What the Heck is a Short Sale in Northern Virginia?"What the heck is a short sale?" is a question many buyers, sellers, lenders and REALTORS are trying to figure out these days. It's the wild, wild west of northern virginia real estate or Arlington real estate where any party can just throw up a listing calling it a "short sale" and then make up the rules from there. I was involved with 3 short sale situations today with different clients. So what is the difference between a regular sale and a short sale?
As of writing this article there are 17 short sales going on in Arlington VA real estate: short sales in arlington. This is out of 980 listings.So they represent a small portion of the Arlington Virginia real estate listings. It is also interesting to note that almost all of them are in the under $600,000 price range with most being in the $400,000s and lower. This is because most owners impacted by defaulting loan issues are in the lower price ranges where parameters were often stretched to help the would be home owner qualify for their home loan. Nonetheless it happens to regular people too often due to changes in life circumstances. A friend of mine is going through this now due to a divorce a year after buying a home on 2 incomes. And in there are currently 358 Fairfax County short sales.
Defining Virginia Short Sales and Their Typical Issues
A short sale usually refers to a scenario in which the Seller's loans are greater than the than the house's market value. Simultaneously, the Seller is having trouble paying his mortgage and foreclosure may be around the corner. Even if the Seller sells the home, the money received for the home will come up short in covering the Seller's loan(s). That's why we call them short sales. Typically the goal of a short sale from the Seller's perspective is to have the bank forgive them the difference between the market value of the home and outstanding loan balance(s) of their mortgage(s).
Imagine going to a bank and saying, "Yeah, I'd like to sell my home for $100,000 less than what you loaned me last year and call it even. What do you say bro?"
Since there are so many articles in the paper an online making short sales sound like the answer to everybody's problems, what is the fuss about--at least from my REALTOR perspective? Short sales in Arlington, Fairfax County and Northern Virginia real estate are a lot more cumbersome and rife with pitfalls than would be buyers and sellers realize....
How We Arrived at Today's Virginia Short Sale ScenarioBack in 1980 buyers had 3 basic choices for buying a home
- 20% down payment
- FHA loan
- VA loan
Risks & Pitfalls of Arlington Virginia Short Sales
Perspectives of the Players Involved:
LENDER--not motivated, not making money from this hassle, trying to minimize his losses begrudgingly. This means low customer service such as responding to offers. Very often it takes 8 weeks to receive a response on a contract for a short sale! No fun!#!#!!
SELLER--likely desperate and will say what they think the realtor or buyer wants to hear. So when you ask the seller has your bank approved doing a short sale on your home and said they would forgive some of your loan, he/she will be tempted to say "Yes of course my bank has said they would accept a short sale contract" even if he has not yet approached the bank on the matter.
BUYER--Likely see short sale as big opportunity but not realize the risks, unknowns and time involved.
SETTLEMENT AGENT--Knows that these deals take much more work and patience to execute but don't close as consistently as "normal" sales.
REALTOR--Well I'm still trying to figure out what to put in this slot--haha
PROBLEMS THAT OFTEN COME UP:
- lenders are in no hurry to forgive and forget a seller's debts. Remember there is often an 8 week or longer response time!
- how will the Seller's credit be impacted?
- What are the tax consequences on the Seller if the lender forgives the debt?
- How can a REALTOR take a listing or write a contract without all the answers on the front end such as whether the lender has already agreed to a short sale or if this is just wishful thinking by the Seller who is using my Purchaser and myself and his guinea pig!!!!
- Should the REALTOR even advise that his client make an offer on a short sale property?
Assessing the Risks of Short Sales and the Dos and Don'ts Thereof
- If the Seller has the money to continue paying his mortgage...stop! Don't get involved. A lender does not want to forgive a Purchaser anything...much less if they can still pay their mortgage but are just finding it inconvenient now.
- A short sale will most likely be similar to a foreclosure on the Seller's credit.
- The amount forgiven will be reported by the lender as income to the Seller for tax purposes meaning the Seller will probably have to pay taxes on the forgiven amount
- The lender could still come after the seller for the rest of the money. The promissory note may still be valid even if the lender releases the real estate. Definitely make sure about this issue, Sellers!
- From a REALTOR'S perspective they get to do a LOT more work for a LOT more risk. If the short sale is a failure then it is now the REALTOR'S fault even though the Seller was likely already on the inevitable path of losing his home. The REALTOR is now an easy target to sue since some of this must be the REALTOR'S fault....
PRACTICAL ADVICE FOR SHORT SALES TO ALL PARTIES:
- Understand that there are no rules for short sales. Nothing is guaranteed
- Lenders need to know somebody really can't pay. Usually a hardship of some sort is what they need to see.
- Because of the added risk and pitfalls of a short sale, the price needs to be aggressively lower than other options the buyer will have
- Get info about ALL the loans--even do a title search if necessary. Check on the status of the seller's payments
- Contact the loss mitigation department of the lender (likely there isn't one since lenders are just starting to get these going) and get important info:
b) Will they approve your contract for a lower payoff? Will they confirm that in writing?
c) Settlement Agent will need written confirmation before settlement.
d) Can one get a faster response than the typical 8 weeks lenders have been giving?
Some lenders won't talk to you until there is a contract from a buyer.
e) Disclose everything to the Buyers on the front end. Do not get yourself in a position in which you need to defend yourself against a claim for non-disclosure.
f) There must be an addendum stating that the sale is contingent upon approval by the Seller's lender of a reduced loan payoff.
g) Property should be sold "as-is" to make is as simple as possible for the lender.
h) List the home close to market value and drop it over several weeks showing the lender that you tried to sell higher and nobody bit on it. (this piece of info I'm still deciding if I agree with. The goal is for the lender to not say you could have sold this for higher if you would have listed $30,000 higher....At same time you want to be priced very aggressively since a lot more risk comes with this sale and that plays into it's market value from a buyer's perspective)
a) Don't end up in a short sale deal by surprise
b) Confirm that the Seller's bank has already agreed to a short sale in principle
c) avoid short sales if possible
d) short sales are tough for families to pursue since it takes so long to get a response generally
e) there is likely no certainty until just before closing
f) Protect your $$$$ until lender approves the short sale. How? Add a clause such as the following: "It is acknowledged and approved by all parties that the Purchaser's earnest money will not be deposited until the lender has approved in writing the short sale."
g) Be sure there is an out for the buyer if the contract is not approved by a certain date. You don't want to be stuck in limbo. Make it contingent on some date that is reasonable given the long wait you are expecting in the first place.
h) Follow up, follow up, follow up. Stay in touch with listing agent and settlement agent and if possible the lender. Follow up in writing as well to further nudge and push....
In Summary, short sales are a major hassle to everybody. They are rife with complications, but do provide an opportunity for the right buyer. Unless you are the "right" buyer and are cool with all the murky waters of a short sale from the beginning, avoid them like the plague!
If you ever need legal advice contact The Settlement Group to get attorney referrals.
[note--I attended an excellent seminar given by Robert Fredericks of Fredericks & Stephens, P.C. --- a real estate attorney that consults/partners with Settlement Group (a settlement company providing title insurance, etc.) He provided much insight and notes into the short sale world which I combine with my own experience in writing this article]