In real estate, a short sale is a sale that happens when the outstanding loan against a property is greater than the market value of the property itself. It represents a solution for a homeowner who cannot pay his mortgage and wants to walk away from the property without blemishing his credit and financial profile through a foreclosure or bankruptcy declaration. Not all banks will consider the short sale, but many will. You will need a willing lender/bank and buyer to complete the transaction.
Do do you want to learn how to short sell? Here's how to do it:
- Value. Confirm the value of the property by having a real estate agent perform a Comparative Market Analysis (CMA).
- Costs associated with sale of real estate property. Figure out what you will spend on selling the property. Total up advertising costs, any broker fees/commissions you may incur, as well as the closing costs for the deal. Ask your mortgage broker about the fees associated with closing. Be sure to include any legal fees in your calculations.
- Total loan value. Total up all loans against the property.
- Do the math. Subtract the total amount of money owed against the property from the expected earnings of the sale. The number remaining represents the "short" of the short sale. The lender will factor this number into consideration when deciding whether or not a short sale is appropriate.
- Legal assistance. You may want to consider hiring a lawyer or having a family friend who is in the legal profession assist you with the deal. This article can give you a general idea about the process, but cannot substitute for legal advice.
- Accountant. It is a good idea to get an accountant's input before you proceed. There are tax implications in the short sale, just as in any real estate transaction. You need to know exactly what you will owe before getting into the deal.
- Find a buyer. In order to do a short sale, you'll need to come up with a buyer to pay off the amount of money your lender will accept. The new buyer will not assume your mortgage; rather, the sale of the property will result in you paying off the mortgage directly and the buyer having his own new mortgage on the property.
- Contact lenders. It is now time to get a lender involved with the deal. Indicate to him that you are interested in a short sale, and share the information on your specific property with him. Depending on what percent of the estimated value you offer the bank, the lender may accept your deal or not. It can be difficult to find a lender with the authority to accept a discounted amount for the loan payoff, so do not think the first broker you call will jump on the opportunity.
- Proving insolvency. You must prove that you are incapable of paying off the entire mortgage and/or staying current with payments month to month. The lender will perform another mortgage application process to discover if you are, in fact, incapable of the financial responsibility you agreed to when you got the original mortgage. If the root of your financial woes occurred before you received your first mortgage, the lender may have a case against you for fraud, so beware. Also, know that lenders will almost never do short sales for properties with second mortgages since the lender in the second mortgage will not be happy about forfeiting his investment.
- Sell the property. Once your lender has okayed the deal and you have a buyer, you are free to sell the property. The lender will want to see a contract between the seller and the buyer indicating that the sales price is the exact amount of payment that the bank will be receiving from the seller. The bank wants to be sure that you (the seller) are not pocketing extra money off the deal.
- Benefits for the lender. Lenders and banks routinely put properties into foreclosure in order to get their money back in a situation where the borrower defaults. A short sale may be an attractive alternative to the lender in some cases because the lender does not have to deal with some of the unpleasantries of a foreclosure, including the eviction process, attorney's fees, costs associated with the resale of the property, damage to the property, and all the delays that are likely to occur in the process. Even though the bank is getting less money, they are getting it "now."
- Benefits for the buyer. The buyer gets a property at a discount.
- Benefits for the seller. The seller iwalks away from the deal without having to declare bankruptcy or having to go into foreclosure. His credit report will be unaffected by this deal as well.
The short sale can be a creative way to save your credit and avoid declaring bankruptcy. Be sure you talk to a lawyer, a competent lender, as well as an accountant to verify the details with particular reference to your situation.