How to Avoid the Pitfalls of a Short Sale

Though an attractive option, due diligence is key

homeownership2As many distressed homeowners await relief from the White House’s loan modification and refinancing program, a growing number of distressed homeowners are considering a short sale — or a deal in which the homeowner sells a home for less than the value of the mortgage, with the blessing of his/her lender. Short sales can be good for both buyers and sellers, but there are a few things both parties should be aware of before taking the leap.

BlackEnterprise.com talked with Kevin Riles, real estate broker and author of 40 Acres & a Mule: The African American Guide to Building Wealth Through Real Estate (Kevin Riles; $15.95) and David Wood, managing partner at Conyers, Georgia-based Wood & Wood L.L.P., about key things to know, no matter what side  of the deal you’re on:

Tips for Buyers

Be patient. Short sales can take at least 90 days to close. “So if you are in a hurry to close and move into your home, don’t purchase a short sale,” Riles says. Wood urges patience as well, adding that oftentimes a buyer will be getting the property for a great price as a result.

Be pre-approved, not pre-qualified.
“Pre-approval means your file has been reviewed by an underwriter and all credit conditions have been met,” Riles says. “You need this so that when the short sale is approved, you are ready to move fast.”

Work with an experienced buyers’ agent. Because a short sale can involve quite a few intricacies, you don’t want this to be an agent’s first short sale.

Lack of communication from the seller or sellers’ agent should raise an eyebrow.
“This probably means they have not heard anything themselves,” Riles says. “You must be in constant contact with the seller.”

Be prepared for last-minute changes at closing. “Usually the closing attorney is seeking approvals from the seller’s lender, the buyer’s lender, and of course the parties in the deal,” says Wood. “With so many people to appease, oftentimes the figures will change frequently as you approach closing.”

The terms of the contract may be restricted by the seller’s lender.
“[For instance], the seller’s lender may only wish to allow the seller to pay a certain sum of the closing costs, while the seller and buyer may have negotiated [a deal] where the seller would pay more of the closing costs,” says Wood. “Ultimately, the seller’s lender will trump the terms of the agreement.”

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  • Anthony Hall

    Thank you for reporting on this timely subject as many homeowners, myself included, have faced or are facing this complex decision.

    While informative, you left out a couple of important points for sellers and buyers to look out for when considering short sale as an option.

    This is especially true if the home in question is in foreclosure due to the sub prime lending fiasco, Option ARM or other such questionable home purchasing practices:

    1. Are there more than one loan on the home? In some instances, the real estate agent and/or mortgage broker may have negotiated 100% financing through an 80/20 loan. This means there are two loans that need to be resolved in a short sale.

    If the both loans are held by the same lender, then the process should be fairly straight forward, but still subject to the delays mentioned in the article.

    However, the original lender may have sold one or both loans to investors and if they are split up, it could be impossible to get the holder of the junior loan to agree to right off the loss.

    This goes for foreclosures as well. Often times the holder of the smaller loan continues to bill the former homeowner, even though a house has been foreclosed and then sold at auction. You might consider this as a topic for another article.

    2. The seller may have to count the deficit (the difference between short sale price and amount owed to lender) as income on their taxes for the year the house sells.

    With the fall in home values in states like California, Florida & Nevada, that could be over $100K added to the seller’s Adjusted Gross Income, which they will owe taxes on.

    This crisis is far from over, but with articles like these that serve as a resource and guide, many existing and prospective homeowners will be helped to navigate these treacherous waters.

    Kind regards,
    Anthony Hall
    Cleveland, OH