In this post, I will talk about who should and should not consider a short sale; and WHEN they should take action.
Why consider a short sale? Anyone who thinks they may end up allowing a home to go into foreclosure should seriously consider this option.
- CREDIT: With a short sale, your credit is damaged, but not nearly as badly as it would be if the home went into foreclosure.
- LIVING SITUATION: With a short sale, you are not evicted (like you could be if your home was foreclosed), and you look like a better prospective tenant to future landlords if your credit shows a short sale, rather than a foreclosure and eviction, on your record.
- PRIDE: You are cutting your losses and controlling the damage....making the best of an otherwise uncomfortable situation. Your neighbors and co-workers probably already know you owe more than your house is worth - so do they... but you're showing them that you are the kind of person that works with everyone involved to find a satisfactory resolution; that you are responsible.
- SECURITY CLEARANCES/JOB REQUIREMENTS: Especially true in the Washington DC Market, many people have security clearances required for their jobs. In these cases, foreclosures can be very difficult to explain, and short sales are are considered much more favorably, especially when they are coupled with a true hardship (see below). Foreclosures can put your current or future job options in jeopardy.
- DEBT FORGIVENESS/AVOID BANKRUPTSY: In most cases, you can negotiate debt forgiveness as part of the package; and therefore, do not have to worry later about collection activities, which otherwise could force you into bankruptsy to protect the assets you do have.
Why should an owner NOT consider a short sale?
- NOT ENOUGH TIME/LENDER WON'T AGREE: If any of lenders advises the owner that there is not time before the foreclosure, or that for other reasons they will not work with the owner in a short sale process (this is increasingly rare, but it happens).
- TOO COSTLY: If the homeowner has so many layers of liens and mortgages against the property that professionals are telling you that it is not likely to be approved and/or they will only attempt it with a large, non refundable deposit or fee. (Small non-refundable fees are reasonable, especially if your case is a complicated one. A small fee is a couple hundred dollars - not thousands.)
- DON'T NEED TO: When the owner CAN continue to make payments as agreed for the duration of the loan; even if it is uncomfortable. Or, when the owner would prefer a loan modification and the lender has indicated a willingness to work with the owner for a loan modification.
A short sale should be the last alternative to a foreclosure, not a knee jerk reaction to falling real estate values and overleveraged homes. With each short sale request, the lender will require a "hardship letter". This is a letter that explains why you, as the homeowner, have a hardship and why they, as the lender, should work with you and forgive part of your debt.
Hardships include:
- Involuntary job loss or unexpected loss of substantial income that prevents you from making payments or from making the full payment.
- Involuntary change in family situation due to death, divorce or other unexpected changes, like becoming the Octo-mom.
- Involuntary relocation (i.e. military relocation).
- Medical situation/disability that either results in a decrease of income, and significant increase of expenses, or the need to move elsewhere, or a combination of these things.
- You could never afford the mortgage in the first place, and you can show that by the continual use of your savings (which is rapidly declining or depleated) and credit lines (which are rapidly increasing or maxed out) to pay the mortgage.
What is NOT a hardship:
- You pulled all the equity out of your home to purchase another piece of real estate which you still own, free and clear from any liens or mortgages. (Cure: sell that second property and pay down your current mortgage; or sell the primary property and take a mortgage on the second property to pay the deficit on the first property.)
- You like going out to dinner every night and shopping at the best stores and that makes it hard to pay your mortgage...besides mom said you can live with her for free.
- You don't really want to work anymore.
- The value of your property declined, like everyone else's, and you don't think you should have to suffer that loss.
While it is true that in some (non-recourse) states, like Nevada, you may still get a short sale approved even if you do not have a hardship.... most of the time, banks are looking for your sob story here. Give it to them.
When do you throw in the towel?
Going through this process is very difficult emotionally. Let's face it, when you started this journey, you had a very different outcome in mind. This was to be your home; or the investment that was going to solve your future financial woes. Now, those dreams are not being realized and you're suffering a very real financial loss and that goes hand and hand with emotional loss.... not to mention that this hardship is generally because of another hardship (like job loss or divorce). Given that, you are likely to go through all five stages of grief:
- Denial (we can do this);
- Anger (if the real estate agent/lender/spouse/child/etc. hadn't...fill in the blank.... I wouldn't be in this situation);
- Bargaining (maybe if we...);
- Depression (it's hopeless);
- Acceptance (OK, let's move on).
You should call the a real estate agent and perhaps an attorney or financial advisor when you are in the "bargaining" stage, assuming (at that time) that you are still current on your mortgage. That's when we can help you examine options. Talk to consultants that you trust, who have your best interest at heart and who are not charging you for their advice at this stage of the game. Be wary of their interests - if they get paid only if you do one thing, expect them to want you to do that one thing; especially if they are pushing you very hard rather than trying to help you. For example, respect a real estate agent who asks you if you've attempted to have your loan modified so you can stay in the home.
DEFINATELY call a real estate agent no later than when you realize you can not make the next mortgage payment. The further behind you are in your payments the harder it is to have a successful short sale, and you may have eliminated other options at that time, too.
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In the next posts, we'll talk more about the selling side - about what the ingredients are for a successful short sale, and about about the role of the real estate agent, attorney or third party negotiator in the short sale process. Then, we'll talk about the buying side, and what risks buyers have and the countermeasures they should take to reduce risks. Stay tuned!
If you are wondering if you should consider a short sale, call me. I am happy to provide a free consultation any time.
Vicky Chrisner, Keller Williams Realty
Ofc: 703-669-3142
Email: VChrisner@KW.com
