We received a few questions yesterday and I thought it would be worth posting as short sale transactions tend to raise so many questions with clients.
Here we go,
Q. I had some questions regarding short sales and how those who are so underwater are able to pay 5-7% for a realtor out of pocket. Are realtors who list short sales doing it at a reduced commission?
A. The seller, in most cases, is not paying the commission and closing costs to sell the property. This is part of the loss that the lender is taking and is paid from the net proceeds to the lender. When we are negotiating the short sale approval we include the costs of sale in the estimated closing statement that we submit to your lender and most of the time the lender does require, as a condition of approval, that the Realtor take a lower commission.
Q. Also, when we sell we will be losing a substantial amount of equity and I really don’t want to pay someone close to $20,000 just to list it. What are our options?
A. If you are considering a Short Sale it is because you don’t have any equity to lose. A short Sale is a situation where you owe your lender(s) say $400,000 but in the current market the property is only worth $300,000 so the lender(s) have the option of accepting the $100,000 loss, plus the cost of the sale which could be another $30,000 and allowing you to sell the property for $300,000 with the lender(s) taking a loss of $130,000. The other option is that if the lender(s) don’t agree to this loss then they proceed to foreclose and eventually after 8-12 months they end up owning the property and putting it on market for perhaps the same $300,000 that you were hoping to sell the property for. In most cases the lender(s) are making the decision to take the loss now or take the loss down the road when they eventually sell the property after foreclosure and the loss down the road may be greater than the loss today.
Q. Our bank suggested a “for sale by owner option” basically to get us to the point where we can do a deed in lieu of foreclosure after listing it for 90 days. How do those who are underwater and have no liquid assets handle this? How do they afford a Realtor to handle the short sale?
A. A for sale by owner is not an option in a short sale. Reason being that it is not you that is paying the cost so what do you have to gain other than you will be having to deal with the constant and painful job of negotiating the short sale package with your lender(s). Short Sales are not an easy process, nationally the success rate is 37% of short sales are getting approved. Many of these short sales are not approved for a number of reasons such as Mortgage Insurance not approving the short sale, Second Trust Deed not approving the short sale, the sellers personal financial status is such that lender(s) don’t see that the owner is in a hardship that warrants the short sale approval. On many occasions I have had a lender state the same thing; “Don’t ask us to take a $100,000 loss because your home went down in value” Lenders expect that if you can afford to keep making your payments, even if it means not paying other obligations, then you are expected to make your payments.
Q. For our specific case, we bought a town home in 2005 for $445,000 and have around $90,000 in equity, unfortunately the homes are now selling for around $350,000.
A. If your home is now worth $350,000 then you don’t have equity, this would be the loss. The question that I have however is; How much do you owe on your home. If you owe less than $350,000 then you may not be a short sale candidate.
Q. We will likely be moving out of the area and keeping this as a rental which may not be an option as rents have dropped substantially and would not even come close to covering our mortgage. Also, for the length of time that we would have to rent it out, to regain our initial value we would lose >$10,000 each year. I have contacted our bank about this and we have discussed a deed in lieu of foreclosure or a short sale. However, they did not mention verification of income and assets. Is that still a requirement to complete a short sale?
A. Most lenders still require full financial disclosure from you as they want to determine if you are a candidate for a short sale. I would need to know who your lender(s) are to give you better info on this.
Q. Is it adequate to say that we are moving out of the area and cannot afford to rent in our new location while subsidizing renters to pay our mortgage?
A. Your current lender(s) is not concerned with what your financial situation is moving forward, they are only concerned with your current financial situation and if you can afford your current mortgage payment. Don’t be mislead into thinking that they are concerned about your future, they are concerned with minimizing the loss that they may take if they have to foreclose or short sale your home.
Q. I am concerned about this because while we do have some liquid assets we are facing an uncertain employment situation for my husband and I am planning on returning to school so the liquid assets were kept that way to pay for living expenses and tuition while I am in school.
A. Depending on how much you have in liquid assets your current lender(s) will not likely approve a short sale if they see that you still have liquid assets available; a common response from lenders is; “Don’t ask us to take a $100,000 loss when you still have money in the bank that you could use to make the payments for the next few months”.
I hope that these answers don’t sound harsh but I am trying to give you the reality of what the Loss Mitigation departments are actually doing at the various lenders and this reality is based on my experience in the Loss Mitigation field. Other concerns that you need to take into consideration is Recourse versus Non-Recourse loans; this is important as it could be that you may continue to be liable for the loans after foreclosure or short sale. And you also have to be concerned with the possible tax consequences, if this is your personal residence the feds have waived the taxes on forgiven debt until 2011 but the state is still expecting to collect taxes.
For anyone reading and considering a short sale in the San Diego, Riverside or Imperial County please contact me so I can go over more of the details based on your personal situation and perhaps we can steer you in the right direction.
Everyone else is welcome to email me with any questions you have. I will be happy to do my best to answer them or use our forum to post a short sale question or leave a comment below with your questions.