Is a Short Sale Right For You?

1 06 2011

In February 2011, USA Today reported that approximately 47.4% of all homes in Prince William County were underwater.  In a table published alongside the story, Prince William placed 26th out of 386 U.S. counties with the highest percentage of mortgages underwater.

“Underwater” basically describes the situation when the amount of mortgage debt you owe exceeds the value of your home.  In short, you owe the bank more than what the home is worth.

A homeowner in this situation basically has five options.  They can sell their home at a loss and find someplace cheaper to live.  If they have the resources they can hold on and hope that their home will recover its value in the future (the “slowly rise to the surface strategy”).  Since lenders have chosen to keep many foreclosed properties off the market until conditions improve, this “shadow inventory” of homes could depress property values for a very long time.  The number of foreclosed and short sale properties that are already out on the market adds to this downward trend.  In August of 2009, there were 713 reported closed sales in the county.  443 were traditional sales, 188 were short sales and 82 were foreclosures.  It’s estimated that short sales and foreclosures represented about 38% of total closed sales.

The following table indicates the severity of the foreclosure crisis since 2006:

Foreclosures in Prince William County, VA

Year                  # of Foreclosures

• 2006: ……. …. 249

• 2007: …………. 2,805

• 2008: …………. 6,549

• 2009: …………. 3,492

• 2010: ……….. 2,078.

(Prince William County Government, FY 2012-2016 Revenue Estimates – – page 10)

Realtytrac.com currently lists the number of foreclosures in Prince William County for 2011 at 3,215.

Another strategy is to renegotiate the loan.  It increases your long-term debt, but you get to keep the house and have the possibility of building equity in the distant future.  On the minus side, pursuing this strategy might result in saddling yourself with even more debt that you can’t pay off.  It also requires willingness by the bank to refinance.

The next two strategies are for you if you know that the burden of debt is so overwhelming that you can’t afford to hold onto your home even with refinancing.

Foreclosure is the “no-alternative” alternative.  Foreclosure will destroy both your credit and your reputation.  Among the more unpleasant things that could happen to you in a foreclosure are:

  • The creditor can take your house and then charge you for the expenses he/she incurred in doing it.
  • Your credit rating will be toast for years to come; the foreclosure will remain on your credit report for 10 years.
  • Under Fannie Mae guidelines, without extenuating circumstances, you will not be eligible to buy another home for 7 years.
  • Since some employers review job candidates’ credit ratings before making a hiring decision, a foreclosure on your credit rating could jinx your chance of getting a job
  • Last year The Washington Post reported that federal employees with foreclosures on their credit records might have their security clearances revoked (The Washington Post, “Foreclosure Freeze Shakes Up Security Clearances,” October 20, 2010).

The final strategy is selling your house in a short sale; an option that has become the solution of choice for many people in our area.  Short sales aren’t a silver bullet for housing distress, but they are the least damaging way to leave a home you can no longer afford.  A “short sale” involves selling your home for less than the mortgage balance and trying to get the lender to forgive the unpaid balance.  Lenders may be likely to accept a short sale because they will lose more money doing a foreclosure.  According to Freddie Mac, a lender typically will lose $60,000 or more in a foreclosure, so lenders have a vested interest in keeping homes out of foreclosure.  It’s important not to delay in making the decision to pursue a short sale.  The longer you wait to request it, the more in debt you’ll be.  The larger the debt, the less it is in the creditor’s interest to consent to a short sale.

Advantages of short sales over foreclosure are that:

  • You will eliminate or reduce your remaining mortgage debt.
  • Assistance for relocation may be available.
  • You may be able to get help under the government’s Home Affordable Foreclosure Alternatives Program (HAFA).
  • You will be eligible, under Fannie Mae guidelines, to buy another home in 2 years instead of 5 to 7 years.
  • If your credit report does not reflect a 60-day+ late pay, under Fannie Mae guidelines, you will be eligible to buy another home immediately.
  • Your credit rating will still take a hit, but it won’t be as drastic as the damage caused by a foreclosure.
  • You avoid the stigma of foreclosure.  When potential lenders or employers review your credit rating in the future, the fact that you tried to make good on your debt rather than just walk away from it will be in your favor.

The major drawback of a short sale is that it takes extra time to close the deal.  You have to get the lender to approve the sale which means wading through a sea of red tape.  If two lenders are involved the time lag increases exponentially.  Closing on a short sale typically takes two months.  This time lag could cause a potential buyer to lose interest and go elsewhere.  Since some lenders require evidence of a committed buyer before they will even consider a short sale, this could halt the entire process.

Steps in a Short Sale

There are several steps in a short sale.  Since any one of these steps can make or break the sale, it’s important to execute them correctly.  Using the services of a real estate professional with a proven track record in short sales can be a huge help because they know the process and they already have relationships with the lenders.

The first step in a short sale is to talk to a real estate agent who has extensive short sale experience.  Ask your Realtor to prove their experience to you by actually showing you how many short sales and which banks they have successfully sold.  Just because the agent has taken a distress certification class does not necessarily mean they have real world experience in the trenches.

Such an agent can quickly verify your eligibility for a short sale.  They will also look at your specific situation and determine the best way to present your case to the lender.  You may be eligible to sell your home in a short sale if you have a hardship, such as a job loss, divorce or medical emergency, you owe more than your house is worth, you’re unable to afford your current monthly mortgage payment and you’re unable to modify your current home loan.

Your real estate agent will list the home for sale and act as your liaison with the lender.  As in a traditional sale, the house will be shown to potential buyers, so you will need to keep your home neat and permit the agent access to the house.  Once you receive an offer, your agent should submit it to your bank in writing with the potential buyer’s signature.  The lender(s) will then perform their own valuation appraisal of the property and, if they think you’ve strayed too far from the fair market value of your home, they may present a counter offer. Once all parties agree to the terms of an offer, the short sale is completed.

The lender wants to be sure that you are leaving your home because of hardship and not because you are sick of paying on a home that yields no equity.  For this reason the lender requires that you submit a statement of hardship which basically supports the claim that you cannot afford to keep the house.  The statement of hardship should explain why you’ve fallen on hard times and it also should document that you have no other resources such as bank accounts, retirement accounts or other real estate that could be used to pay off your debt.  Along with the statement of hardship, you’ll need to submit supporting documents such as W2 forms, income tax forms and bank statements.  It’s critical that your submission be complete and accurate and that any factors that might complicate the sale such as a lien against the house be included in the information.  In addition, you’ll need to submit a letter of authorization, which permits your agent to negotiate with the lender on your behalf and a comparative market analysis or list of recent comparable sales in your area.  It is crucial to choose an experienced short sale agent that has successfully negotiated multiple short sales with your particular bank.  Each bank is different in how they respond and negotiate.

Short sales involve complex negotiations between the seller and the lender.  Because short sales are complicated, you need expert guidance.  “Good guidance is critical in navigating your way through a short sale” says Ashley Leigh, Linton Hall Realtors’ Broker and Owner.  Leigh, a short sale expert who has successfully closed more than 200 short sales since 2008, says that because the popularity of short sales in our area is very recent, most local real estate agents have never done a short sale.  Leigh’s short sale team actually gets over 90% of their short sale deals approved by the banks. “Lawyers are expensive and con men and scam artists are popping up everywhere to take advantage of people’s lack of knowledge in this area.  A mistake or omission in your paperwork could result in a foreclosure.  Therefore it’s critical to find a real estate agent who can help you navigate this convoluted procedure.”

The Linton Hall Realtors web site at www.LintonHallRealtors.com has an extensive Short Sale FAQ section that can help you decide if a short sale is an option you want to pursue.  You can also discuss your situation with a short sale expert at 703-485-4663 begin_of_the_skype_highlighting            703-485-4663      end_of_the_skype_highlighting, or e-mail Ashley Leigh at ALEIGH@ACLTEAM.COM.  In addition, there is a short sale blog that many locals enjoy at www.NorthernVirginiaShortSales.org as well as www.StopForeclosuresInNorthernVirginia.info

 

 

 

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