Taking The Short Route – The Process

Suppose you read my earlier post on why you should consider a short sale. What needs to happen in order to pull it off? Here is a short overview of the process.

Get The Right People Involved

It definitely helps to have a realtor involved in this process because there is a lot of back and forth, coordination, and information transfers. It’s really helpful to have someone handle all that for you – especially if they’ve been through this process before. A realtor can also help convince the bank that the property value warrants a short sale.

You will want to consult with an attorney because they can be helpful at several steps in this process, starting with getting your lender’s attention. One way to get your lender to consider a short sale is to stop paying your mortgage. However, I hear that is no longer the only way to get their attention and I wouldn’t recommend doing this without first consulting with an attorney. Then you will want your attorney involved again later in the process when your lender presents you with different settlement options so that you can understand the implications of them. For instance, you can sign a 0% interest note for the deficiency or the bank can just forgive the debt. Each of these alternatives has specific implications for your credit history, your future liabilities, and your taxes. You will probably want your attorney negotiating the terms of your deal for you, though your realtor will negotiate the offer with the lender.

Because of the tax consequences you’re also going to want to involve your accountant. For instance, under certain circumstances, when a sale is completed, you may receive a 1099 C from the lender that documents how large the deficiency was. As debt forgiveness, this would normally be taxable except that there is the Mortgage Forgiveness Debt Relief Act of 2007 that provides for this phantom income to not be taxable if the debt forgiveness is related to your principal residence and the debt is forgiven during 2007 – 2009.

Contact The Lender

Once you believe your lender is ready to consider a short sale someone needs to contact the lender to start the process. This is something your Realtor can actually do for you. The first step is to figure out who to talk to and to document the process. In general, you want to be dealing with the Loss Mitigation department, not customer service. They can outline the steps and the required documentation.

Prepare The Documents

Before the lender will have any discussions with your realtor that are specific to your case they are going to want to have an authorization on file that explicitly gives your permission for the lender to talk to the realtor. After that, the lender will need a short sale package on file. Every lender has a different process but in general the following documents are required in the short sale package:

  • Copy of the listing agreement with any amendments
  • A hardship letter, written by you, explaining your circumstances that require a short sale. If there is any supporting documentation such as medical bills or termination letters, those should be included.
  • Financial information request form, which provides a summary of your income and expenses
  • Copy of pay stubs
  • Copy of income tax return
  • Copy of property tax bills

Pricing The Property

Once your lender is in receipt of your short sale package and they have been authorized to talk to your realtor your realtor should call your lender to discuss pricing and the lender’s process for responding to offers. This is where a realtor can really add some value by figuring out what the lender’s targets are and how flexible they are. In addition, by understanding the process your realtor can set the appropriate expectations with potential buyers and possibly even expedite the response. The last thing you need is a realtor who just lets fate take its course.

Next Time

In another post I’ll cover what happens after an offer is made. In the meantime, if you would like some additional perspective on the short sale, check out this Atlanta based realtor’s blog.

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