If you're a homeowner looking to sell your home but find yourself in the unfortunate position of being upside down in your mortgage, what are your options?  For many it's simply of matter of hunkering down and riding out the storm until real estate prices work their way back up to pre-crisis levels.  Considering that housing values in Roseville and other surrounding areas are nearly half of what they were just five years ago, when the buying boom hit it's peak, that may take a while. 

So, what if you're not in a position to wait?  What if, for reasons beyond your control, you absolutely must sell your home?  Maybe you've recently been laid off, or have experienced some other form of hardship like a divorce or death of a spouse.  Maybe your adjustable rate mortgage just reset and you simply can't afford the payments any more.  I don't mean to be morose, but these are real life situations being experienced by thousands of real people in our communities every day.  You may know one of them, or you may be one of them yourself.

As a real estate broker, I'm constantly asked for advice on these types of problems and the good news is that there are solutions out there if you know where to look. 

The worst thing a person can do is to do absolutely nothing.  If you can't make your payment and are in pre-foreclosure, you don't have to wait for the "inevitable" and just hope for the best.  The fact is, the banks want to resolve your problem almost as much as you do.  If you look at it from their perspective, they don't want you to be foreclosed on.  That's a costly and time consuming process.  And they certainly don't want for you to just walk away.  Their goal is to recoup as much of their initial investment as possible, and the best way of doing that is by working with you, the borrower.

Many borrowers, especially those in adjustable rate mortgages, have been able to renegotiate their mortgage terms through loan modification.  Banks still continue to modify loans, but the requirements are somewhat stricter than they were a couple of years ago after the market collapsed.  You still need to "qualify" for the payment you're attempting to renegotiate, so a solid income and work history are a must.  Otherwise, they look at it as just putting off the inevitable.

Let's say you don't qualify for, or don't need, a loan modification.  What then?

That would be the point where I would recommend looking at a short sale.  A short sale is when the bank agrees to let you sell the home for less than what you owe on it.  So, let's say you bought a house in Roseville five years ago for $450,000 and today your real estate agent tells you that the best you could hope to get is only $275,000.  That's a difference of $175,000!  You know there's know way you could come up with that kind of cash at closing, but you absolutely must sell the home, so you tell the bank you want to do a short sale.

Here's what the bank is going to want from you:

First, they'll want to know why you absolutely must sell the home.  What is your hardship?  This has to be explained in a hardship letter.  It can't have anything to do with not liking your neighbors, or the neighborhood, or you just need a bigger place, etc.  They want to know that a short sale is the only thing that's going to save you from being foreclosed on.  Examples of hardship include unemployment, divorce, bankruptcy, medical bills and death.

Second, they will need to be shown that the house is worth less than what you owe on it.  This can be done very easily by using what’s called a BPO (Brokers Price Opinion).  The professional real estate broker does their analysis primarily by using apples-to-apples comparisons of recently sold homes in the immediate area.  The bank may also order an estimate from a licensed appraiser.

Third, the bank will want to verify that you have no assets that could be used to offset their expected losses.  Do you have a 401K sitting around?  How about that condo you inherited ten years ago?  It’s all fair game and will be part of the bank’s due diligence in determining whether to allow the short sale.

Fourth, they will require that you have a legitimate offer from a qualified buyer.  Although some buyers may want to take advantage of your distressed situation to make an unreasonable offer, a good buyer’s agent will understand that the bank is also trying to mitigate their losses and keep the offer in line with the fair market value.  That’s why it is always important to deal with only reputable licensed real estate agents for a short sale, or any sale for that matter.

If, after satisfying these basic requirements, the bank agrees to the short sale, the process proceeds very much like any other real estate transaction.  Always make sure to get your approval in writing before taking it to the next step.

I often get asked about the tax implications of short sales and, for most people, this is not an issue at all.  Thanks to the Mortgage Tax Debt Relief Act of 2008, you are generally not liable for taxes on losses from short sales as long as the mortgage was a purchase money loan and you didn’t take equity out of the house to spend on things other than home improvement.

Recently, the state of California went one step further in 2010 when it passed SB931, which protects borrowers from banks seeking a deficiency judgement in order to collect unpaid balances from short sales.  In short, if the bank approves the short sale in writing, then they are not allowed to pursue you for their loss.

As for credit damage, with some fiscal discipline, good work history and steady income, many borrowers can be back in the real estate market within just a couple of years.  While the bank will report that the closed account was “Paid in Full for Less than Agreed”, this is far less severe than showing a foreclosure which can stay on your report for seven years.

I hope you’ve found this information helpful, and if you have any questions about short sales and want to find out if it’s a good fit for your situation, just give us a call.

All the best,

Tim