There is a lot of confusion over short sales. They are a bit of a mystery to the general public and many agents struggle with them as well. Before we go into the wonderful world of short sales, I believe that I should explain why I believe San Carlos may start to see more and more of them on the horizon.
Why will Short Sales become more common in San Carlos?
Anyone currently looking for a home in San Carlos will tell you just how awful the inventory situation has become. Here we are in March and we only have 30 homes on the market. Not much to choose from and those homes that are attractive to buyers are receiving multiple bids. Why is inventory so low? Quite frankly, sellers are not selling unless (1) they absolutely have to; (2) there is a job transfer (3) they are secure enough with their job and finances that they can take advantage of the move-up market; and finally (4) the home is the product of a probate or trust sale. The result….very little inventory, as these are not groups that typically produce decent levels of inventory in a down economy. So what would lead to a sudden change in short sale activity? The answer lies with (1) above….people not selling unless they absolutely have to. Based on my recent experience of meeting with sellers in San Carlos over the last six months, I think it is safe to say that we have a number of families just barely hanging on.
Many of these families who bought in the last two years with a lower than 20% down payment may not be able to sell their home and get out of the transaction without having to come to the table with a check to cover the deficiency. Once all other options are exhausted, the families will have two choices (1) Foreclosure; and (2) a Short Sale.
Why Short Sales are more attractive for sellers
The thought of having to leave a home for financial reasons is perhaps one of the most difficult decisions a family can make. Most families in this situation are aware of letting the home go to foreclosure as a possible option. The problem with this route is that a foreclosure will typically remain on the seller’s credit report for 7-10 years and greatly reduce their credit score. Additionally, if any of the loans on the property are non-purchase money loans, the lender can foreclose and possibly institute a legal action to recover the deficiency.
If a short sale is completed, and completed correctly, all of the loan balances will be satisfied. Whether they are a purchase money loan or a non-purchase money loan is irrelevant. A short sale will lower your credit score as well, but it is not nearly as devastating as a foreclosure would be. Most short sales show up on a credit report as something similar to “debtor and creditor reached an agreement to settle for less than the amount owed”.
How exactly does a Short Sale work?
The mechanics of a short sale are as follows: The seller puts the home on the market, as they would do if they were attempting a regular sale. The fact that it is a short sale must be declared on the MLS and to prospective buyers. Once the sellers find an offer they would like to accept, they can do so. However, the seller’s agent will have the buyers and sellers sign a Short Sale Addendum, which essentially states that the seller will only be obligated to sell the house to the buyer when and if all current lien holders reduce their balances owed in a manner that would allow the prospective purchase price to satisfy all outstanding balances. Next, the bank or banks, depending on the number of loans on the property, are informed that the seller is in financial trouble and attempting a short sale.
The next step is tricky, and it is where most short sales fall apart. The bank will then ask for a Short Sale Package to be sent in to their loss mitigation department. The Short Sale Package differs slightly from bank to bank, but basically consists of the following: A hardship letter from the sellers, a completed financial package from the sellers, bank statements from the sellers and a copy of the proposed purchase agreement. The goal of the seller’s agent is to get the Short Sale Package in front of a negotiator at the bank who will make two determinations: (1) whether the hardship actually exists; and (2) try to determine if the price offered by the buyer is the fair market value of the home. If the answer to both of these questions is answered in the affirmative, the short sale moves forward to be negotiated by all parties. Most short sales tend to fall apart at this juncture because they never get in front of the negotiator, or at least in front of a negotiator that does not re-assign the file.
Why do the majority of Short Sales fail?
Most agents have not completed short sales. They are a relatively new phenomenon to the peninsula. Consequently, many buyers and sellers do not have their expectations set correctly and end up getting frustrated and abandon the process. Here are two more reasons why short sales generally fail:
(1) Just getting the short sale package to the bank is difficult. As mentioned in a previous short sale post, we once spent 40+ days trying to fax in the Short Sale Package. Quite simply, the loss mitigation departments in the big banks are completely overwhelmed and understaffed.
(2) If a seller is not organized or not thorough with record keeping and information gathering, the transaction will be over before it begins. Banks have no patience to keep after the seller for incomplete items in the Short Sale Package. If something is missing or out of place, it will be given back to the seller’s agent and the file will go right to the bottom of the file and the process will start over again.
(3) Often sellers wait until it is too late to start a proper short sale and the prospective short sale is pre-empted by foreclosure.
The benefits of Short Sales
The seller gets out from under the home and does so without a foreclosure on their record. The benefit for the buyer is that they generally purchase a home for slightly under fair market value. Homes that are short sales are generally priced a little under fair market value for two reasons: (1) the seller’s agent should understand that they are going to need to give some incentive for the buyer to stick with a process that could take six months and has no assurance of actually closing; and (2) the bank may come back and ask for more money from the seller when negotiating the short sale.
If you are considering a Short Sale, be aware of the following
These are complex transactions and should only be attempted after advice from an accountant (for any tax ramifications), a legal consultation and the input of an agent experienced in short sales.
You will need to exercise a good deal of patience and understand that the process is long and frustrating at times.
Summary
Short sales will be appearing more frequently in San Carlos in the months to come. Buyers and sellers should educate themselves on the process so that they can make the right call when the time comes. If executed correctly, a short sale can be a life-saver for a seller and a true bargain for a buyer.
6 Comments
Is it also true that the bank or financing organization will send the sellers a 1099 for the difference between the amount owed on the note, less the gross proceeds from the sale? i.e. Amount of note $500K, short sale price $450K, sellers get a 1099 for $59K to be reported as income.
Hi Dave,
An excellent question. This is why I put in the notation regarding speaking with your accountant prior to undergoing a short sale. Now, I do not have any direct knowledge of local short sale sellers actually getting a 1099 for the deficiency amount, but it certainly is a possibility.
Many of the banks engaging in short sales have been given extremely large sums of money by the government to help buffer the blow short sales on the banks’ bottom line….so it could be argued that the banks should not be handing out 1099s for the loss since they are receiving cash from the government. Each home owners’ situation is going to be unique, such as whether the loan was a purchase money loan and a host of other factors that would go into determining any tax liability on the short sale.
Bob
Thanks Bob. I am hearing through local news sources that it is the California FTB who is chasing short sale homeowners and not the IRS.
Hi Dave,
Yes, I have heard the same thing, although I am yet to see it in action. It doesn’t make much sense to have the government try and help bail people out only to go after them the next year for money due under that same bailout (especially going after people that do not have the money to begin with)….but there are a lot of things the government does that does not make much sense : )
Bob
Hi Bob,
We bought a house in San Carlos as a short sale and did get a “good deal”. I agree that patience is a must. It took over 4 months of going back and forth with the seller/selling agent, the banks and making sure that the owner had paid all the back taxes owed on the property. I am not sure if this is true of most short sales – but because of the situation, the house was distressed by the time we closed due to lack of maintenance and upkeep. So we had a lot of cleaning up to do. We also consulted with our tax accountant and our finance person. Our agent did comparables in the area to make sure that what we were offering was in line with what was going on at the time. We believe it may have gone more smoothly had the selling agent been more organized. Our agent was relentless with frequent follow ups and communication to keep things moving along. If anything, I think it was his patience and experience with it, that kept us from walking away.
Hi Racquel,
Thanks for your post. Four months is actually fast for a short sale, if you can believe that. Congrats on sticking with the process and welcome to San Carlos!
Bob