Is a Short Sale the Right Solution for me?

With the steady increase of inflation & medical care costs, many homeowners who need to sell their homes in the current market find themselves trapped, as they owe more than their home is worth. As a result, traditional home sales are not an option. This is when a short sale becomes one of the only viable solutions.

What is a short sale?

A short sale is the sale of a home where the proceeds of the sale are not enough to cover all of the outstanding obligations associated with the ownership and sale of the home. This may include the mortgage or mortgages, unpaid property taxes, attorney’s fees, title expenses, commissions or other obligations or debts.

This shortage would require the seller to either:

• Bring additional money to the closing to be able to exit their mortgage(s), or

• To negotiate a “shorted” payoff with their lender.

Although the lender has no obligation to agree to this, many of them will do so, as ultimately this saves them more time and money than the other available alternatives. Usually a short sale is attempted by sellers who are near to facing foreclosure or have fallen behind and for a multitude of reasons are no longer able to continue making their payments to the mortgages, insurance, and/or taxes for the property.

The process in Minnesota and other lien theory states

This is a confusing topic, and there are a lot of misconceptions about the short sale process & the lender’s role in it, frequently even among real estate agents & Realtor®s. In these sales, the seller’s lender’s role is nothing more than that of a contingency. This varies by state, depending on whether it’s a title theory state or lien theory state.

The information provided in this article applies in Minnesota, which is a lien theory state, meaning that the owner holds the title and the lender holds a lien on the property.

Since the seller owns the home, they are ultimately the one who during the sale of their home (generally with the help of their agent) chooses to accept, reject or counter an buyer’s offer. In this short sale situation, when the offer is accepted by the seller, it is done so contingent on their lender agreeing to accept the net proceeds of the sale as full settlement of the amounts owed.

In my personal experience, on more than one occasion an agent acting on behalf of a buyer has asked when their offer will be submitted to the bank even before the seller has agreed to accept it. This can add to an increased level of confusion when multiple offers are received. To clarify, it is not the case that all offers must be presented to the lender. Instead, all offers must be presented to the seller, who will choose whether or not to accept the offer and will then follow up with their mortgage lender for the contingent approval.

The goal of the listing agent, and the seller, stays the same as it is during a more traditional home sale – to obtain the best offer possible, thereby giving the transaction the best possible chance of approval and actually closing.

What are the odds of a successful closing on a short sale?

They are better now than they used to be. in today’s market, it makes sense for banks to seriously consider accepting a short sale as, in many cases, they net more money overall through this method than they would by executing the foreclosure process, taking the home back and marketing it as a REO (Real Estate Owned) property. Most foreclosures in Minnesota are non-judicial foreclosures, although some foreclosures are judicial. Judicial foreclosures generally take much more time to complete, upwards of a year. In other states, this can take upwards of 3 years.

When you consider that, in most cases, the bank is receiving nothing during this timeframe, while the process plods along, you can clearly understand their motivation to consider other options. Add to this the deterioration to the property during that time and the additional carrying costs, and the benefits to the bank become even more impactful. The bank in this situation, much like the homeowner, is looking for the best way to limit their losses.

The benefits of a short sale for the seller

Lenders generally don’t allow the seller to receive any of the proceeds of the sale. This is more than fair when you consider that the whole basis of the short sale is negotiating with the lender to convince them to take less money than what they are owed. Additionally, when a lender agrees to the short sale, they are allowing the seller to avoid having a foreclosure on their record, which would negatively impact them for several years. Finally, most short sales also let the seller out from under the debt without being pursued for a deficiency.

Each of these individually is very beneficial to the seller, and combined, these three things should be a powerful motivator for the seller to agree to not attempt to gain additional benefit form the transaction in the form of financial profit. While there are no guarantees that the bank will agree to a short sale, for the reasons identified here, it’s certainly worth the effort to ask and find out.

How do you find the right person to facilitate a short sale?

Short sale transactions are not for beginners. There is no substitute for experience when it comes to navigating this process. If working with an agent, an experienced agent and attorney are both crucial. When dealing with a potential short sale, it makes sense to become educated, and to ask questions.

For many agents, short sale & foreclosure courses are available to help with this educational process. While many of these are worthwhile, these courses alone are not enough to make the agent an expert. Experience is the only way to gain expertise, so try to find an agent referred by a seller who’s been through this process, or an agent who can provide references of this nature for you to call and validate.

A real estate investor may be a better fit for you

Alternately, real estate investors are frequently experienced in facilitating short sales. This is another avenue to pursue as they can also guide you through the steps and facilitate your discussions with your mortgage company. When working with a real estate investor, the process is streamlined. They are the buyer, so there are less people involved in the communications, negotiations, and closing. Other benefits to this approach is that real estate investors will never charge a fee to list the home, they will not incur marketing expenses to get the word out when purchasing the home from you, and they are not as gun-shy about working on contingency with your lender as traditional homebuyers and their agents are.

What will it cost me?

In most cases, a short sale will cost you nothing unless there’s an upfront fee charged by an agent to list the home. Ask your agent, they negotiate their own fees. It should not cost you anything to talk to an agent and get that information from them up front.

Alternately, work with a real estate investor, and these fees will go away, since the marketing, facilitation, and communication that you would be paying the agent to do are not needed.

As for the rest of the costs, all commissions and other closing costs that a seller would normally pay will be factored in. If the lender agrees to the short sale, then they are agreeing to the net amount of the sale. This means that the lender is basically agreeing to pay your closing costs. As you can hopefully see by now, for someone facing foreclosure, a short sale can be an excellent solution all the way around.

To recap, here are the benefits to the seller of a short sale.

• The seller can avoid foreclosure, and the negative impact on their credit rating

• The seller can exit the mortgage without having to pay the full amount owed, and will walk away with no debt from the home

• The lender agrees to not pursue you for this deficiency

• The lender pays all closing costs (aside from an agent’s up front costs)

• Real estate investors can facilitate the deal for you with your mortgage lender(s) and will not have the same concerns as traditional home buyers relating to the contingent approval of the lender(s) in the sale.

In conclusion, if you’re in a situation where your house is upside down (you owe more than its current market value) and you cannot afford to keep up with the mortgage, insurance, and/or tax payments, you should find an experienced real estate investor (or a skilled agent and attorney), talk to your mortgage lender, and find a way to get out of the spiral of continuing debt that leads to loss of the property and the negative credit impacts and potential for remaining debt that comes with a foreclosure.