In this series, I detail six possible ways to deal with an “underwater” home—one that’s worth less than the amount of money owed on it. Here is part four of my six-part series.
Option #4: Short Sale
In a short sale, you sell your home for less than you owe. CoreLogic reports 62,000 short sales in the first quarter of 2010—tripled from the second quarter of 2008.
For the homeowner/seller, the goal is to get the lender to approve a short sale and forgive any remaining debt. This can get especially tricky if there is a second mortgage, but it’s not impossible to wipe out deficiencies on both first and second mortgages. While it would seem to be common sense for a lender to accept a short sale rather than allowing a home to go into foreclosure, where losses could be even greater, it’s not always easy to convince a lender—or lenders—to agree.
The Home Affordable Foreclosure Alternative program (HAFA) is a government-initiated short sale program. Sarasota Florida real estate professional John Scherden has found himself working with an increasing number of clients involved in short sales after the Florida real estate market took a nose dive. He says HAFA is making a real difference, and believes the program is “extremely beneficial” for those who qualify. “If all parties agree, the (remaining) debt will be forgiven and the seller will walk away with $3000 at closing.” For those who don’t qualify for HAFA, lenders may still be willing to negotiate a short sale, but it could leave the seller on the hook for a deficiency.
Attorney Anne Weintraub, a Florida real estate attorney and partner in the firm of BandWeintraub, P.L., says that, overall, it is getting easier to get a short sale approved and closed. She explains that in recent years “most servicing banks have invested in partnerships with vendors who can assist with processing short sale packages electronically which has improved the pace of short sales and the chances the homeowner’s documents will not go missing. In other banks, the short sales have become easier because of the hiring of much-needed staff to man the phones, review the borrower’s documents, and analyze the files.” But she also warns that some banks haven’t done anything to speed up the process of short sales, often resulting in so much frustration on the part of both sellers and prospective buyers that they give up.
Scherden agrees. He is in the process of working with a client whose short sale will end up taking less than 90 days from start to finish. But both Weintraub and Scherden both warn that the short sale process can be daunting and is not a DIY project. If you’re thinking about selling your home in a short sale, consult with:
- A real estate professional with strong experience in short sales to both evaluate the value of the property and to help guide you through the process. Your lender is not going to want to hold your hand through a For Sale By Owner short sale. One designation you can look for: “SFR” or “Short Sale & Foreclosure Resource” certification;
- A real estate attorney with experience in foreclosures and short sales to walk you through the legalities, help you avoid a deficiency, and to continue to defend the foreclosure case until the short sale is finalized; and
- A tax professional to help evaluate whether you may owe taxes on the forgiven debt
Short sales involve extensive documentation, and the borrower must be able to document a hardship. All that paperwork can be to the detriment of the homeowner who wants to get out of a bad situation. “Typically a short sale won’t be approved if you have a retirement plan that could be drained, or the income to support the payments on the mortgage,” warns John Maddux, CEO of YouCanWalkAway.com.
“About half of our clients have looked at the option of a short sale, and they’ve already talked with their lenders,” he says. “There are some states where a short sale is worse than a foreclosure. In Nevada they may include in short sale verbiage that they have up to two years to collect a deficiency. Also you have to divulge a lot about your finances, which means it can be easier for them to pursue a deficiency judgment because they have so much information about your finances,” he warns.
It’s also essential that sellers make sure the prospective buyer is committed to the short sale, warns Weintraub, who advises her clients to get an escrow deposit from the buyer and to complete inspections early in the process. “The worst possible scenario is that the homeowner hires professionals, completes all of the paperwork the bank requires, obtains the short sale approval, and then the buyer walks away with the homeowner getting nothing for their efforts and time the property (is) taken off the market,” she says.
Other options for homeowners with “underwater” mortgages:
- Underwater On Your Home Option 1: Stay and Pay
- Underwater On Your Home Option 2: Refinance
- Underwater On Your Home Option 3: Get a Loan Modification
- Underwater On Your Home Option 4: Short Sale
- Underwater On Your Home Option 5: Walk Away / Foreclosure
- Underwater On Your Home Option 6: Bankruptcy