A significant number of the properties listed in the Realtor’s Multiple Listing Service (MLS) are now short sales.  They are so prevalent that there are many Realtors who specialize in handling listings where the seller’s only option is to sell “short”.  This is a two part series to better understand what it takes for a seller to make the decision to move forward with a short sale and what to expect if you are a buyer putting an offer on a short sale.  Whether you are in Birmingham Michigan or any part of Southeastern Michigan, it is best to be well informed of the process of a short sale because a person’s credit score is hugely impacted.

What is a Short Sale?

The very basic definition is when a home is selling “short” what is owed to the lender. Another significant piece is that the lender has to be willing to take less. This means that s seller has to prove to the lender that they are incapable of making the payments and are about to go into default or already have. This is known as proving “hardship”. For a lender to agree to take less, it requires a hardship package to be filled out by the seller to prove their financial status. This may vary from lender to lender but usually entails submitting W2s, bank statements, hardship letter, itemized expenses etc. Sellers have spoken to me about a short sale without realizing that all income sources must be reported like a 409K, other property owned etc. I have had clients moving out of state, a spouse losing a job and other factors that may support hardship so it is wise for a seller to consult with a professional to see if they might qualify. Lenders do not want to own real estate so they are becoming more willing to negotiate a short sale.

Why do a Short Sale?

Every good financial adviser will say that missing a mortgage payment has the biggest impact on a credit rating. While a short sale will affect credit, it is not as devastating as a foreclosure. A foreclosure is forever and typically, in a short sale, a seller may be able to buy another home sooner.  With a foreclosure, as with a bankruptcy, it may take up to 7 years before another home can be purchased depending on what has been done to restore credit. The effect of a short sale on a seller’s credit report often results in a loss of 200 to 300 points on a credit report and can stay on the report for 7 years. Consumers are allowed to put a short statement on their credit report to explain the adverse information which may soften the blow. When it comes to credit, there are many factors and it is best consult an expert-these are general indicators expressed here.

How to do a Short Sale?

Time is of the essence. In this market, homes can be on the market well over a year. Anyone committed to lessen the impact on their credit and not go to foreclosure, should consult a Realtor immediately and tell them the situation. A Realtor gets the home sold faster than trying to sell it alone. A Realtor gets it the maximum exposure including having it listed on the multiple listing service (MLS). In a short sale, sellers do not pay commission, title insurance and other costs associated with a sale-this is paid by the lender.

After finding a Realtor experienced in short sales, do not try to sell it without disclosing the circumstances. This will delay getting the cooperation of your lender and completing the necessary paperwork. A short sale can be done even if a seller is not in default on their mortgage. However the lender gives priority to those sellers who are in default and even more priority to those that have gone to sheriff’s sale and are in the redemption period. Once a default occurs, the process, including the redemption period, can take 9-12 months. If a home is listed after it goes to auction, the time is significantly reduced.

When choosing a Realtor, ask about their experience with short sales. Ask how they will market your home including the resources they use on the internet. Over 80% of buyers utilize the internet before they consult a Realtor. Above all, make sure you can work with your Realtor. This is a difficult time in one’s life when you face losing your home and you want someone who is empathetic and listens to your concerns.

What Happens in the months to come?

The process can be at a couple of stages before a home has to be vacated. It is advisable to contact the lender when you know you can no longer make your payments. There are programs that sellers may qualify for to remain in their home. Lenders do not want to own Real Estate. Their ability to finance loans depends of not having inventory on their books. Many more lenders are willing to work with sellers depending what has caused the current circumstances. There are no guarantees and it varies from lender to lender.

Upon missing the first (or second) mortgage payment the lender will call to evaluate the situation. After missing two or more mortgage payments, the lender will send notice that they are proceeding with a foreclosure. Keep all notices, names and numbers of the people from the bank. This information will make it much easier for your Realtor to contact the right people at the bank. Once the notice of foreclosure is received, it must be published in the newspaper for four-five consecutive weeks and then it goes to auction. Auctions are held regularly in a specific location within the county.

Once a home goes to auction (sheriff’s sale), Michigan allows sellers a six month redemption period in which time they buy back your home or remain in the home without making mortgage payments for paying taxes. For farms and large parcels of land, the redemption period can be 12 months. Even in the redemption period, a seller may still pursue a short sale. Many lenders will continue to work with a Realtor to complete a short sale during this time. A Realtor who works with that particular lender may be authorized to offer a seller “cash for keys” to vacate earlier and forfeit the redemption period. Lenders cannot force a seller to leave until the redemption period is over. If the home is not vacated six months after the sheriff’s sale, the eviction process will begin.

Will I Owe the Bank the Difference After a Short Sale?

This is negotiated with the bank.  Sometimes the bank will forgive all the debt.  However, it is becoming more common for the bank to try and collect some of the deficient amount in the form of a promissory note signed at closing.  If the bank asks for some of the deficiency to be paid by the seller/borrower, this amount can be reduced by an experienced Realtor who is negotiating the short sale.  It is very important to be clear on the final agreement regarding the deficiency before signing any documents at closing.

I have represented both sellers and buyers in the short sale process. If you have any questions, please contact me.