As we mentioned a few weeks ago, we are diving deeper into the world of underwater mortgages and the prospect of short sales in New York City. As such, we interviewed Shane Sutton, real estate attorney extraordinaire, to develop the top 10 list of what you should know as you embark on the short sale journey. First, let’s understand what a short sale is. Put simply, it is a transaction in which the party holding mortgage (read: bank) is ready to accept less than face value of the note rather than foreclosing on the loan.
- Are you an actual short-sale candidate? The first sign is that either you can no longer make the mortgage payments OR property has dropped so much in value that it would take 5-10 years to even consider breaking even and clearing your mortgage.
- Have a good understanding of your situation by determining the real value of the property. Consult a qualified broker who can conduct a market analysis for you. This is the only way to truly understand just how underwater your loan actually is.
- To fulfill short-sale, you must: 1) have all of your documents in order as requested by the bank, 2) have a signed contract for the sale of your property, 3) have a broker who is available with comps to support the sale price when the lending bank seeks an independent Broker’s Price Opinion.
- The bank hires realtors to verify the legitimacy of the contract price. The danger here is that an over-appraisal of the property will cause the bank to reject your short sale application. Make sure your agent is there with sound justification of your contract price.
- You must have a well-written hardship letter. When the bank negotiator considers your application, it wants on file a letter showing why the circumstances of purchaser have changed significantly. Therefore, make it compelling to avoid any hassles (typical hardships include family changes such as divorce, the loss of a job, illnesses, etc., versus merely “the property’s not worth what I paid for it”.)
- One of the significant obstacles polluting the process is the increasing resistance by banks to pay reasonable attorney fees. Some banks are shortsightedly limiting or capping such fees, meaning that customers will have to pay the fees themselves ($4k – $15k), lest the entire short-sale process grind to halt. Find out if your bank has such limits to avoid a nasty surprise at the end which you may not have the funds to cover.
- It is critical to keep things progressing swiftly to avoid buyer’s remorse from kicking in. Assemble your documents quickly (have your tax returns completed in a timely manner) and make sure your attorney is constantly in touch with bank to move things along.
- Just because it’s a short-sale doesn’t necessarily mean it’s inherently a good deal for the purchaser. This should be obvious but it had to be said. The entire premise of a short-sale is based off of the relationship between the price at which the property was purchased versus today’s values; this does not necessarily translate into a better deal than other properties on the market. It may, in fact, be a worse deal if the process takes too long.
- Note that the entire process, from time you have a signed contract, generally takes 4 months. This delay is based on the bank’s ability to process its backlog. Some banks have even begun sending packages offshore before they go to the negotiator (based in the US).
- The credit impact is far preferable to that of a foreclosure. Within two months of the completion of a short sale, the mortgage will show as having been satisfied, after having been delinquent for however many months. At this point, your credit will start to improve (so long as you are not in arrears on your other credit obligations). Generally speaking, it takes 18-24 months to make a mortgage default not so relevant.
We hope this has been helpful in terms of getting an initial sense of what it takes to conduct a short-sale from a seller’s perspective. “Remember,” Shane notes, “there’s no shame in being underwater and trying to clean up your own toxic debt.”