Local real estate Q&A: How do short sales work?
YOUR JOURNEY HOME
Free Press Real Estate Columnist
Q: My wife and I bought our house in 2008. We paid $275,000 for it. This week we’ve invited three Realtors to look at the house to give us a market value for possible sale. Each of them has said since we owe about $255,000 we may end up being in a “short sale” situation. Each explained the short sale process but we are still confused. Can you give us a few more of the “high points” of the process, please?
A: First off, you probably were told the house must be listed for sale by a Realtor. You will never see a FSBO short sale situation. The bank wants thorough market research, predictable marketing, and a bottom line price as close to market value as possible and as close to what you owe as they can possibly end up with.
In order for you to apply with your loan investor so they might accept a short sale, meaning that the lender takes less payoff at the time of closing than the total principle owed, you have to have a hardship. Among the most typically-accepted hardships are: divorce, loss of employment or necessary job transfer, or other severe financial circumstance. Your circumstances need to be explained in a “hardship letter” with a few details but generally in no more than two or three paragraphs. While you must produce this letter to even be considered for a short sale, lenders do not seem to feel obligated to let you know at any particular point in time if they have accepted your hardship explanation.
If you have liens or second loans of any type secured by the house, those note holders will each have to accept the short sale financial result before the sale can close. Second note holders can be the topic of a whole different question. Suffice to say, some second note holders are willing to settle for receiving pennies on the dollar owed to them while others get hard-nosed and attempt to garner every penny owed to them. In worst case scenarios, second note holders can put the final brakes on an otherwise viable short sale.
A very basic fact is that you will not receive any proceeds from this sale. It does not cost you any special fees to do a short sale but you must understand that all sale proceeds go to pay creditors and cover costs of sale such as closing costs and Realtor fees.
Receiving no money from the sale, you might wonder why sell the house rather than just let it go to foreclosure? According to current federal law, you do not need to pay taxes on the forgiven debt. That has not always been the case but it is at this point in time. Another advantage of a short sale is that if you have not ruined your credit by being late or not making payments, you may be able to purchase another house in as little as two years in some cases. If you let the house go to foreclosure that waiting period can be much longer.
You should also know that it can take 45-90 days and sometimes longer to get a short sale completed.
Some buyers see opportunity with a short sale to possibly get more house for less money. Other buyers would never ask their Realtor to show them one. Those buyers may be geared to a time frame in which they need to purchase or they may just not like the idea of playing Russian roulette with such a major purchase.
Speaking of opportunity risk and results, according to the Grand Junction Multiple Listing Service (MLS), as of Tuesday there are:
• 28 short sale houses on the market of a total 923 homes for sale today. That means 3% of the total homes for sale expect to be sold as short sales.
• 47 of the 354 properties currently under contract are short sales, or 13.3%.
• 62 short sales have SOLD year-to-date of the total 1,477 single family homes sold, or 4.2%.
That apparent discrepancy of more than 13% under contract yet only 4.2% closed may reflect buyers terminating their purchase contract during the often long wait while the bank decides if they will allow the short sale to proceed to closing or not. Some that do not close may also be as a result of the bank not accepting a seller’s appeal for hardship.
Doug Van Etten is a local Realtor with Keller Williams Colorado West Realty. He is also founder and organizer of the Real Estate Investors Network of Western Colorado (www.REIN-WesCO.org). For information about buying or selling a home, investing in real estate or joining REIN, contact Doug at 970-433-4312 or DougVE@kw.com.
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