North Sound Property News

Here is the first truth about short sales: there is no “one truth” about short sales.  If you ask 10 different agents about what it’s like to work short sales, you’ll probably get 10 different answers, which will be influenced by the agent’s personality and tenacity, the situation surrounding the short sale, the lender itself, and who they talked to at said lender.

 The point of this post isn’t really to imply that all short sales are the same and that there is only one way to handle them, simply to pass along some things I’ve learned when I’ve handled them.  Your mileage may vary.

 First things first.  You may be reading this and asking, what is a short sale?  A short sale can be called by many different names, but all of them refer to asking a lender to forgive debt on a house that is sold for less than is owed.  This situation is referred to as being ”under water” or negative equity.

In my experience, getting a short sale to go through requires a very tenacious real estate agent, buyer and seller.  There are a lot of obstacles that can get in the way of getting a short sale approved and you have to be willing to diligently work through those issues and provide the information requested in order to get the short sale approved.  You also have to know how to navigate through the various levels of bureaucracy involved, or it won’t happen.

 One of the first things to know is that if a short sale is approved, the debt to the lender does not go away.  Usually what they want to do is attach a lien to any other assets you may have, or work out a repayment plan.  If it’s clear that there are no assets and no way to repay, then and only then is it possible to have the debt forgiven.  If the debt is forgiven, the IRS considers this as taxable income, and you will have to pay taxes on it.

The second thing to know is that there is no way to do a short sale and not have it affect your credit in some way.  The best you can hope for is to mitigate the damage by being cooperative and communicative with the lender.

I think it’s already clear that this is not a situation to take lightly.  The only seller who should consider doing a short sale is one who is in a MUST SELL kind of situation.  Death, divorce, illness or disability, and other such life-altering types of events are the kinds of things that commonly are associated with these kinds of sales. 

Generally, if you’re still paying your mortgage, and it appears to the lender that there is no reason to believe you can’t continue to do so, they won’t approve your short sale.  If you are more concerned about the damage to your credit than you are about selling the house, and you are still able to pay your bills, you may not really be in a situation of having to do a short sale.  Perhaps a better choice would be to take your house off the market and rent it out, if you can find a renter.  Of course, if you can’t find a renter and if you can’t pay the mortgage without one, you may be back to having to consider selling short. 

The bottom line is, a short sale should be a last resort.

 To get a short sale approved, you have to put together a “short sale package.”  Each lender has slightly different criteria for this package, but there are some common elements.  The purpose of the package is to build the case for why the lender should consider taking a loss on their loan, as they won’t do so unless they believe that this loan is going bad no matter what.  The package usually includes a hardship letter, detailing the circumstances of the short sale–the sadder the story, the better the odds of approval.  Other elements of the package include financial statements, pay stubs, medical bills, divorce decrees, etc. 

 The most important element of the package is the purchase and sale offer, as a lender isn’t going to consider the short sale until there is an offer on the table and it can be proven that the sale price is indicative of market value, after having allowed a sufficient period of time to sell. 

Once this package is put together and submitted to the lender, it can take several weeks to get it approved.  The best way to speed the process along is to follow up diligently on all requests.  It’s also important to choose an agent who is experienced with short sales, understands the behind-the-scenes structure at the lender, and can motivate the different players involved to achieve a speedy resolution to the process. 

 There is a lot more to be said about short sales, but each sale seems to be highly individual, as every seller, buyer, lender and agent may handle things a little differently.  Some buyers think short sales are a great way to pick up a property that is a good deal…and in some cases they can be.  Most buyers wish to avoid the hassle and uncertainty involved with any deal where a third party is involved.  Some sellers think that a short sale is a “get out of jail free” card, when in fact a short sale is a very arduous process that involves some fairly serious negative ramifications.  Other sellers are so afraid of damaging their credit that they won’t consider a short sale until the damage done by waiting is worse than it would have been by approaching this kind of sale from a business perspective.

 The bottom line is, that in a market like the one we are currently experiencing, it’s becoming increasingly important to understand how short sales work, and decide for yourself whether buying or selling a short sale home makes sense in your particular situation.

About the Author: Sandy Kaduce is Associate Broker of Gallery Homes Real Estate. She serves buyers and sellers in North King and South Snohomish counties. She is 2009 Board President of the Mukilteo Chamber of Commerce, as well as Vice President of Site Selection for Habitat for Humanity of Snohomish County. For more information, visit Sandy on the web at www.sandykaduce.com! Read more from this author