What Is A Short Sale?
A “short sale” is the sale of a house in which the proceeds fall short of what the owner still owes to the bank.
For example: If a Seller still owes a bank $150,000 on their mortgage, but they may only be able to sell the home for $100,000, then the home and seller may qualify for a short sale, and the bank may agree to accept $100,000 as full payment.
What Is The Difference Between a Short Sale, Pre-Foreclosure, Foreclosure & REO?
Pre-foreclosure – Before a foreclosure is started by a bank the Seller is deemed to be in pre-foreclosure. Typically, before a home becomes a foreclosure, the Seller has missed payments, and the bank has given notice that they have started a legal process to pursue their right to take back the home. The home is usually referred to as a pre-foreclosure, because it is BEFORE the actual foreclosure lawsuit takes place.
Foreclosure – Forelosure in Florida is the judicial means by which the bank files a lawsuit against the defaulted home owner to obtain a monetary judgment as a result of failing to timely pay the mortgage secured by the property and have the court auction the property at a general foreclosure sale.
REO – An REO is a short term for Real Estate Owned. Typically in Florida when a property is sold at a foreclosure auction, it is many times purchased back by the bank, lender or investor. When this is the case, it becomes part of the lending institution’s inventory – and as such, it is called an REO.
Why would a Lender agree to a short sale?
Lenders will often agree to a short sale when necessary since the foreclosure process can be very lengthy and costly. In Florida the lender must obtain legal counsel and file a lawsuit to foreclose on the property. Then if no one outbids the Lender at the foreclosure sale, the lender then has to take possession of the property, often times make necessary repairs, and then market the property to prospective third-party purchasers.
Can Anyone Do A Short Sale?
It is important to understand that not all lenders will accept short sales or discounted payoffs, and not all Sellers will qualify for a short sale. Yes, there is a qualification process. In most short sale cases, the Seller must have a proven hardship and must owe more to the bank that what the home is currently worth. There must be some sort of extenuating circumstance that is preventing you from selling the home and completely paying off the entire debt. Additionally, you must also show that the current circumstances have affected your ability to continue making timely mortgage payments.
Common hardships that may be acceptable to banks include divorce, curtailment of income, job loss, job transfer, medical issues etc. Banks want to ensure there is a valid reason to take a loss. Sellers must be able to prove that they are enduring a financial storm by providing mountains of paperwork to the bank such as bank statements, paystubs, tax returns etc.
What are the Tax, Legal and Credit Consequences of a Short Sale?
Sellers often ask which is better… a Short Sale or a Foreclosure? Well, that depends, and it will always depend. More often than not, a short sale is going to be ‘better’ because the consequences will be less severe than a foreclosure. However, each situation is different, each Seller’s needs are different, and each bank is different. Regardless, there may still be credit, legal and tax consequences with both short sales AND foreclosures. We STRONGLY recommend speaking with a Certified Professional Accountant to discuss your specific financial consequences that could result from a short sale or foreclosure.
Both foreclosures and short sales will have credit consequences and both may stay on your credit report for 7 to 10 years. However, whereas a foreclosure may prevent a lender from approving you for another home loan for 5 to 7 years afterwards, typically, short sellers may be able to purchase again within 2 to 7 years. Alot depends upon how a short sale is reported to the credit bureaus. If it is reported like the vast majority of cases as “settled for less than full value”, then your credit will indeed take a hit, albeit still smaller than with a foreclosure.
Many people think that if a home is foreclosed or sold short, the seller can just walk away, free and clear of any debt. Not so fast! While in some states, that may be true, in Florida, laws allow a lender to pursue a ‘deficiency judgement’ against the seller for any amount of debt that was not paid.
In many instances when short sales have been properly negotiated, the lender may release the entire debt. Instead of just releasing the lien on the property, they may consider the debt satisfied in full. This means that they will not take recourse against any debt unpaid after the close of the sale. Of course, this will vary from lender to lender, seller to seller and case by case. But in cases where the seller is insolvent, it is more likely to happen – but is never guaranteed. In cases when a seller may have cash reserves, the lender may require a cash contribution or promissory note to mitigate their losses.
Our attorneys are able to discuss the legal consequences with you.
We STRONGLY recommend speaking with a Certified Professional Accountant to discuss tax consequences that could result from a short sale or foreclosure. There are certain pros and cons to each situation. In most cases, a short sale, regardless of the consequences, is still a better route than simply letting your home go into foreclosure. But do keep in mind, even if you give the keys back to your lender and allow them to foreclose, there is a liklihood that the lender may still pursue a course of action against you, the seller, for any loss they may have incurred, depending upon the program for which you qualify. If you are going to do something, and if a short sale is a viable alternative, a short sale is almost always the best option. If nothing else, the bank will sustain a smaller loss in a short sale than in a foreclosure, thus reducing your potential liability.
What if I have more then one loan on my property; can I still do a Short Sale?
We can work with all your lenders or if the same lender holds more than one loan. Even if the value of your home is below the balance of the first mortgage, we can normally get the different lenders to cooperate.
How long to Short Sales take and What is the Typical Process?
Some short sales get approval in two to eight weeks. Others can take 90 to 180 days on average. Attorneys’ Title Services can help to speed up the process by staying on top of the file and holding the bank accountable.
This is the typical short sale process from the bank’s end of things:
- Lender acknowledges receipt of the purchase contract and short-sale package. This can take from 10 days to as long as a month.
- A negotiator is assigned by the lender. This can take from two days to as long as a month.
- A Broker Price Option (“BPO”) is ordered. This is a report of what the property will likely sell for based on the condition and recent comparable sales in the area if listed with a real estate brokerage. This can take from ten days to as long as a 45 days.
- The file is sent for review based on the lender’s short-sale requirements. This can take from two weeks to 30 days.
- If approved, the bank will issue a short sale approval letter.
I am current on my mortgage; will my lender allow a Short Sale?
This varies from lender to lender. Some lenders will accept a Short Sale file for approval on loans that are not delinquent. Other lenders will not accept the file until the loan is delinquent. We can put your Short Sale file together within a couple days and submit it for approval. That is the best way to determine if your lender will accept a file for approval on a loan that is current.
Will Bankruptcy affect the short sale of the property?
Most lenders would not consider a short sale if the homeowner is in the middle of a bankruptcy proceeding. Negotiating a short sale between the parties is considered a collection activity and such a negotiation is prohibited in bankruptcy.
Can you guarantee that my short sale will be successful?
We have extensive experience in handling short sale transactions and we can guarantee that we will do everything that is required to complete a successful short sale. However, we unfortunately cannot guarantee that the lending institution will approve the short sale.
12428 San Jose Blvd., Suite 1
Jacksonville, FL 32223
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