real estate

How to navigate a short sale

  • A list of liens. There may be more than one, so determine how many liens are on the property. The good news is that since late 2008, the IRS has been willing to release a federal tax lien. The IRS is not forgiving the back taxes that homeowners owe; it is just no longer requiring that the lien be paid off before the property can be sold. And a single mortgage lien is an easy problem to solve.

If there are first and second mortgage liens, the question becomes: What's the plan to satisfy these lien holders? The seller and the real estate agent should have a plan that is more sophisticated than crossing their fingers, Thompson says. In the best of all possible worlds, the seller will be willing to contribute to paying off the second lien, so the first lien holder gets the full amount from the sale.

If there is a third mortgage lien, reaching any deal is very iffy. Deal killers include child support liens, state tax liens and homeowners association liens. If they exist and there are no obvious solutions, walk away, Thompson says.

Here's one more deal killer, something that can be difficult to sleuth out, says Thompson. Because a short sale generally doesn't cover the whole amount owed or other liens, it can trigger mortgage insurance. If the property is covered by a mortgage insurance policy that doesn't have to pay off until the home has been in foreclosure for 150 days or some similar length of time, chances are the insurer will hold up the sale because it won't want to pay any earlier than necessary and hopes the foreclosure will just disappear. Often the mortgage insurer will simply go silent. Thompson says: No response, no approval. (Bankrate offers several articles on the topic of foreclosure.)

Be realistic

The bottom line: Don't choose a short sale if you're in a hurry.

"It's a waiting game," says Vidal.

Part of what slows down short sales is buyers' insistence on making really lowball offers, she says. "You get really crazy, ridiculously low offers -- and they are rejected."

Another factor is the increasing number of government programs aimed at keeping people in their homes -- about 50 percent of defaults never go as far as foreclosure, according to the Mortgage Bankers Association. So lenders see short sales as potentially the least attractive option and aren't willing to expedite them.

How can a potential short-sale buyer be protected from getting involved in an extended negotiation that doesn't go anywhere in the end? Thompson says you should negotiate an agreement with the seller and the seller's real estate agent that your offer will be the only one presented to the lender. If the lender isn't flooded with offers, it will be more motivated to move forward. If the lender turns down the offer without countering, then the restriction disappears.

Once you've crafted a deal, you better know where the money is coming from to close. If you're getting a loan, you need bank approval in advance.

As is true with any of these deals -- REOs, short sales, foreclosure auctions -- make sure you have money lined up. Cash is the best financing alternative in these cases.

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