(Originally posted April 13, 2008)
Because of declining home values, many homeowners (especially those that bought between 2004-2006) owe more than their home is worth. This can be for a few reasons, such as: they put zero down, they financed the home and their closing costs (103% loan), they took an interest only loan, a 3/1 ARM or a pay-option ARM. Any of these choices will have made them "upside down" from the day they closed. Now when they want to sell, in order to walk away, they would have to bring money to the closing (not possible in 99.99% of the cases).
There is an alternative where the bank will "forgive" the amount you owe that's over the sale price. It is called a short sale (you are selling for less than the loan owed to the bank.) Due to all the foreclosures in Las Vegas and the country, the only way to compete for a buyer is a short sale. Many inexperienced real estate agents (and those not trained to do short sales) will list a home as a short sale, pick a price that is: a) reasonable for what the same homes are selling for as foreclosures or b) pick a lowball price, hoping the bank will take it and it will attract buyers to their listing.
Unfortunately, it's not that easy. You, the homeowner, have to qualify to sell your home short. Here's the general qualification list:
1 - You have to be at least 45 days behind in your mortgage payment (receiving a "Notice of Default" from your lender)
2 - You have little or no equity in your home
3 - You have no assets that you can sell (other homes, money in the bank, extra cars, boat, etc.) to payoff the shortfall
4 - You must have suffered a financial hardship (job loss, death of spouse, major health issue, rate adjusting loan)
If you qualify with all of the above, you can submit a short sale application to the bank, with your paystubs, your bank statements (from all accounts) along with a hardship letter - and the bank will review this to see if you qualify.
It's the last step that most agents are not doing. The majority of short sale listings are putting the home up for sale and then submitting the application once they receive an offer. The big problem is that this is entirely backwards, and if you're the buyer, you can potentially wait 4 to 6 weeks, even 3 months (personal experience) before the bank will even consider your offer. Once they consider the offer, they usually counter it with a higher number, rather than accepting it. Even worse, many buyers are putting in lowball offers plus closing costs (which is okay, it's a buyer's market), and the banks don't even bother to respond - EVER.
This is why I counsel most of my buyers that short sales are make believe listings and I will not show them, UNLESS, the listing says "Short Sale Approved." I do call the listing agents and ask them where they are in the process, and I've yet to have a listing be approved.
Those three magic words are the key to a successful short sale. Unfortunately, one out of 100 listings are approved.
Just for clarity, for the person selling, if this is not your primary residence, you will most likely be responsible to pay the taxes (to the IRS) for the amount "forgiven" by the lender. In some cases, the bank makes you pay them back for the money you're short - in the form of a long-term installment loan.
I am trained to get approvals on Short Sale listings, but there's a short timeline before foreclosure, and many sellers don't contact me (or any agent) before it's too late. If you feel that you do qualify for a short sale, or will in the very near future - it is time to call me now to explore your options.