The first thing you need to do if you want or need to sell your home is to determine the likelihood that it will be a short sale. The formula for this rather straightforward – the difficulty lies in determining how much your home will sell for in this situation.
Let’s start with the “easy” side of the equation. Add up all of the expenses related to selling your home, including the following:
- First mortgage
- Home equity line, if any
- Real estate taxes due for prior calendar year(s)
- Estimated real estate taxes for the current time period, up to the date of closing
- Any other liens on the property. (If you had some work done on your home and you didn’t pay the contractor or other service provider, they may have put a lien on your property.)
- Lawyers fees, real estate sales commission
- Miscellaneous closing costs including survey, title fees, etc. (contact me for a detailed list)
Then you need to consider what your home will sell for in the current market. Bear in mind that if you are in a short sale situation, the home will sell for less than a comparable home that is not a distressed property. For buyers, purchasing a home through a short sale has a lot of uncertainty and risk. So, they expect to save some money on the purchase. In general, banks appear to be approving short sales at prices that are around 90% of the current market value. Use this as a rule of thumb, not as fact.
The best way to determine what the home will sell for is to work with a Realtor who is familiar with your neighborhood. There are some on-line resources that you can use as a starting point, such as www.zillow.com, to roughly determine market value. However, the computer-generated models used by Zillow and other value-estimation web sites cannot replace the insight and expertise of a Realtor. These programs utilize publicly available information on homes that sold, but they cannot take into account the condition of the homes, recent updates, and location factors such as busy streets, train tracks, walk-to-town, etc. Your local real estate agent will have a lot of information on all of the variables that will affect your sale price.
As a seller of a short sale property, you should try not to be personally sensitive about the price. At the end of the day, you will not see any proceeds from the sale. Your objective is to sell the house for a price that the bank is willing to accept to pay off your debt to them, and to any other lien holders. In fact, if you are in default on your mortgage, or at risk of being in default, then you will need to price it low enough to ensure a quick sale and avoid foreclosure.
When the expected sale price is less than all of your anticipated closing costs, then you will be in a short sale situation.
The next step is to assess your financial situation. If you have the financial means to make up all or some of the difference between the short sale price and the closing costs, the bank(s) will insist that you do just that. On the other hand, if you cannot make up the difference, then you have to go to great lengths to prove that to the bank(s). Once you have a buyer the bank(s) will require that you complete a short sale package. This may include any or all of the following:
- Tax returns
- Pay stubs
- Letter describing your hardship, explaining why you can’t bring any cash to the closing
- Authorization for you lawyer and/or Realtor to speak with your mortgage holder
- Bank statements (NOTE: Banks cannot require you to use your 401K funds to make us short fall on a short sale)
- Complete investment information
- If you have your own business, you will need detailed documentation of assets and liabilities.
If you have two liens... If you have both a mortgage AND a home equity line with different lenders, the short sale process becomes a bit more complicated. After you find a buyer, then the short sale needs to be approved by TWO lenders. The first lender's goal is to minimize their loss on the loan, and will not be willing to allow a large amount of the purchase price to go to the second lender (the home equity line). However, the property cannot be sold if there is a lien on it. So the second lender does have the right to demand some payment at closing. Here is an example of a typical deal that the second lenders have been getting:
- Cash at closing for small percentage of what is owed. For this payment, the second lender will release their lien on the property so that the closing can actually take place.
- The seller signs a promissory note for 10 - 25% what is still owed to be paid out over a fixed time period (maybe 10 years) at no interest. (Use these numbers as guide, these will vary depending on how much is owed.)
Forgiveness of debt can be a huge benefit of a short sale. Be very careful and ask a lot of questions about this. Right now if the bank(s) forgive your deficient balance you will receive a tax form from them reporting this amount of money to the Federal Government as income. However, for 2009 tax year in many situations you will not have to pay taxes on this amount. I am not sure what will happen next year. Consult your tax adviser for more information on how this works.
The most important piece of advice I can give you is to work with a lawyer that has plenty of experience with short sales. You need a lawyer that is going to go to bat for you and work out a deal with the bank(s). This isn't easy and not all lawyers, and not even all real estate lawyers, are willing to put forth the extra effort required to make this happen. You also need someone that is going to take the time to make sure that everyone involved is kept informed on the status of the deal. Many short sales fall apart because the buyers get tired of waiting and waiting to find out whether or not the banks are going to approve the deal. They want to know what is going on, and they are starving for information. If they don't get any information or updates, then they cancel their offer and find another house. Call or send an email to me - I have found a couple of terrific attorneys that can help you out.
Thanks for reading. To see all homes available for sale in the Chicago area click here. You can also find info on homes that already sold, open houses, and much more at the same site.
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