Short Sale Basics| Short Sale Basics |
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I. What is a Short Sale?
According to the Arizona Association of Realtors®, “The term ‘short sale’ is used to describe a sale in a situation where there is more debt owing against a property than the property’s value. In a loan default situation, (pre-foreclosure) the creditor(s) may be willing to agree to allow the property to be sold for less than the loan amount and/or accept less than (or “short”) the amount owed as payment in full.”
II. Why do Short Sales Work?
Fundamentally, a Short Sale is a bank authorized alternative to foreclosure. It is not an alternative to a sale. The basic idea is that instead of getting foreclosed on, you sell your property at a price and terms and conditions satisfactory to you and your lender. This can usually take place under the following conditions:
a. You are unable to continue making payments due to some hardship
b. The amount owed on your house is greater than what Buyers are willing to pay in this market.
The bank is often more willing to take a reduced amount in a short sale rather than take the property back through a Trustee’s Sale. The banks are in the lending business, not the property ownership business. Foreclosure vs. Short Sale
III. Short Sale Stages
One of the most commonly asked questions is whether or not a Seller needs to be behind in payments to do a Short Sale.
Because Short Sale considerations are always as a result of some kind of hardship, Lenders expect that the hardship results in an inability to pay the Lender because they can’t afford to. IF the Borrower is making regular monthly payments, it defeats logic that there is a hardship. The exceptions to this are Divorce, Death, Incarceration, Deportation or some other event that can’t be remedied and is date certain to take place.
Remember, a Short Sale is for someone who NEEDS to sell due to hardship, but CAN’T sell due to market conditions (property value). The following outlines a typical series of events that take place as a Borrower moves fromHardship to Trustee’s Sale (Foreclosure)
Hardship
Something changed that had effect on the financial health of their household. This could be something temporary (job loss, job change, health need, increase of debt, decrease of income) or something permanent (divorce, death, incarceration, deportation).
Soft Default
Due to the hardship, the borrower begins to fall behind in payments to the Lender. The missed payment will trigger a call from the Lender to remind the borrower that the payment is due and to find out why they are not making the payment.
Workout Solutions
When the Borrower informs the Lender of the hardship circumstances, the Lender may offer a variety of workout solutions aimed at helping the Borrower retain ownership of the house. These solutions can be a revised payment plan, refinance or other solution to help the Borrower bring the account current. If the Lender sees that the hardship is a permanent one, they often will advise the Borrower to pursue a Short Sale with a qualified Real Estate Agent.
Hard Default
After attempting some workout plan with the Lender and either defaulting from that plan or being denied the plan altogether, this will usually trigger more of a hard line relationship with the Lender. Unless and until the Borrower brings the account current, the Lender will turn the heat up with calls and letters demanding repayment and threatening foreclosure and judgments. This can go on for several months.
Foreclosure Department/Notice of Default
At some point the Lender will determine that the Borrower is not able to or not going to remedy their situation. The ONLY solution for the Lender at this point is to move the file into their foreclosure department and issue an official Notice of Default which informs of a coming Notice of Trustee’s Sale.
Notice of Trustee’s Sale
Once a Borrower receives a Notice of Trustee’s Sale, it will state a FIXED date of Auction. The Notice will come in the form of certified mail or even physically posted on to the front of the house. The name of the Trustee will be disclosed and the date and location of the sale. This date is 90 days from the notice as required by law. NOTHING changes that date except the account being brought current or the Lender postponing it because of a Short Sale they are evaluating.
Trustee’s Sale- SOLD
At the sale, the Lender (via the Trustee) attempts to sell the property for some price above their minimum opening bid price. This price is some percentage of value the Lender has determined they are willing to sell for instead of taking the property back for it to become Bank Owned.
Anywhere between Hardship and Trustee’s Sale is where a short sale offer can be negotiated with the bank. The steps for a Short Sale have the same basic steps for all real estate transactions. You List the property, you Contract with a Buyer and then you Close Escrow. The added dimension is the Bank/Lender Negotiations and Approval.
IV.Short Sales and the Arizona Association of Realtors®
The Arizona Association of Realtors® has prepared Addenda to the Listing Contract and the Purchase Contract that Sellers and Buyers are required to sign. These documents spell out additional language and disclosures that we have found to be extremely helpful.
Short Sale Addendum to the Listing Contract
The following are important elements a Seller needs to understand:
LEGAL & TAX ADVICE: Seller acknowledges that Broker is not qualified to provide financial, legal, or tax advice regarding a short sale transaction. Therefore, the Seller is advised to obtain professional tax advice and consult independent legal counsel immediately regarding the tax implications and advisability of entering into a short sale agreement.
CREDIT AND CREDITOR CONSIDERATIONS: A short sale may adversely affect the Seller’s credit score. Further, even if the creditor(s) agrees to a short sale, the creditor(s) may not agree to forgive the debt entirely, and may require the Seller to pay the difference as a personal obligation. If the loan is guaranteed by the FHA or VA, these entities may also require payment of the difference. Seller is advised to be certain of the terms of any short sale before making a decision, and obtain any debt forgiveness agreement in writing.
TAX CONSIDERATIONS: A short sale in which a portion of the debt is forgiven is considered a relief of debt and may be treated as income for tax purposes. A creditor who forgives a debt may submit a 1099 form to the IRS indicating the amount of the debt that has been forgiven.
DETERMINING THE AMOUNT OWED: Seller agrees to disclose all liens encumbering the Premises and to cooperate with Broker(s), escrow company, and creditor(s) to determine the amount of debt owed on the property, including but not limited to, purchase money loans, home equity loans, homeowner’s association fees, property taxes and other tax liens.
OBTAINING CREDITOR APPROVAL: Obtaining creditor(s) approval of a short sale involves documentation similar to that required for the original loan application. The Seller must generally establish that the Seller is financially incapable of paying the loan(s). The Seller agrees to promptly submit to creditor(s) all requested documentation, including W-2 forms from employers, bank statements, tax returns, “hardship letter” (stating the reason the creditor(s) should consider granting a short sale) and other requested financial documents outlining income and debt. The Seller acknowledges that it may take weeks or months to obtain creditor(s) approval of a short sale. Seller(s) agrees to grant creditor(s) permission to communicate directly with Broker(s).
OTHER OPTIONS: Seller is advised to explore options with creditors other than a short sale, such as loan modification, revised repayment plan, refinance or entry into a lender(s) loan mitigation program, if available. Seller agrees to notify Broker if Seller decides to pursue other options.
Short Sale Addendum to the Purchase Contract
The following are important elements a Seller & Buyer need to understand:
LEGAL AND TAX ADVICE: Seller acknowledges that Broker is not qualified to provide financial, legal, or tax advice regarding a short sale transaction. Therefore, the Seller is advised to obtain professional tax advice and consult independent legal counsel immediately regarding the tax implications and advisability of entering into a short sale agreement.
CONTINGENT UPON ACCEPTABLE SHORT SALE AGREEMENT: Buyer and Seller acknowledge that there is more debt owing against the Premises than the purchase price. Therefore, this Contract is contingent upon an agreement between the Seller and Seller’s creditor(s), acceptable to both, to sell the Premises for less than the loan amount(s) (“short sale”). Buyer and Seller acknowledge that it may take weeks or months to obtain creditor(s) approval of a short sale. Nothing shall limit a Seller from accepting subsequent offers from subsequent buyer(s) and submitting the back-up contract(s) to Seller’s creditor(s) for consideration. All parties understand and agree that Seller’s creditor(s) may elect to allow the Seller to sell the Premises only to the holder of the Contract with terms and conditions most acceptable to creditor(s).
DOCUMENTATION TO CREDITOR(S): Seller shall submit to creditor(s) a copy of this Contract, including this and other Addenda, and any other documentation required by the creditor(s) for approval of this sale within five (5) days after Contract acceptance. Seller agrees to diligently work to obtain short sale approval and will promptly provide the creditor(s) with all additional documentation required, including an appraisal, at Seller’s expense, if required. Seller instructs creditor(s) to provide approval status updates to Broker(s) and Buyer upon request.
TERMS UPON ACCEPTABLE SHORT SALE AGREEMENT:
Agreement Notice: If Seller and Seller’s creditors enter into a short sale agreement, the Seller shall immediately deliver notice to Buyer (“Agreement Notice”).
Time Periods: The date of Seller’s delivery of the Short Sale Agreement Notice to Buyer shall be deemed the date of Contract acceptance for purposes of all applicable Contract time periods.
Escrow and Earnest Money: Buyer shall promptly open Escrow and deposit Earnest Money as described in the Contract upon receipt of Agreement Notice.
Loan Costs: Buyer will be responsible for all Buyers’ Loan Costs.
SellerWarranties: Buyer hereby waives Seller’s warranties as set forth in Lines 163-166 of Section 5a of the Contract that all listed items shall be in working condition at the earlier of possession or COE. However, Seller warrants and shall maintain and repair the Premises so that, pursuant to lines 167-168 of the Contract, at the earlier of possession or COE, the Premises, including all heating, cooling, mechanical, plumbing, and electrical systems (including swimming pool and/or spa, motors, filter systems, cleaning systems, and heaters, if any), free-standing range/oven, built-in appliances and additional existing personal property included in the sale, will be in substantially the same condition as on the date of Contract acceptance and all personal property not included in the sale and all debris will be removed from the Premises.
Close of Escrow: Close of Escrow shall occur thirty (30) days or _________________ days after delivery of Agreement Notice.
Creditor Requirements: Buyer and Seller agree to cooperate with Creditor(s) and sign additional Creditor disclosure(s) or execute additional addendum(a) required by Creditor(s) as a condition of approval of the short sale, provided that Buyer and Seller incur no additional cost or liability.
BUYER CANCELLATION: Buyer may unilaterally cancel this Contract by notice to Seller at any time before receipt of a short sale Agreement Notice from Seller.
UNFULLFILLED CONTINGENCY: In the event that Seller and Seller’s creditor(s) are unable to reach a short sale agreement acceptable to both, at the sales price contained herein, Seller shall promptly notify Buyer of same, and the Contract shall be deemed cancelled due to the unfulfilled short sale contingency. If applicable, Buyer shall be entitled to a return of any Earnest Money.
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