Spoiler Alert:: If you don’t want to read the rest of the post, the short answer is a resounding “No.”)
One of the biggest myths in the housing crunch and the stress of the foreclosure process is the belief in the possibility of salvation from a so-called “short sale.” They’re being oversold by brokers and agents because, well, with mortgage lenders being mostly shuttered while they ride out the credit confusion roller coaster, the normal purchase and sales market is shut down. With no real lending market, home sales cant really happen They have to generate sales commissions somehow right? For many, short sales are it for the moment.
What is a “short sale?” A short sale is nothing more than the sale of a piece of real estate for less than the amount of the total debt which it secures. Example: If the home is worth $300,000, and the loan balance is $350,000, a normal sale is not going to generate adequate proceeds to satisfy the loan. That means, in this example, that the seller (or someone) is going to have to pony up another $50,000 in order to get title released from the lien and complete the sale. A “short sale” happens when the borrower (or more commonly, his or her agent) is able to convince the lender to accept less than the full loan amount and release the property anyhow.
Why would a lender do this? Simple really. If the value of the property is really only $300,000, the lender isn’t likely to be able to sell it for any more than that after foreclosure anyhow. So why spend the money and time to go through a cumbersome foreclosure process which, after all is said and done, isn’t going to net the lender any more than what the short sales offers? If the lender concludes, after crunching the numbers, that it’s going to lose $50,000 anyhow, why spend the money and time to foreclose to suffer that inevitable loss? Let the borrower and his agent do that work. (I don’t know exactly what it costs a lender to foreclose, but it is a cost which won’t be recouped by the lender.)
Why would a borrower do this? There is only one reason: To salve a bruised conscience. There is no good legal, business or economic reason to incur this heavy burden and take on the time and expense risks. Let me explain.
The concept of a short sale is attractive, though the reality is significantly less so. Whether it’s worth the hassles and heartburn is going to depend on your particular situation.
However, assuming you’ve decided to actually go through with trying to do this, here are some thoughts and cautions…
First of all, I don’t take any credit at all for the following advice and observations. They come from a recent seminar I attended hosted by Fidelity National Title in Novato, at which the guest speaker was Bill Gordon of TMG West. Although based in Burlingame, California, TMG’s website indicates that they’re doing these all up and down the West Coast. Bill gave a seminar to a group of brokers and sales agents recently and he knows his stuff. He was kind enough to allow me to attend, and was even patient with me when I couldn’t keep my mouth shut a couple of times
Here’s what I learned from Bill.
1. Interview several agents and look for one who has some experience doing them. They are not easy to close, can take months and the risk of a having a deal fall out at the last minute can be significant. They are not for the feint of heart, the impatient or someone who lacks really tight organizational skills. Don’t hire an agent who has never done one. Period. You’re asking for serious trouble if you do. If you don’t know how to find one, call the resident broker in charge of a reputable and large real estate agency and ask them.
2. Determine up front whether or not you and your property fit the profile of a possible success story or whether you’re wasting your time. You will have to be at least two months behind on the mortgage and have a signed purchase contract in hand before the lender will even talk to you. That’s a tall order for someone who’s also stressed about the possibility of losing their home in foreclosure. So try to grasp that first point: You must already be in default at least two to three months before the bank will even consider your proposal.
So if you’re still current on your loan and someone (maybe even a local real estate agent) has called you up and made an offer to buy your condo at way below market, you’re still three to four months away from having any information on which you can really act or from really even being able to present the deal to your lender. How long is that lowball offer going to hang in there? Long enough for you to screw up your credit and set yourself up for success?
3. The lender will require you to provide, together with the signed purchase and deposit receipt mentioned above, at least two years of tax returns (federal alone will usually suffice); Two to three months of pay stubs; A hardship letter in which you bare your soul and in an attempt to pluck the tender heartstrings of your reader–who, remember, will be a banker; A comprehensive financial statement; Two to thee months of bank statements; Current property tax statements; Estimated HUD-1. Then you submit it all to some “loss mitigation specialist” in St. Louis or Phoenix or Orlando…and wait…and wait…and wait….
Last, there are still risks on a short sale. I think most notable of these is the possible that you might get taxed on the debt forgiveness. Because forgiveness of debt on a mortgage is legally considered ordinary income and is usually a taxable event, you could be liable for income tax on the amount by which the outstanding debt exceeds the value of the property at the time of foreclosure.
If you would like to read more about this issue, I would suggest downloading IRS Publication 908.
Would I do a short sale? No. I don’t believe that the advantages of a short sale are worth the headache. Furthermore, who’s bacon are you trying to save, yours or the bank’s? The damage you have to do to your credit in order to even be considered for a short sale are substantial: Basically, if you haven’t defaulted on your mortgage and gotten to the brink of losing it in foreclosure, you’re not eligible. But if you have defaulted on your mortgage and gotten to the brink of foreclosure, then your credit is already trashed. There is no meaningful difference between a short sale after a 90 to 120 day default and a foreclosure or Chapter 7.
By the time you’re a candidate for a short sale, you’ve already done as much damage to your credit as a foreclosure or bankruptcy. So what’s the point? The old saw about rearranging deck chairs on the Titanic comes to mind.
Of course, your mileage may vary, and there may be circumstances where it makes sense to try it. But if I were going to do it, I’d pick up the phone and call an expert.