If you are considering selling your home for less than what you owe on your mortgage, then the first step should be to discuss potential tax consequences with a certified public accountant (CPA), especially if you are looking to sell investment property. In some cases, a short sale can trigger income tax liability if the lender does not pursue the balance remaining on your loan(s) above the amount collected from the short sale. Most homeowners selling their primary residence will be shielded from adverse tax consequences under the Mortgage Forgiveness Debt Relief Act of 2007 through 2012, but still a good idea to discuss tax issues with a professional up front.
Hire a Short Sale Attorney
Short sale attorneys are trained in negotiations and will typically cost you less than a third party negotiator. They also do not have a vested interest in the sale, and can protect you from common pitfalls that arise in nearly all short sales. They can also help you locate a real estate agent experienced in short sales. If you already have an agent who is not experienced in managing short sales, your attorney can educate and work with your agent towards a successful outcome that does not leave you with a large outstanding debt. Short sale attorneys can provide valuable legal advice that a real estate agent or third party negotiator cannot provide.
Hire a Real Estate Agent
Successful short sales depend heavily upon the skills of a qualified real estate agent. The agent is responsible for listing and marketing your property at a fair price that will generate an offer. If the price is too high, you will not get an offer. If the price is too low, you may get an offer but your lender will reject the price. The agent is also responsible for communicating regularly with the lender to make sure the lender has everything they need and to provide the necessary prodding that some lenders need to open the file. The short sale agent sets the stage for a successful sale, and the short sale attorney sees to it that the lender doesn't clutter that stage with language that is more harmful to the seller than a foreclosure.
Market the Property at a Fair Price
All short sales begin and end with aggressive yet reasonable marketing. In a tough market, you will be but one out of thousands of distressed properties for sale. If you set the price too high, the property will not sell. If you set the price too low, you might generate lots of offers, but you run the risk of not getting approval from your lender(s). Some people operate under the assumption that the lender will simply counteroffer if the price is too low. The problem with this tactic is that it will take the lender more time if they have to produce a counteroffer on price and you run the risk of losing the buyer. The typical turnaround time for lender approval is 60-90 days and could take as long as 6 months depending upon who your lender is. This alone is enough to scare off some buyers, and the need to haggle over price could add another 30 days to the process.
Purchase and Sale Agreement - Considerations
Once you receive and accept an offer, your agent or attorney will submit the purchase and sale agreement to your lender. Short sale agreements are typically contingent upon lender approval as the buyer cannot get title to the property clear of the existing loans absent approval from the existing lenders. However, the agreement should also be contingent upon the lender "waiving the deficiency" that remains after closing, otherwise you could get approval from the lender, close the sale, and then get a letter months later demanding you pay the remaining balance owed on your loan(s). Just because a lender has approved the sale does not mean they are agreeing to release you from the entire debt. If the short sale approval letter from the lender does not specifically state that the deficiency amount on the loan is being "waived", then you will still owe the remaining balance on the loan that was not paid out of the short sale proceeds.
Documents to Submit to Lender
Once you have an offer in play, the following is typically required by your lender and should be sent together as a short sale package:
1. Purchase and Sale Agreement signed by buyer and seller;
2. A hardship letter describing why you are unable to meet your loan obligations;
3. Tax returns for the last 2 years;
4. Bank statements for last 6 months;
5. Proof of unemployment or paystub;
6. Statement of Assets & Liabilities (e.g., Fannie Mae Form 1003A);
7. Notarized Authorization to Release Information to listing agent and attorney (needed to negotiate with lender);
8. Recent Comprehensive Market Analysis (provides activity data in the area for last 6 months and includes Active, Pending and Sold properties);
9. Preliminary HUD (shows net amount that lender will receive from the sale).
Keep Buyers in the Loop
Most buyers will agree to a 60 day timeline to obtain lender approval, but will they agree to postpone the closing if the lender takes twice as long? If a buyer is on a tight schedule because they are selling or have sold their own house, the agent and attorney will need to work in tandem to make sure the file gets processed in a timely manner. It is not uncommon for a lender to submit its approval letter the day before closing, and they will even miss the fact that the deal has been lost due to their delay unless they are reminded of key deadlines in a manner that is persistent and firm. If lender approval has not been obtained within 2 weeks of closing, the buyer should be informed that the closing date may need to be pushed out. This is especially true if the seller is negotiating a waiver of the deficiency as the approval letter is not enough to close the deal absent an express waiver. If the buyers are unable to extend the closing date, inform the lender in writing.
Short Sale v. Foreclosure
One of the primary reasons for selling a house short is to avoid foreclosure. One of the primary reasons for a lender to approve a short sale is to avoid foreclosure. Selling a house at foreclosure is almost always a last resort for everyone involved in the short sale process. However, if the lender will not agree to waive the deficiency, the seller might be better off if the bank foreclosed, especially in a non-recourse state. Having a real estate attorney to explain all the benefits and risks associated with short sales, foreclosures, and even bankruptcy is a small price to pay for peace of mind.