Real Estate Attorneys

Short Sale

A short sale in real estate occurs when the outstanding loans against a property are greater than what the property can be sold for.  In a short sale the Lender agrees to accept less than the full amount owed and will terminate the mortgage of record such that the Seller can provide clear and marketable title to the next Buyer.  Unless otherwise agreed to in writing, a short sale does not mean the Seller is released from responsibility for the balance which is due to the Lender (a/k/a the deficiency balance).

1. Do I need to Hire an Attorney? It makes sense to consult with an attorney about your property and the potential solutions that are available to you, including a short sale.  DHR understand short sales, has negotiated and closed hundreds of them, and can also discuss any other potential solutions available to you.

2. Value of Property. First, you must determine the value of your property. If you are selling the property through a Real Estate Agent, which is strongly recommended, your agent will provide you with an estimate of your home’s market value. If you are selling the property yourself, do your own market analysis of the area (i.e., comparable sales on comparable homes) and your property.

3. Estimate Closing Costs. Next, you will need to estimate your closing costs to determine the actually “net” to the lender.  At DHR, we can assist by preparing a draft settlement statement for the lender which will include all usual and customary charges and pro-rations in the format the lender desires.
4. Lien Balance(s). Determine the amount owed against the property. This will be the total of all loans against the property. Keep in mind that some loans will have pre-payment penalties which could increase the balance outstanding if sold prior to a certain date.  Additionally, if you have been past due on any of your loan payments, the Lender likely has the contractual right to charge late fees, attorneys’ fees and costs to enforce their rights, as well as default interest which may be as high as 18%.

Calculate the Deficiency:  Do the calculations. Subtract the total amount owing against the property from the estimated “net” proceeds of the sale.  On a short sale, this amount will be “the deficiency.”

5. Contact Lenders. At this point, it is time to contact your Lenders and speak to someone in their “loss mitigation” or “workout“ department and tell them the situation and your desire to engage in a short sale. Remember most Lenders will not speak with you about a short sale unless you are delinquent in your payments.  This of course will have a negative effect on your credit, but at present it is the norm for the majority of Lenders.

6. Specific Requirements. Ask the Lender what its procedures are for a short sale. Generally speaking, in order to get the short sale approved Lenders require the following documentation:

  • Hardship Letter
  • Two months of Bank Statements (checking and savings)
  • Two years of Tax Returns
  • Two months of Paystubs
  • Income & Expenses worksheet
  • Listing Agreement
  • Contract for Sale of Property
  • Proposed HUD-1 Statements

8. Negotiate the Deficiency. Depending upon the terms of the lender’s approval letter, you may find that you have to consider and deal with the deficiency which remains after the proposed short-sale. It has been our experience that the best time to deal with this is prior to closing. The lender already has your financial information and is in the best possible position to evaluate your ability to settle the debt. Some lenders will require a lump-sum payment prior to or at closing. Other lenders will allow you to sign a promissory note for some amount of the deficiency. There are a couple of general rules with regard to settlement of these deficiency amounts: (1) the more money and assets you have (or earn), the more you can expect to pay; (2) the more cash you can pay at closing, the less you can expect to pay toward the deficiency amount; (3) you will not have to repay the entire deficiency amount in full. A few other points to consider are: (1) second lenders (i.e. HELOCs) will absolutely want something from you to settle the deficiency; (2) every person’s situation is different and you should not rely on the urban legends you hear from friends and family about deficiency settlement; and, (3) the fact that the lender has approved the short-sale does not mean that they are going to waive their rights to a deficiency judgment unless this has been put in writing in the short-sale approval letter.

9. Sell the Property. Assuming that you have been able to gather everything required for the short sale and have received written approval from the lender, now you only have left to do one thing:  Close of the sale of the property!

You may have significant tax consequences as a result of a short sale, because in the event the Lender “writes off” the deficiency and issues you a 1099C, this is seen as debt forgiveness by the IRS and may be treated as income. Please consult with your with your tax advisor for specific details regarding your situation. 

 

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