Seller Frequently Asked
Questions Concerning Short Sales
What is the difference between a foreclosure and a short sale?
A foreclosure is when the bank takes ownership of the property after the property owner has defaulted on the loan. The foreclosure process in Colorado can take months after the first mortgage payment is missed. A borrower is “short” when the borrower owes an amount on his property that when combined with closing costs and commission is higher than current market value. A short sale occurs when a negotiation is entered into with the homeowner’s mortgage company or companies to accept less than the full balance of the loan at closing. A buyer closes on the property and the property is “sold short.” A foreclosure is “forever” while a short sale is a temporary impact to the seller’s credit score.
Why would a lender accept a short sale?
In a nutshell, money! The bank losses more on the property if they complete the foreclosure process than if they negotiate a short sale with the borrower. The foreclosure process is very costly to the lender when you include legal fees, property carrying fees such as maintenance and utilities, insurance, and taxes, not to mention lost opportunity costs when the bank’s money is tied up in the property. In other words, the bank’s money is tied up in ownership of the property when it could be generating interest from other qualified borrowers. Additionally, banks are in the finance business, not the property management business. Once the property is bank owned the market value declines even more. By negotiating a short sale with the borrower, they can save several thousands of dollars on each property, release their funds, and avoid ownership of the property.
Is it too late for a short sale if the lender has already started the foreclosure process?
Probably not, but it depends on the lender and where they are in the process and how flexible they will be. This is why it is important to hire a qualified real estate agent that can negotiate with the bank on your behalf. The sooner you contact the agent and get the home listed, the sooner you can find a buyer, close the deal, and move on with your life.
Why do I need a real estate agent?
Lenders prefer to work with professionals who understand the local market and houses for sale. The lender will want expert advice on pricing the home, marketing the home, and negotiating with the future buyer. A real estate agent can show the pricing history of the property in the Colorado Springs MLS to help justify any buyer offers. Most lenders will not accept a pricing history for a For Sale By Owner (FSBO), they want to see that the property was properly priced and marketed in the local MLS. Also, home owners are often emotionally tied to the property and can interfere with negotiations. A third party can negotiate with the lender and future buyers without getting emotionally involved.
Do I need a lawyer to complete a short sale?
No, legal representation is not required to complete a short sale. However, you do want to use an experienced agent with a relationship with a successful short sale negotiator. The seller gives the negotiator authority to negotiate the sale with their bank on their behalf. Typically there is no additional cost to the seller.
Can I negotiate a short sale with the lender?
Most lenders will not allow the seller to negotiate the short sale. There is no financial benefit for doing so. Lenders prefer to work with qualified experts who know how to price and market the home at the start of the process, saving valuable time and money for all concerned.
Why would I want to sell my Colorado Springs property as a short sale?
If you owe more on the property than the property can sell for and you can no longer afford the monthly payments due to a financial hardship, a short sale may be the best option to get out from under the payments. Short sales also have less of an impact to the credit score than a foreclosure and allow for a quicker recovery for a future home purchase. Remember, foreclosures are “forever” when filling out future credit or applications.
If I haven’t missed a payment, can I still do a short sale?
Possibly. You need to be able to prove a financial hardship to your lender that will impact your ability to make future payments.
I have a second mortgage on my property; does this mean that I can’t do a short sale?
Not at all. Lenders in second position understand the risks associated with being in that position. A qualified real estate agent or their representative will negotiate a short sale with the lender in second position as well as the lender in first position.
Am I a good candidate to sell my property as a short sale?
Can you prove a financial hardship? Has the primary financial supporter of the household encountered a significant loss in earnings, divorce, health, or death, making it impossible for the remaining members of the household to pay the mortgage? If yes to any of these questions, you may be a good candidate for a short sale.
Do I need to use all my savings and retirement before I sell at a short sale?
NO. In fact, we want to talk with you BEFORE you start to dip into your savings and definitely before you start to spend your retirement funds. You should not have to expend all your savings knowing you cannot recover from your unfortunate circumstances.
Can I stop the foreclosure process by starting a short sale?
Maybe. Again it depends on the lender and their flexibility and cooperativeness. Many lenders will suggest contacting a qualified real estate agent to initiate the short sale process. In most cases, you will need an offer on the property to delay a foreclosure. It will be stressful because often the delay is not approved until just before the sale date. This can continue for months while the bank works toward an approval. It is highly recommended that you talk with a real estate professional BEFORE the lender initiates the foreclosure process. Once a foreclosure date is identified, the time to find a buyer is very limited.
Should I do a loan modification before I do a short sale?
Yes, if you want to stay in your home. But the real question is can you qualify for a new loan and can you afford the payments? This is the process for a loan modification. If you can, then by all means, start the process for the loan modification. Please note, that with a loan modification there is no need for a third party to be involved, so DO NOT pay for a third party service to assist you. This is between you and your lender. Please note: a loan modification will not solve the problem in the case of loss of income, job transfer, or death.
Should I consider foreclosure?
In some cases foreclosure is an option. Because the seller is required to disclose their liquid assets to their lender when conducting a short sale, a foreclosure may be a better option for them.
Should I consider bankruptcy?
This is a question you should discuss with a bankruptcy attorney.
Should I rent my home instead of doing a short sale?
This is a very good option in some markets, particularly in Colorado Springs where we have a shortage of rentals. If you can rent your home for the amount of the mortgage payments, this may be a good option to allow you to keep the home until the market improves or until your financial situation improves. You will need to calculate in the cost of a rental for your family and the potential for loss rent when the property is vacant.
What should I look for in an agent to help me with a short sale?
You want an agent who understands your options and can provide you the resources to help you make an informed decision. If you choose to sell your home as a short sell, you want an agent that understands the short sale process, preferably one that is a Certified Distressed Property Expert (CDPE) which uses the most successful short sale processes in the industry.
Is it better to do a short sale or walk from the property and allow it to foreclose?
It depends on your goals. If you want to preserve your credit, then by all means, negotiate a short sale. If your credit is of no concern and you want to just walk away or you have assets you want to preserve, then you may consider a foreclosure or deed in lieu of. But a foreclosure does not guarantee forgiveness of the debt. In other words, you may have a foreclosure today, and years down the road after you are back on your feet, the bank may file a claim against you to recoup what is owed. Please seek professional advise on this matter. A deed in lieu of foreclosure is a voluntary foreclosure and is “forever” where a short sale can be eventually removed from your financial records.
We have an offer, what now?
With the Murray & Associates process, we will request that the buyer obtains pre-approval with our preferred local lender. Once we know that the buyer can qualify for the loan, then we put together a short sale package together with all the supporting documents and submit it to the seller’s bank for approval. This process can take 1-3 months. Once we have bank approval, we can close within about 30 days depending on the buyer’s loan and inspection.
Will I have to pay the bank the difference that is owed and what the buyer pays?
It depends. You need to make sure your agent negotiates forgiveness of the debt with the bank. If this isn’t done at the time of closing, the bank can come back in the future and demand payment of the debt. Something else to watch for is that the debt that is forgiven can be taxed by the IRS as income. Because we use a short sale negotiating company to negotiate our short sale, we are usually able to receive debt forgiven.
If the buyer walks, do I get their earnest money?
No. Chances are that if they leave the deal, they will do it legally and their earnest money is returned. In most cases, this happens before the bank approves the short sale.
The bank countered. Can they do this?
Yes. You have to remember that in most cases, the first time the bank is involved in the short sale is when they receive the first offer. They will conduct a market analysis or appraisal of their own to determine if the offer is a reasonable offer. If they feel it is too low, they will counter. The buyer doesn’t have to agree and can even counter with his or her own price. The buyer’s agent should be able to justify the buyer’s price with a market analysis. If this can’t be done, then maybe the buyer does need to come up in price. However, if the buyer decides to conduct an appraisal in advance and submit it with the contract, then the bank in most cases will not counter.
My home has been listed as a short sale for weeks in the Colorado Springs MLS but we haven’t received an offer?
Chances are, you need to lower your price. When a buyer sees that the property is a short sale, they assume that it will require more work, so it really needs to be priced below market value. A good short sale agent has a pricing strategy in mind and should lay this out for you in advance. They will take into consideration the market value and the foreclosure date, and identify a pricing strategy with regular price reductions that can be provided to the bank with the first offer as a pricing history. Short sales that are priced at market value will not find a buyer and short sales that receive an offer 20% below list price most likely will not get approved. A history of price reductions is necessary to show the bank that a buyer was not found until the price was dropped below a certain level.
What is the Home Affordable Modification Alternatives (HAFA) Short Sale Program?
HAFA is a government ran program that started in April 2010 with participating lenders and available to homeowners in Colorado Springs as well as around the country. The concept is to pre-approve a seller earlier in the process, reducing the approval time after the bank receives a contract. The homeowner starts the HAFA process by initiating contact with their lender. If the seller wants to remain in the home, the first step is to consider refinancing the loan. Unfortunately, this often does not work for the homeowner due to a hardship that has impacted their monthly income. If the homeowner does not qualify for refinancing and meets other qualifications, a short sale may be their only option. If the lender participates in the HAFA program the bank will send the homeowner the Short Sale HAFA Program Letter. The homeowner has 14 days to contact the lender and confirm interest in the program. Once interest from the homeowner is confirmed, the lender will order an appraisal. This is one key difference between a HAFA short sale and a traditional short sale. The appraisal will be used by the bank to determine the starting list price of the home. The lender will then give the homeowner approval to contact a listing agent to list and market their home for sale. After all the necessary documents are signed by the lender, homeowner, and listing agent, the listing agent will have 120 days to market the home for sale. The listing agent will discuss the marketing and pricing strategy for the home with the lender every 21 days. During this marketing period the foreclosure sale is postponed. If the home does not sell, the homeowner will turn the home over to the lender by Deed-in-Lieu of Foreclosure, which was agreed to in advance. The beauty of this program is that as long as the homeowner cooperates, they will receive up to $3000 for relocation costs, whether the home sells or not. This program is subject to change depending on the economy and political environment.
How do I qualify for a HAFA Short Sale in Colorado Springs?
First of all, your lender needs to be a participating member of the Home Affordable Foreclosure Alternatives (HAFA) Program. The quickest way to find out if they are, is to call them and ask. Another option is to check out the participating members on the HAFA website. If you have an FHA, VA or Ginnie Mae loan, the HAFA program does not cover them, but that may change in the future. In order to be HAFA eligible, you must meet ALL of these criteria:
- Homeowner cannot qualify for a loan modification and has decided to pursue a short sale or deed-in-lieu of foreclosure.
- The property is the homeowner’s principal residence and has not abandoned the property — the exception is if the homeowner changed jobs that is 100 miles or greater from the property.
- The mortgage was originated on or before 1/1/09, is at least 60 days delinquent or default is reasonably likely due to hardship, has an unpaid principal balance less than $729,750 for a single family home, and has a monthly payment (PITI) exceeding 31% of the borrower’s gross monthly income.
What are the differences between a HAFA short sale and a traditional short sale?
The biggest difference is the approval process and time lines. For the HAFA program, the participating lenders have agreed to follow the government-mandated times to include pre-approving the seller BEFORE the property is listed with an agent. The lender plays an active roll in evaluating the status of the marketing and pricing of the home during the marketing period, and once an offer is received, the lender must respond within 10 days. If the offer is reasonable, the transaction proceeds to closing. A specified time to close is not required by HAFA, but the lenders want to close quickly and since they have pre-approval for the short sale with the mortgage investors, the closing can happen in short order, 30-45 days.
With traditional short sales, the lender often will not want to work with the homeowner or the listing agent until after the first offer is submitted. The lender then begins the process of obtaining approval from the mortgage investors. This alone can take months and is the reason why short sales have a bad reputation with buyers and buyers’ agents.
With the HAFA, the foreclosure is postponed during the 120-day marketing period. Additionally, the seller must agree in advance that if the property does not sell within the 120 days, they will turn the property over to the lender in deed-in-lieu of foreclosure. If the homeowner cooperates with the bank, they will receive $3000 for relocation costs whether the property sells or not. The lender also agrees that they will not file a deficiency against the homeowner.
For the traditional short sale, there are no promises made by the lender. If an offer is not received before the foreclosure date, the property will go to foreclosure. Additionally, the homeowner receives nothing and could receive a deficiency if it is not negotiated with the lender at the time the short sale is approved.
As more and more lenders participate in the HAFA program, we will see “short sale” mean what it implies – a quick sale, and short sales become a positive experience for sellers, buyers, and real estate agents. We will also see the prices of short sales sell closer to market value. Gone are the days of pennies on the dollar deals for short sales. This will help to stabilize the Colorado Springs housing market because more homes will sell as a short sale closer to market value and fewer foreclosures and bank owned properties hitting the market. It may take a year or two, but we are already seeing banks hold on their list price for bank owned properties, this will be true for short sale properties as well.
By Nancy Murray
Murray & Associates, Keller Williams Colorado Springs