Short Sale 101 — Seller’s Perspective Part 1

In the most brief terms, a short sale happens when a bank agrees to let a homeowner sell their home for less than they owe on the mortgage and “forgive” the deficiency.  That makes it sound pretty simple and, if you’re a seller who is upside down on your mortgage, it sounds pretty good.  No one wants to bring money to the closing table to sell their house, right?

The kicker is that short sales are complicated and many factors really depend on the lender holding the mortgage.  So, we’re going to break the topic of short sales down into more manageble chunks of information that are easier to digest.  In this first article, I’ll try to tackle the general concept of whether a seller may be able to get approval from their bank to do a short sale.  Later topics will include: How does the short sale process work? What constitutes a financial hardship? What is an “approved short sale”?  How will a short sale affect a credit score? Are there other alternatives or options similar to a short sale to help me sell my home if I don’t have a true hardship? If you are a seller and have specific questions, please feel free to post them and we’ll answer them, along with help from our go-to attorney, Chris Little with Parkway Title. 

Part 1: Am I a candidate to short sale my home?

Nearly every seller I meet with in this market has heard of a short sale and inquires whether it’s something that they can do — usually to avoid having to write a large check at closing to payoff what they owe on their mortgage.  There are some basic considerations that determine whether a seller would likely be approved.  Understandably, the bank isn’t going to just write off a deficiency because the homeowner doesn’t want to pay it.  That would be nice — most of us would borrow money all day long if we knew that down the road, we could just get the lender to forgive our debt because we didn’t want to pay it.  I know that’s simplifying the situation, but you get my point.  So, here are the basic things a bank will look at to determine if a homeowner can sell their home as a short sale.

1) The homeowner has to be able to demonstrate a hardship.  This is probably the most important component.  The reason for moving can’t be that you just don’t want to live there anymore.  Job transfers, job loss, divorce, bankruptcy or any change in financial status that makes it difficult to make the mortgage payment are common examples of hardship.  Cases could be made in more specialized situations like the need to move to be closer to a parent to be a caregiver.  But, in the most basic sense, there has to be a hardship — a compelling reason that you need to sell your home.

2) The homeowner has to demonstrate financial hardship.  Now, this one becomes a bit of a gray area and will vary depending on the lender.  But, in the most basic sense, the seller has to be in a position that they cannot pay the deficiency.  Again, it’s very painful to write a check for $50,000 at closing because the value of your home has declined.  But, if you have $50,000 sitting in the bank, your lender isn’t going to write off the deficiency on your house for a short sale.  That being said, there is a case to be made that exhausting financial resources to sell a home isn’t an acceptable solution.  This is where the negotiation aspects of a short sale come into play.  And, where the topic gets a lot more complicated.  We’ll tackle this topic in another article, but suffice it to say that only EXPERIENCED short sale agents and attorneys are most qualified to negotiate with a bank on a seller’s behalf. 

3) The comparable sales have to support the lower sale price.  Typically, a bank wants to know that the market value of the home is lower than the amount owed on the mortgage.  This information can be demonstrated to the bank fairly easily in this market as many sellers are “upside down”.  It may become an issue if a contract price is negotiated between the buyer and seller, and then the bank doesn’t think the market price is that low.  Again, this is a somewhat complicated topic and we’ll talk about it more in future articles.  But, suffice it to say that the bank has to approve the sales price and, often they think it is higher than the price the buyer and seller have agreed upon. 

4) Foreclosure should be imminent.  Generally, the bank looks at a short sale as an alternative to foreclosure.  If they believe the seller really must sell their home and simply does not have the financial resources to bring cash to closing to cover the deficiency, then they will consider a short sale the alternative to foreclosure.  That being said, this also is a complicated part of the negotiation process and will vary from lender to lender. 

If you are a seller and are in a situation where you need to sell your home and are upside down in your mortgage, the best place to start is to talk to a qualified short sale agent.  Most good short sale agents are now working with attorneys on the negotiation process and can help you decide if this is a process that can work for you.  And, stay tuned to future postings on this topic.  If you’d like receive notification of future blogs, “Like” Red Robin Group on Facebook. 

posted: Sep 15, 2011 | No Responses

Posted by:  Wakamo & Associates

Melissa Wakamo and her dynamic team of agents and support staff provide buyer and seller clients with exceptional service and proven results. Since the start of her real estate career in 2004, Melissa has proven to be a true advocate for her clients and has consistently performed in the top 1% of agents

“When I started my real estate career, I wanted to work in my local community and get to know my neighbors. Now, I realize how important that local expertise is to our clients. At Red Robin REALTORS®, all of our agents are specialists in working with buyers and sellers in Atlanta’s intown neighborhoods.”

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