Common Short Sale Questions & Answers

For Clients in Foreclosure

1.       Foreclosure:  Legal process by which your bank sues you to get possession of your house so they can sell it themselves and try to recover as much money as they can from what was loaned to you.

2.       Short Sale:  Negotiation process where the bank agrees to take less than what is owed.  A successful Short Sale will not result in a deficiency judgment against you, the bank will not report a foreclosure on your credit report but they will issue a 1099-C to the IRS.  (see your CPA about IRS form 982 - Discharge of Indebtedness)

3.       Deficiency Judgment: The right of the bank to sue you personally and try to collect any money that was not recovered from the sale of the house.  The more money the bank loses from the sale of the house, the more likely they are to pursue a deficiency judgment.  In most cases we are successful in getting a full release for our clients.  At the very least, we would negotiate a reduction of the total amount owed.  Ultimately, it all depends on whether the bank deems it financially feasible to hire an attorney and try to collect from someone who doesn't have any money.

4.       1099-C:  The bank elects not to pursue a deficiency judgment but will write off the balance of your loan as bad debt and issue a 1099-C to the IRS for the difference between what they loaned you and what they lost from the sale of the house.  This is considered income to you and you would have to pay taxes on this money.  If the house was your primary residence, you may not have to pay taxes.  Talk to your Accountant about this.

5.       Bank Legal Notices & Phone Calls:  After you miss your first payment and before you actually go into foreclosure, the bank will start calling you.  You can also expect to receive a default notice from the bank and a letter from the bank's attorney letting you know of their intent to foreclose.

6.       Bank Collections Department:  The bank's collections department will call you relentlessly and at any phone number they have access to and their sole purpose is to get money from you.  I suggest you review your rights under the Fair Debt Collections Practices guidelines such as when and where they can call you ... etc.  Most banks will not violate these rules.  If you have a retirement account, I suggest you consult with an Attorney and an Accountant before you use these funds for your mortgage payment.

7.       Court Foreclosure Documents:  When the bank starts the foreclosure process, they will hire a law firm to handle the legal process of foreclosure against you.  There are (3) key court documents that you should receive during the foreclosure process.  You may receive them either by certified mail or a deputy Sheriff will leave the notice on the front door of the house that is in foreclosure.

a.     Foreclosure Summons:  This is the official notice to you that your bank has started the legal foreclosure process against you.  We commonly see 5-6 months or longer before the Sheriff Sale is scheduled.

b.     Summary / Default Judgment:  Your bank has won the foreclosure case against you.  Plan on about 60 days or less before Sheriff Sale.

c.     Sheriff Sale:  Your house will be sold at a public auction.  Most of the time, it will go to the bank.  You have 30 days from the date of the notice.  At this point you should be aggressively looking for another place to live.  You don't want to be in a position of being evicted by the Sheriff.  If we can get a reasonable offer from a Buyer and we have your complete Short Sale package at least one week before the Sheriff Sale date, we have been largely successful at getting the Sheriff Sale postponed giving the bank some time to review the Short Sale package.  Please understand, it is NOT GUARANTEED that the Sheriff Sale will be stopped.  Its been my experience that we commonly won't know if the Sheriff Sale has been postponed until the day of the sale and we confirm it with the Sheriff.  Many times the Sheriff Sale will be stopped hours before the sale time.

8.       Settlement Conference:  You have approximately 23 days to respond after you receive the Summons.  I suggest you consider responding to the Summons.  At the very least it will buy you a little more time to help you figure out what you need to do and where you will go.

9.       FHA Loans: If you have an FHA loan, FHA guidelines require that you must be living in the house in order to qualify for a Short Sale unless there has been a significant event that prevented you from living there such as death, job transfer, job loss, divorce ... etc.  The house must not have been purchased as a rental or have been rented for the more than 18 months.  Although difficult, we have been able to get FHA clients approved who have moved out of their house and do not fully qualify for exemption.

10.   Short Sale Key Elements for Success:

a.     The Bank must approve the Short Sale

b.     We must find a Buyer

c.     We need all of your Short Sale documents and your full cooperation

11.   Short Sale Time Frame:  The fastest Short Sale we've completed was around 45 days from the date the house was listed for sale to closing.  The longest Short Sale we did was close to 2 years.  On average, we estimate 90-100 days after we submit a complete Short Sale package which is usually when we get a reasonable offer.  In other words, at least 4-5 months from start to finish.  As long as the bank doesn't have a Sheriff Sale scheduled, it all boils down to ... see item #9.

12.   Short Sale Price: We will list your house based on what the current neighborhood sell prices are for houses like yours in foreclosure.  Remember, the bank will do an appraisal and determine what the house is worth regardless of what we list it at.  Its possible that the bank will want more money than what we list for and we would adjust accordingly.

13.   Selling Your House:  Just because your house is a Short Sale and we can sell it for less than your competition, does not mean someone will buy it.  The basic rule applies CONDITON, LOCATION and PRICE.  We can control condition and price.  Below are some important items to consider when getting your house ready to sell.  Its understood that you may be struggling financially so do what you can within your financial means.

a.     De-Personalize Your House: Potential Buyers of a different race, religion, sex or political view may sub-consciously decide against your house because of what they see in the house including family photos, religious icons, political posters ... etc.  Take them down and pack them away so you'll be ready when its time to move.

b.     The Average Buyer:  Provocative artwork, pink flamingos in the front lawn and a hot pink master bathroom will not appeal to the typical Buyer making it harder to sell your house.  You should consider consulting with a Home Staging Specialist to help you arrange your house so that it appeals to the typical Buyer.  A little paint, home accessory placement and furniture arrangement can go a long way in making your house more marketable.  As a rule of thumb, the woman buys the home.  A focus should be on the kitchen, master bedroom and master bathroom.

c.     De-Clutter and Clean: Its important that the house look and smell its best whenever a Buyer is looking at the house.  Its actually preferable to have some staging items on the counter tops so the house looks like it is lived in but get rid of or hide the beer can collection, stack of bills on the kitchen table, organize the kids toys, clean and put away any dirty dishes, take out the garbage, clean and vacuum the floors, use febreeze for pet odors ... etc.  Consider putting extra items in the garage.

d.     Pets and Smoking:  Not everyone loves pets or if they do, probably not yours.  Also, many people do not like the smell of smoke.  Pet and smoke odors permeate fabrics and carpet and are tough to get rid of.  If possible, try to have the carpet cleaned, try to manage pet smell, fur and kitty litter and if you smoke, do it outside.

e.     Curb Appeal: Do your best to keep the front lawn mowed.  A bag of weed and feed goes a long way toward keeping the grass green and weed free.  If a potential buyer drives by and the grass if knee high with a thistles, they may not even stop regardless of how good the house looks inside.

f.      Showings:  When a Buyer wants to look at your house, you should do everything you can to let them see it given reasonable notice and times.  Any Buyer that you turn away could be an offer to buy your house.

g.     Utilities & Winterizing:  If at all possible, you should keep the electricity on so the house can be shown when its dark outside.  If your house has a basement, its critical to keep the sump pump running.  In our experience, a flooded basement and mold will make it very difficult to sell the house.  If you have to leave in the winter months, it is critical that the house is winterized.  Again, frozen pipes and subsequent water damage will destroy the interior of the house along with mold growth.  It is preferred that the water is turned off if you leave the house.

14.   Bank BPO - Appraisal:  When the bank has the complete Short Sale package, usually after we get an offer, they will send someone out to get a price opinion of your house.  This is commonly called a BPO (Broker's Price Opinion) or if it was an FHA loan they will send an Appraiser.  We want the Appraisal / BPO to reflect our offer.  In other words, we want the highest offer we can get from a Buyer and the lowest price opinion we can get from the Appraiser / BPO.  The Short Sale could be denied if the bank thinks the house is worth more than our offer.  Sometimes we are not aware that the Appraisal / BPO will be done and in some cases they will simply do a drive by or just come up with a price from the MLS without even seeing the house.  We always ask them to do an Interior price opinion which means they have to go inside the house.

15.   Bank's Right to Secure the House:  The bank gave you money to buy your house and you gave the bank a mortgage which states that the bank has a right to secure the property if you vacate the house.  The bank will sometimes hire a 3^rd party company to winterize the house, change the locks, maybe mow the grass or any other activities deemed necessary by the bank to protect the house from frozen pipes or vandalism.  You still own the house until its sold and its trespassing if you still live there.  Just remember to call us first before you leave the house.  Also, your homeowner's insurance is no longer valid 30 days after you vacate the house.

16.   Arms Length Transaction:  The Short Sale must be an Arm's Length transaction. For example, you can't have a relative buy the house at Short Sale on your behalf and let you stay in the house.  We can't have any side agreements with you and we will not buy the house via Short Sale and let you stay in the house.

17.   Where Will I Live - My Credit is Damaged?:  Millions of people have gone into foreclosure across the United States.  I often say that you don't see these people living out of cardboard boxes on the side of the road.  Foreclosure and Bankruptcy do not have the same stigma it had years ago.  Finding an apartment or rental home should be relatively easy if you can afford the monthly rent and your credit report history shows that you paid your bills on time at least until the foreclosure happened.

18.   How is My Credit Affected:  Your credit has already taken a hit due to the fact that you have already missed one or more mortgage payments.  Once the house is taken care of via a successful Short Sale and assuming you don't have any other credit issues, you can begin the journey of credit repair which may take 12-18 months or longer to get back to an acceptable credit score.  If your house goes to Sheriff Sale, the bank will report a foreclosure judgment on your credit report which will keep you from buying another home for at least 3 years and they are more likely to pursue a deficiency judgment against you by which they can put a lien against any other asset you may own or garnish your wages.