Hardly a day goes by without at least one article in the newspaper about the increasing foreclosure rates, even in the greater Charlotte and Lake Norman area. What many sellers facing a possible foreclosure don’t know is that there is another option. They, with the help of their attorney and Realtor, may be able to negotiate what is called a Short Sale which will enable the seller to sell their home for less than the debt owed against the property. The reality for the lenders is that foreclosures require a lot of work; not just processing the foreclosure but also listing and selling the foreclosed property. So, they may be willing to take less than the full amount of the loan balance due in order to avoid foreclosing on the property.
I did my first short sale transactions back during the recession in the early 1990’s. They require a lot of work and patience on the part of the buyers and the sellers but they do work. So how do you begin? Here are the first steps:
- Research the title records of your property and make a list of ALL liens including all mortgages, judgments, property taxes and IRS tax liens.
- Talk with a bankruptcy attorney to get legal advice
- Rank the debts by who has the right to be paid before whom. For instance, in a foreclosure the first mortgage will be paid before the second, third etc.
- Once you have a comprehensive list, start talking with the last debtor first to negotiate either a partial payment or even total forgiveness of the loan. The reality is that if the property goes to foreclosure they wouldn’t have gotten anything anyway.
- The goal is to negotiate with each of the lien holders a reduced/complete forgiveness of the debt based upon the actual purchase price of the buyer’s offer so that the sale can proceed with all liens removed by closing.
During the negotiations of a short sale the homeowner will most likely be asked to provide the following:
- Letter of authorization for Realtor to contact your lender(s)
- A “hardship” letter explaining why you are requesting a short sale and are unable to pay off the entire debt.
- Financial statements to verify your inability to pay
- A Comparative Market Analysis substantiating the agreed upon purchase price of your home
- A Copy of the Offer to Purchase and Contract Agreement
- A Settlement Statement outlining the net proceeds to the lien holders
This is a very brief explanation of a short sale written with the goal of providing a general definition and overview of the short sale process. It is important for the seller to understand that a short sale may affect their credit score and that the amount of the debt that is forgiven will be taxed by the IRS as income. I urge anyone facing a foreclosure to consult a bankruptcy attorney to discuss their specific details.