What is a short sale and how does it work?

Five or six years ago if someone was underwater and they lost their job their mortgage company would not do anything to help them out because the real estate market was so hot that even when someone stopped paying on their mortgage the bank could foreclose on them and resell their home to someone else and make money.

Times have changed. Fast forward to 2010. Now, it is the bank’s best interest to take an amount less than what is owed on the loan if someone has a hardship and cannot stay in their home. The bank doesn’t have any alternatives if you are serious about not paying and want to walk away. The market has depreciated so much that anyone living in these areas (California, Arizona, Nevada, Florida, Michigan, or along either the east coast or west coast) and got a mortgage anytime after 2003 the bank is looking at a big loss. It is in their best interest to allow their homeowners to short sale their home rather than foreclose on them.

What is a short sale?

A short sale is the process a bank uses to allow a homeowner to sell their home when the homeowner can’t afford to pay back the full amount of the loan that they used to buy or refinance their home with.

How does it work?

These are the following steps of a short sale:

1. List house for sale with Realtor (At this point you don’t need the bank’s permission, just get it listed, and set the price at the current fair value, DO NOT add up the loans and list it for that price)
2. Get a sales contract from a buyer
3. Realtor submits sales contract to the bank(s) including your financial information and hardship letter
4. Bank(s) review and approve/negotiate or counter offer with Realtor
5. Realtor (or or settlement attorney or professional short sale negotiator) negotiates on homeowners behalf with the bank(s) to have the debt forgiven (important step and if done incorrectly you get a nasty surprise later then the bank tries to collect the difference between the sales price and the full amount you owed in the form of a deficiency judgement)
6. Once an agreement has been made the buyer closes on the home just like a normal sale
7. In cases of HAFA elgible short sales, the homeowner gets an incentive (typically $1000) to complete the short sale and move out.
8. Done.

What are the risks involved with a short sale?

A short sale is complicated and there are many areas that the uneducated homeowner can get taken advantage of, by either the bank or a potentially incompetent real estate agent that is representing them. Avoid Realtors that are not experienced.

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