have happened—and can happen. The times are extraordinary, and lenders are different. The short sale will also impact your credit negatively, but not as much as a foreclosure.
Very truly yours,
Matt Williams
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