Short Sales Part 1:  What is a Short Sale?

(This is Part 1 of a 3-part series of posts about Short Sales.)

A short sale is one of the greatest inventions the mortgage industry has ever offered the people of the United States.  It enables homeowners who cannot afford to sell their home for what they owe, the opportunity to sell and walk away from the mortgage balance.  However, before we can get into the details of what a short sale is, we must first look at what a TRADITIONAL SALE looks like.  (When you list the house with a Real Estate Agent and sell it on the open market).

Does the following sound like you?

“You bought your dream home 3-10 years ago and paid full market value for it.  You were happy and life was good.

But then the Louisville housing market crashed and your home is now worth less than you owe on your mortgage.  For one reason or another, you need to sell your house–maybe you lost your job or got a new one, got divorced, or developed health problems.

Now you’re asking yourself the question: How do I sell my house?”

Selling a House the Traditional Way:

Chart Explanation:

• What You Paid (=100k): The amount you paid for the house, simple.
• Current Value (=90k):  The value of your home right now.  It’s likely that your house has decreased in value about 10% since you bought the home.  If you paid $100,000, then that means it’s worth $90,000 now.  You can either get an appraisal or ask a Realtor for their estimate of what the value is. (Yes, their opinion which could be incorrect if they’re trying to earn your business)
• Final Sales Price (=85k): Even If you house is in pristine condition and you put it on the market for $100,000, do you really expect everyone to offer you $100,000? (don’t say yes) The answer is “No!”.  There’s a cushion there of 2-15% (normally 5%) that people will offer BELOW the amount you have it listed for sale, regardless of the value.  For our purposes we’ll estimate $5,000 below the current value/asking price.
• Realtor Cost (=7% of Sales Price): Yes that’s right, Real Estate Agents charge 6-7% of the sales price in commissions.  Back in the day when Real Estate values increased quickly this was usually covered by the increased equity in the home after a few years.  Those days are over and the commission will have to come out of your pocket.  Thinking FSBO? your house will sell for 10% LESS than it would with a Realtor so it’s like you’re paying 10% commission and you do all the work, not a wise choice.
• Closing Costs (=3% of Sales Price):  You’ll need to pay 3% of the sales price towards the Buyer’s (and your) closing costs.  This covers the closing company, taxes, a home warranty, etc.
• Repairs (=5-10k+):  Good luck selling your house for full market value without doing ALL of the repairs first.  A typical 1,500 sqft home will cost $5,000 in carpet and interior paint alone.  Any home you sell on the open market MUST have new carpet and paint at a minimum.  If you haven’t replaced the roof in 10 years, count on another $7,000 to replace it.  Handyman work like repairing holes in walls, leaking faucets, old flooring, and water stains add up fast too.  Landscaping is also a must and can cost $500-$1,000+.  If your home has not been updated you can estimate $3,000 for a cheap bathroom and $7,000 for a cheap kitchen (1,500 sqft house).  Those numbers all increase for larger homes and will at least be double that in upper-class neighborhoods.  For illustration purposes, we’re only going to estimate $5,000.
• Other Liens (=5k):  If you have any long overdue and unpaid bills, there’s a chance one of those has turned into a judgment against you and your home.  Some states don’t let liens attach to property but in most they do.  That means you have to pay that lien off in order to sell your house!  Some examples are: Unpaid credit cards, a loan you received in order to buy your washer/dryer/oven/fridge, that unpaid landscaping bill, or unpaid Taxes (Federal, State, or City).  If you’re in a good financial situation there probably aren’t any liens but if you’re struggling to make mortgage payments, you probably do have something out there that you haven’t been able to pay.
• Mortgage Balance (=100k):  The first several years of paying on a mortgage are used to pay off the INTEREST.  As time goes on your payments start going more towards the PRINCIPLE and less towards interest.  When you pay down the principle that’s when you pay down the mortgage and create equity.  For a home that was purchased 4 years ago, the amount of equity built-up is almost nothing.

Doing The Math–Traditional Sale:

What is a Short Sale?

Take that same $34,000 and use the mortgage company’s “Mattress Money” to pay for it, that’s the difference! The mortgage company agrees to waive the balance including everything they paid for you at closing.  You pay nothing from that point forward, ever.

Selling a House the Short Sale Way:

• What You Paid = $110k: No Change.
• Current Value = $90k:  No Change.
• Final Sales Price = 80k: The price drops by the amount of the Repairs.
• Realtor Cost = $0: Paid for by Seller’s Mortgage Company.
• Closing Costs = $0:  Paid for by Seller’s Mortgage Company.
• Other Liens  = $0:  Paid for by Seller’s Mortgage Company.  Typically these liens are “Settled” for less than owed and paid-off for good.  What a BONUS of doing a short sale! Each lien will typically get up-to $1,000-$2,500 each even if they’re owed more.
• Repairs = $0: Sell the house AS-IS and have the Buyer do all the repairs!  You don’t have to do or pay for any of them.  As a result, your selling price is going to drop the amount of the cost of the repairs.  With a Short Sale, that doesn’t matter!
• Mortgage Balance = $0:  Paid for using the proceeds of the sale from Buyer.  The amount is “settled” for less than is owed.

Doing The Math–Short Sale:

So What’s the Catch to a Short Sale?!

There are several POSSIBLE catches to a short sale.  They can all be avoided if you have the right company handling your short sale.  At Kentucky Solutions there we help homeowners walk away from the house 100%.

a) Not Everyone Qualifies for a Short Sale – If you have $34k stuffed in a mattress somewhere, a short sale is not for you.  A short sale is for someone without the means to come out of pocket, and can prove it on paper.  Their bank account will be almost empty they will have experienced a hardship that put them in a financially strenuous situation,

b) Deficiency Waiver in Writing – Sometimes lenders won’t agree, in writing, to waive the deficiency balance.  However, it’s rare that even after such an instance that they will actually pursue someone for the deficiency after the sale is completed.  Why? Because there’s no money to be had and they know it because they know your financial situation already and know you can’t afford to pay it.

c) Promissory Notes – Sometimes you must sign a promissory note in order to complete a short sale.  However, this can usually be avoided with a counter-offer or by getting the buyer to pay a little bit more.

d) Credit – A short sale can negatively affect your credit score.  However, most people believe that the consequences are still far better than having a lingering foreclosure auction and possible deficiency judgment against your credit.

e)  Taxes – Sometimes there are tax consequences to a Short Sale.  Homeowners will almost always get a 1099 from the mortgage company after completing a short sale.  However, ask your CPA how to use debt cancellation to avoid paying those taxes.

f) You Need a Buyer – Without a buyer the short sale process cannot even begin let alone be approved.  At Kentucky Solutions, we provide you with a Buyer (we will buy it!), a Realtor (to handle the sale), and handle everything with the mortgage company for you.

g) Time – It can take 3+ months to complete a short sale.  However, if you’re still living in the house that means FREE RENT for as long as it takes to complete the short sale.

At Kentucky Solutions, Our Short Sale Clients Have NEVER:

1. Been pursued for a deficiency judgment
2. Had to pay for a promissory note
3. Turned down a short sale approval terms that we negotiated.
4. Complained about the effects of the short sale on their credit scores.
5. Had issues having to pay taxes on a short sale we completed.

However, our clients have always been very happy after completing a short sale with us.

SHORT SALE BONUS! Make Money Doing A Short Sale?

Did you know that there is a way to get the mortgage company to pay you money for doing a short sale? You could earn $1,000 or more if done properly.  Contact us directly for more information.

Parts 2 & 3 of this Short Sale foreclosure series will be available shortly.  Until then: To Learn More About Short Sales, Visit Our Short Sale FAQ