Short Sale Foreclosures

A Short Sale foreclosure is a process where a lender agrees to accept an offer for the sale of a home that is for less than the outstanding balance of the mortgage.Typically a short sale will only occur when a homeowner is in default and facing foreclosure.

The homeowner would list the home for sale with a realtor who would perform a CMA of the property and compare it to recently sold homes and existing for sale homes in the area. If the value of the home suggested by the realtor is less than the outstanding mortgage the realtor might suggest that the homeowner consider a short sale.

Any offer for a home in short sale must always be approved by the lender before the property can be sold. However the homeowner can accept offers and even go to P&P (purchase and sale agreement) with the term subject to third party approval inserted in any agreement between the homeowner and any potential buyer.

Why would a homeowner in foreclosure consider a short sale.

A homeowner who is in default and facing a foreclosure sale by the band would consider a short sale as a lesser of two evils. If their home is foreclosed they will be evicted by the bank with the embarrassment this will bring but more costly will be the foreclosure listed on their credit report for seven years.

Even more potentially costly is the possibility that if the bank loses money by foreclosing and records this loss in their taxes, there is the very real possibility that the IRS will see this loss by the bank as income to the homeowner who was foreclosed and pursue them for taxes on this income.

Lets say the homeowner had an outstanding mortgage balance of $200,000. At the foreclosure the bank netted $175,000. This $25,000 loss by the bank is actually seen by the IRS as a gain by the foreclosed party and is taxable.

If the bank sends the foreclosed homeowner a 1099 for the loss incurred by the foreclosure the foreclosed homeowner is liable for taxes on this perceived gain.

In the short ale process a homeowner can negotiate with the bank to not notify the IRS by 1099 of any loss incurred by the Short Sale.

The short sale process for the homeowner in foreclosure:

The first step in the short sale process for the homeowner is to list their home for sale. Most lenders will require that the home is listed with a real estate agent and that it is listed in the local MLS (multiple listing service).

It is important for the homeowner to find a good real estate agent with experience in distressed property sales. Also find a professional real estate agent who works full time as a realtor who will be available to answer the phone and return messages. The short sale process though simple required considerable effort and time on the part of the realtor and therefore a novice who is working part time won't be in your best interest.

Please note that the bank will not wait forever. If your real estate agent is tardy they will foreclose.

The realtor having listed the home in the MLS at a competitive price with the notation "subject to third party approval" will show the home to interested parties and encourage offers.

The homeowner should realize that there is nothing in the deal for them other than avoiding a foreclosure and avoiding a possible 1099. The offer amount is of no interest to the homeowner. it is for the bank to accept or decline.

It is important to be agressive with the pricing. If no offers are forthcoming then reduce the asking price early and often.

A short sale package for a homeowner in foreclosure consists of:

• A signed offer to purchase with the subject to third party approval clause included.
• A hardship letter written by the homeowner stating the financial reasons for their inability to continue making mortgage payments and the necessity for the short sale.
• The bank will require W2's, tax returns and or pay stubs to prove the actuall financial situtation of the homeowner.
• A proposed HUD settlement statement showing how the funds will be distributed at closing. The reason for this is to establish that (a) the homeowner will not in any way profit financially form the short sale, (b) the amount any second mortgage will be paid, (c) the realtor commission.
• A limited power of attorney noting the party who will negotiate with the bank on the homeowners behalf. This should note the last four digits of the homeowners social.
• An income and expenses statement for the homeowner. In most cases this will be on the banks own purpose built form which will be supplied to the realtor at the initial request for a short sale package.

The banks loss mitigation department is overburdened with short sales. There are literally millions of homes in foreclosure. You are a needle in the haystack. The bank will not contact you, you must contact them.

It is vitally important that your negotiator keeps on the bank, and gives them any documentation they ask for in a timely fashion. The bank will lose documentation constantly, this is no reason to get angry, merely resend any missing document.

Here is a best practice procedure for dealing with an overburdened underpaid under appreciated loss mitigation department and ensure that your short sale is approved.

• Send a fully completed short sale package with all documentation intact and with the account number written in sharpie in a conspicuous place on every page. Also include the date of submission of package on every page in a conspicuous place in sharpie.
• The negotiator should call the bank to make sure that the fully completed package was received. If not resend.
• The negotiator should get a contact name and email address for the loss mitigation person assigned to the package. The difference between success and failure is this email address.
• If the bank wants to know what you had for breakfast, document it and send it to them promptly with the account number and dated noted in the margin in sharpie.

Remember the purpose in submitting the short sale package is not to feel good about the process the primary and only purpose is to have the short sale approved. Do what the bank asks, and do it efficiently, professionally and promptly.