"SHORT SALE"... ok, what does that really mean?

"Short Sale!"... We see it all the time in ads in the paper and in the Multiple Listing Service (MLS). However, many "homes for sale" that are advertised this way... really aren't.

I asked the two Realtors from RE/MAX Headquarters in Denver, CO, in the photo (above-right) to help me understand this "short sale" phenomenon. This is what they told me:

1. A "short sale" happens when a bank is willing to take less for a final payout than the current mortgage amount (i.e. You owe $350,000 - Current market value says $285,000 - The bank agrees to take $265,000, allowing for about 7% to cover commissions and other closing costs)
2. Short sales are not a magic solution for sellers wishing to avoid contractual, financial obligations. If the seller has assets, the bank will likely squash a short sale attempt. The seller's options are generally limited to:

• Sell it and bring money to the closing to cover the difference between what is owed and the current market value.
• Keep it and rent it and wait for market recovery.
• Let it go to foreclosure (huge future credit implications)
• Short sale - (IF bank requirements are met)

3. To attempt the short sale, the bank will require forms and statements to accompany the request, such as:

• Loan info release "ok"
• Cover letter
• Listing contract
• W-2's
• Bank statements
• 2 years Tax returns
• Hardship letter
• Financial statement
• HUD-1 (when an offer comes - to show no profit for seller, or other abnormalities)... Title companies will do a preliminary HUD, especially if there is an existing relationship.

4. The bank is hard-pressed to give the seller or the listing agent the "bottom line" up front, because they see this as "negotiating against themselves." They will often require offers to be sent to them for approval first. This can be frustrating for buyers, as time goes by... and by... and by. It can take weeks to get a response from a dispassionate bank "mitigation officer"... even if the agent practices due diligence, does his or her homework, and establishes the relationship early in the process.

5. Contracts should be required to be "AS IS," subject to inspections, appraisals, etc. The bank won't want to be involved in fixing anything... and the seller (theoretically) should have no money to do repairs.

6. Watch out for "commission-ectomy" attempts by the bank. They figure, "Hey, we're losing... why shouldn't the Realtors?" As agents, attempt to negotiate guarantees prior to getting folks involved. When you start to take away people's money - things can get messy. Watch out how you advertise "co-op fees" in the MLS. If you offer 3% ... even with a "subject to bank approval" disclosure, your brokerage firm may end up working for free if you allow the bank to whittle away your hard-earned fee. The banks can be tough, yet don't forget that Realtors can be tough, also.

7. Remember, banks are in business to make money, not lose it. Don't get involved with a "short sale" deal unless the listing agent can show that they have done their homework and that they and the sellers are "fully involved" with the bank and their loss-mitigation department. Also, make sure to ask, "Are there any subordinate mortgages... or any other potential clouds on the title?" The bank wants to know that the seller truly has hardship and deserves the short sale. They will weigh the benefits to them (not the seller or the agents or the buyers) and determine if "short sale or foreclosure" is in their best interest.

8. Tax-wise, the seller may trade one challenge for another. Checking with their tax advisor is a good thing to do, as there are ways to legally avoid this... BUT: Often, the bank will issue the defaulting borrower a 1099 in the amount of the shortfall. It could add financial burden if the seller had to report this forgiven loan as income...

9. As Realtors in the transaction, it's wise to include a couple of addenda: A listing addendum, outlining the short sale scenario for the sellers signature... and a contract/offer addendum outlining touchy subjects (like possible commission attacks by the bank) for the agents/brokers, as well as the principals to the transaction.

There... Hope this clears things up a bit. I was impressed. These girls really know their stuff. Contact me at 386-931-1987 or frankzedar@Gmail.com or visit these websites: http://www.frankzedar.remax.com/ or http://www.realestateforheroes.com/ If you buy or sell a house, I'll make sure these agents at HQ get a referral fee, in your name, of course :-)