Seattle, Bellevue, and King County Real Estate Blog

Short Sale 101: For Sellers

    For sellers in difficult situations, a short sale is generally a strategy that most are unfamiliar with. I routinely receive phone calls from sellers who are having difficulty selling their home due to their lack of equity, and for many of these sellers the short sale is their best option. Through my experience working with these individuals I have found that I generally answer the same questions about short sales, and I have detailed those questions and my answers below:

What is a Short Sale?

    Simply defined, a short sale is when the proceeds from the sale of a property are insufficient to cover the existing debt owed on the property, and the owner is unable to pay the funds required to cover the difference at closing. Since the owner is unable to pay the difference, the final approval of sale must come from the lienholders (i.e. lender). Many lenders will agree to accept the reduced proceeds of a short sale to avoid a lengthy and costly foreclosure.

Why Should I Short Sell My Home?

    If you are unable to sell your home for an amount that will cover the existing debt and all settlement costs (taxes, commissions, escrow fees, etc generally around 9% total), then a short sale will prevent you from having to pay to close on the sale of your home.

    Let’s use a real quick example. Jack and Jill Homeowner bought a property two years ago for $300,000 with 100% financing and need to sell. However, the current market value of their home is only $310,000. After an approximate 9% in closing costs for the sale (excise tax, title and escrow fees, commissions, etc), the total proceeds to pay off their loans will be $310,000 less approximately $28,000, which equates to $282,000 to the lender. In this instance, the proceeds from the purchase will be short by approximately $18,000, which is what Jack and Jill Homeowner would have to pay the lender at closing.

    Unfortunately, with the challenges today’s economy is facing, many sellers are like Jack and Jill and cannot afford to pay $18,000 to sell their home. Even without any economic challenges, no one wants to pay to sell their home. Some homeowners choose to discontinue making payments and let the home eventually slip into foreclosure. GREAT NEWS! There’s a better option. Lenders dislike foreclosures as much as the rest of us… they’re lengthy, messy, and costly. Lenders frequently accept short sales to avoid this costly legal process.

What About My Credit?

    Preventing unnecessary damage to your credit is major reason sellers choose to short sell their home. Short sales are less damaging to your credit and your ability to gain future financing than foreclosures. If you are unable to pay the amount needed to close the sale out of your own pocket, then the short sale is likely your best option to mitigate credit damage.

    One of the most damaging aspects to your credit scores are late payments. If you choose to stop making payments and begin to have 30, 60, or even 90 day late notices then your credit will take a much more significant hit. Although some real estate agents are qualified to assist with your short sale, they are not attorneys or CPAs. Thus, I always recommend speaking with your attorney and tax professional to carefully examine your financial and legal situation and to assist in your decision in choosing to short sell your home.

What is the Process and What Timelines Can I Expect?

Step 1: The first step is to get your home listed on the MLS at an attractive price in an effort to coax a quicker offer. It is important to realize that price plays a less significant role once you decide to short sell your home. That doesn’t mean price isn’t important because we do want to submit an offer that the lender will accept. What it does mean is that the difference in selling your home for $400,000 or $390,000 makes no difference to you the homeowner since you are neither paying to close or walking away from closing with money in your pocket. We will list your home with specific remarks that buyers and agents search for in seeking out short sales.

Step 2: Once we get an offer, the second step is to submit the offer to the lender with their requested short sale package material. This generally includes pay stubs, an estimated closing statement, and a letter of hardship to name a few. Prospera Real Estate agents work with negotiators who assist in putting the short sale package together, submitting the short sale package, and negotiating with the lender on your behalf at no cost to you.

Steps 3-6: The next four steps are PATIENCE. Short sales take longer then a traditional transaction because we have to wade through the bureaucracies of the lender. It takes time for the short sale package to get updated into their system, then for the lender to assign one of their negotiators, then for appraisal… and you get the picture. Overall it can often take about a month from point of submittal to point of approval but this varies depending on the specific lienholders.

Step 7: Get the deal closed! Depending on the buyer, closing the deal can happen within days of lender approval. Lenders will often give 30 days from point of approval to get the deal closed… so expect anywhere from a few days to 30 days depending on your unique transaction.

Can You Walk Me Through an Example?

Subject Home: A Bellevue split level home with two existing mortgages totaling $538,200. In this instance the only liens on the property were the first and second mortgages that were with the same lender. The market value of the home at time of listing was around $530,000. The appraisal conducted at the time of the second mortgage came in at $598,000 less than one year prior to homeowner falling behind on payments.

Ideal Scenario: For this particular homeowner, the ideal scenario was to short sale the home as the owner did not have sufficient funds to provide at closing to cover the existing debt. The homeowner did not want a foreclosure to appear on his credit report so he felt most comfortable settling with the lender.

The Process: We entered the market at the price we felt reflected the current market value of the home in an effort to show the lender we tried to get the best offer possible. Within one week, we received an offer for approximately $45,000 less than the asking price. The lender accepted the offer after all the required paperwork was delivered to the lender and their internal appraisal was conducted. This offer was eventually rescinded due to a buyer’s contingency. Thus, since we knew the lender would accept 45k less than we originally listed the home for, we re-listed the home at the price of the first offer to ensure we received a quick offer. Upon re-listing, I called all of the parties that showed interest prior and was able to drum up a new offer that night. The new offer was substantially lower, but the lender approved it and we proceeded to closing.

***** I realize that this may all be a lot to digest, especially for those of you who are taking your first look at the short sale as an option. I handle short sales on a daily basis and I can of course go into greater detail and answer any questions you have. I’m just a phone call away and can be reached at 425-289-1099 *****