Short Sale Frequently Asked Questions
Why do they call it a ‘SHORT’ SALE? Because the money from the sale is short of a full payoff on the mortgage. The fair market value of your home is less then the mortgage balance. Thus the phrase Short Sale.
Does a SHORT SALE stop foreclosure? No. This is a common misconception, likely perpetuated by real estate agents giving bad advice. The bank does not care that you are trying to sell the house. Your mortgage is just one of many and decisions are made on a large scale basis. The bank will file a foreclosure lawsuit against you once you fall 3-5 months behind on payments. The timeframes may vary, based on the simple fact that banks are filing between 50,000 – 60,000 foreclosures a month in Florida, but the average consumer can expect a lawsuit within 4 months.
Can I complete a SHORT SALE while my house is in foreclosure? Maybe. Before the bank takes the house back at a foreclosure sale they need to get a judgment against you. If you choose to give up your legal rights and not yourself and your home in lawsuit (or hire STAMATAKIS + THALJI + BONANNO to defend your foreclosure), then the bank will take the house back within 6-10 months on average (times vary county to county, but we have seen default foreclosures in Hillsborough, Pinellas and a few other counties completed in only 4 months).
Do I benefit from a SHORT SALE? Maybe. Going the SHORT SALE route while simultaneously defending the foreclosure can extend your timeframe in the house. If you decide that you cannot save the house then extending your stay in the house can be the next best thing. Saving money is key to keeping afloat during these difficult economic times. Further, a SHORT SALE may help you avoid a bankruptcy and a judgment. If you are able to sell the house and get the bank to waive the deficiency then a bankruptcy may not be needed. A SHORT SALE may also help avoid a judgment in the foreclosure lawsuit. In Florida judgments are good for 20 years and are recorded on the public record, available on the internet for all of your friends and enemies to see. Technically, the bank can enforce collections on the deficiency for 20 years. Plus, judgments are a major drag on your credit.
Does the bank waive the deficiency after a SHORT SALE? MAYBE. We see a number of different scenarios from the various lenders. Some will explicitly waive deficiency in the SHORT SALE approval. Some banks will remain silent on the issue. Some banks will put clear language in the SHORT SALE approval letter informing you that they will seek to enforce the deficiency at a later time. All banks are consistent in their refusal to even discuss this issue until final approval.
Does the bank make me sign a new promissory note? SOMETIMES.Banks may ask you to sign a new promissory note for a reduced balance upon closing. These notes are often interest free and are paid back over 10-15 years.
What is a 1099? If the bank waives the deficiency they may issue you a 1099. A 1099 is a form typically given to independent contractors as a record of the income they received from a particular business. The IRS considers debt forgiven as the equal of income. Thus, if the bank waives a $50,000 balance then the government considers that $50,000 in your pocket. In some respects this makes sense, but the practical impact on the average consumer is seemingly very harsh. Next, you must claim the 1099 income on your taxes. You may be able to exempt yourself from any liability as a result of the 1099 (if the 1099 is from the sale of your primary residence) see the Mortgage Debt Relief Act of 2007 . A couple of general rules: if you short sell you primary home then you likely qualify for exemptions, if you short sell an investment then you probably don’t qualify for a full exemption (but other exemptions may be available to you. The general idea of the 1099 should not serve as a deterrent, at least initially. We always recommend consulting with a CPA about this issue.
What information does the bank need from me? Lets see, tax returns, bank statements, hardship letter, financial worksheet, proof of income. Why stop their, how about handing over your diary too? It all seems like an exercise in futility. The banks are so understaffed they cannot possibly go through all of these document with a fine-tooth comb. But, they must have them if they are going to consider your sale for approval. No matter how many times you send them the documents they will claim they never received them. Furthermore, every time you call they will tell you they have no record of you calling in the past (even though you have called no less then 10,000 times!). The ineptitude of the banks never ceases to amaze us.
How long does a SHORT SALE take? On average 60-75 days to get an approval from the date of submission of the contract to the bank. However, once approved the real work begins. Closing one of these deals typically takes an additional 2-4 weeks if the buyer is getting financing. Banks are so skittish these days that they will require an new appraisal every week before they will let the buyer close on the loan. If the buyer is getting an FHA loan or is buying your condo with financing it will require a small miracle to get the SHORT SALE closed. The economic downturn has really gutted the Title Insurance Industry made closing loans a challenging process.
How much does the realtor make? 6% commission is standard. If there is a buyer’s realtor then the real estate agents split the commission. If your loan is held by Fannie Mae or Freddie Mac then they will honor your realtor’s request for the 6% commission. If it is not a Fannie or Freddie loan then they will likely cut the commission to 5% and even 3-4% if there is only one realtor involved in the sale. If your realtor complains to you about getting their commission cut or threatens to kill the deal without full commission then fire them.
How does the realtor and closing costs get paid? Those fees usually come out of the contract price and not your pocket. For instance, if the contract if for $200,000, then you would subtract the $12,000 for commissions and $3,000 (just an example – check with the title company for the actual figures – ask for a copy of the HUD) then the bank gets a net of $185,000. Keep in mind that even though the closing costs don’t come out of your pocket directly, they do subtract from the money to the bank, which in turn adds to the deficiency balance.
Why an ATTORNEY over a real estate agent? Because SHORT SALES are really a breach of contract lawsuit dressed up like a real estate sale. You will need a realtor to sell the house (because that is what their license is for – lawyers are not licensed to receive commissions for selling your house). But, a realtor cannot do anything for you in court and that is clearly the most important part. Further, the lawyer brings more knowledge to the table when dealing with the bank, can negotiate through the bank and the bank’s attorney, and is responsible for keeping your best interests in mind.
My realtor says they can sell the house in a “Quick” Sale, should I be concerned? Yes. Time can be your best friend in a SHORT SALE. If STAMATAKIS + THALJI + BONANNO is defending your foreclosure then general timeframes can increase. Over time banks often feel more compelled to accept deal more beneficial to the consumer.
Should my realtor market the property to his ‘investors?’ No. The obvious purpose of the investor is to make money and who can blame them? But, if they buy your house then they are going to offer the least amount of money possible to get the bank to bite on the sale. Then they are going to turn around an resell the house for the real fair market value and make a quick profit off of your misfortune. You will be left with a greater deficiency and the investor will get a handsome stack of cash. It hardly seems fair. If your realtor is shopping your house to ‘investors’ then that may create a conflict of interest and you should fire that realtor.
STAMATAKIS + THALJI + BONANNO will quarterback the entire short sale and foreclosure defense process. We will make sure you are being defended in court, being dealt with competently and fairly on the real estate side of things, while making sure you are being properly informed. Before you sign a listing agreement, call us for your FREE CONSULTATION.