More to short sales than getting the lender's OK
Short sales have become the only way out for some sellers who owe more on their mortgages than their houses are worth. For struggling borrowers, it's a chance to avoid foreclosure.
While helpful, short sales can be stressful, time-consuming and may lead to harsh consequences if not done properly.
Many sellers think the biggest challenge they face in a short sale is persuading the lender to take a haircut and allow the property to sell for less than the mortgage balance. That's only the first step.
Here are five tips you must know when short selling your home.
Choose an agent experienced in short sales
If you needed heart surgery, would you put your life in the hands of a surgeon whose first surgery would be on you? Probably not.
The same applies to your financial life. Hire a real estate agent experienced in short sales, says Daniel Gomez, a board member at Neighborhood Housing Services of the Inland Empire in San Bernardino, Calif. He also is a real estate agent.
Ads of real estate agents who claim to be short-sale specialists are widespread these days. But some of these agents have closed only a handful of short-sale deals, says Gomez. Many have taken short-sale courses and are certified in selling distressed properties. That's not enough; certifications help, but nothing counts more than experience, Gomez says.
"Interview agents, ask how many short sales they've closed and ask to talk to some of their clients," he says.
A short sale is a time-consuming transaction and can take months to close. You want an agent who will stay on top of the game until the deal is closed.
Understand potential consequences of short sale
Underwater sellers are so anxious to get rid of their mortgage payments, they often don't think about what comes after the sale. Then, months or even years later, they receive a collection letter for the difference between what the house sold for and what was owed on the mortgage.
Laws vary by state, but many states allow lenders to go after that balance once a short sale or foreclosure is completed. That's why it's crucial for borrowers to understand whether the lender agrees to waive the deficiency, or the balance that will be left on the loan after the sale, says Howard Ullman, an attorney at Family Counseling Law Firm in Deerfield Beach, Fla.
"This needs to be discussed verbally and represented in documents," he says. "It shouldn't come as a surprise."
One way to avoid a deficiency judgment is to do the short sale through the Home Affordable Foreclosure Alternatives program, or HAFA. Lenders who approve short sales through this federal program have to release the borrower from a potential deficiency judgment.
Lenders are not obligated to approve HAFA short sales. They may choose to do the short sale based on their own internal rules and the guidelines set by loan investors. In that case, it's really up to the lender to decide whether it will pursue the deficiency against the borrower.
You can negotiate your way out of deficiency
When negotiating a short sale, many lenders don't voluntarily offer to release you of liability on the remaining balance of your loan -- at least not for free. But you can ask to negotiate a waiver.
"I've never had a lender refuse to negotiate a settlement" to waive the borrower from deficiency, says Patty Da Silva, a real estate agent certified in distressed property assets and owner of Green Realty Properties in Davie, Fla.
Some lenders may ask you to sign a promissory note for at least a small portion of the balance, usually cents on the dollar, or they may ask for a lump sum. Sellers often are outraged when first presented this settlement offer, Da Silva says.
"The sellers sometimes forget they actually borrowed that money," she says. In many cases, it is usually worth paying upfront to avoid future headaches.
"There is a price attached to the waiver of deficiency, but most of them are very tiny," she says.
Talk to an attorney
Real estate agents who are experienced in short sales can coordinate the transaction with the bank and tell you what to expect of the process, but remember they are not lawyers.
"Most of the people who do short sales are doing it through the Realtors or people who claim to be short-sales specialists," Ullman says. "But there are many issues that borrowers need to discuss that cannot be discussed with a short-sale specialist."
Those issues range from potential tax implications to protecting other assets the borrower may own if the lender tries to collect the balance of the loan in the future.
If you don't understand the contract you are signing or the potential consequences of a short sale, you should consult with a lawyer.
Keep up with HOA payments
If you are thinking about short selling your home, don't stop paying your homeowners association dues. The fees can turn into a snowball and kill the sale, even if the buyer is willing to pay for the delinquent dues at closing.
"In short sales, there are a few problems that money cannot fix," Da Silva says. In a regular sale or even with foreclosures, the seller or the bank pays any past dues owed to the HOA at closing so the buyer gets clear title of the property. But in a short sale, the seller's lender wants to get every penny out of the transaction, Da Silva says.
She says it is so crucial for the seller to stay current on HOA and condo dues that she refuses to represent a seller who won't keep up with the payments.
"Plus, you want to make sure the association is able to maintain the common areas so your house is saleable," she says. "A short-sale property needs to be maintained. The power needs to be on; the grass needs to be cut. You don't want your home to look like a foreclosure."