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The short sale process begins when an owner needs to sell a home, but their is no equity in the property and the owner is unable to continue to make the payments. A short sale is simply a real estate transaction where the lender agrees to accept less than what is owed on a loan after the sale of the property. The lender pays for escrow fees, including commissions and closing costs that would otherwise go to the home owner in a regular transaction. The lenders realize the home owner is already suffering a hardship and will not be able to pay these costs. Lenders often agree to short sales because the foreclosure process is much more costly and time consuming. If the lender agrees to sell the property in a short sale, they can get it sold before the date the property would have foreclosed, saving them time and money. Here is the short sale process broken down:
Step 1. Calling An Agent.
Contact an agent who has experience dealing with banks. Don't allow someone who is offering to buy your house represent you in a real estate transaction because they have their own interests at heart. A real estate agent who has experience with short sales and a fiduciary responsibility to you is the safest transaction you can have. Agents can do a price comparison of your house, make make getting the paperwork together simpler and help you work out where you are going to move after your short sale is complete.
Step 2. The Listing Appointment.
When you visit with your real estate agent, they will begin to collect what is known as a short sale package. The short sale package is everything the bank requires to verify that the owner wants to sell the house, has an upside down mortgage, and has some type of hardship that has made them unable to make the payments on the property. Most of the forms required during the first meeting with a real estate agent can be met easily, which includes:
1. A sales Contract. The sales contract, also known as a listing agreement is signed by the home owner allowing the real estate agent to put the house on the market.
2. Authorization To Release Information.
This form is simple and gives permission from the home owner to the bank. It allows the real estate agent to represent and negotiate the loan on the home owner's behalf.
3. Last 2 years of income tax.
4. Last 2 bank statements.
5. Last 2 pay stubs.
6. List of current bills that are not commonly sent in the mail, such as gasoline, food, clothing, and other miscellaneous expenses.
7. Supporting bills, such as electric, gas, trash, water, medical, liens, child care, child support, etc.
In addition, the real estate agent collects information that does not require assistance from the home owner. These include:
- A cover letter.
- Current Market Analysis, or recent sales of houses in the area.
- Estimate of needed repairs.
- Net sheet provided by an escrow company showing how much the bank the net proceeds at the end of escrow.
- The title report provided by a title company.
- Purchase agreement from a buyer.
Step 3. Finding The Buyer.
Your house will be listed in the MLS for real estate agents and buyers to view. A sign will be put outside on your front lawn and a lock box will be put on the door. However if you choose not to have a sign or lock box, you can request that one not be used. People will view your home with their agents and one or more offers will be submitted.
Step 4. Signing The Contract.
Even though the lender is agreeing to a short sale, the owner is still the legal seller. Therefore the seller must sign the selling agreement. Since the seller will not receive any proceeds in a short sale, the seller should sign the paperwork according to the current market sales price, and not based on the original purchase price. The real estate agent should already be aware if it is a good offer before asking the home owner to sign it.
Step 5. Getting Short Sale Approval.
Lenders rarely approve a short sale before they receive an offer and the entire short sale package. Once the entire package has been submitted, the bank will issue a Broker's Price Opinion(BPO), where other agents not affiliated with that particular sale take pictures and submit comparable current listings and recent sales.
Step 6. Acceptance of the offer.
If the BPO(s) submitted to the lender meet the right price expectations, they will approve the short sale and accept or decline the offer. Sometimes waiting for approval can take longer than a buyer is willing to wait. If the buyer backs out of the offer before acceptance, there are often back up offers waiting to be reviewed and submitted, which only slows the process down a little when using a diligent real estate agent.
Step 7. Escrow.
Escrow will require that you sign some escrow paperwork. Sometimes it trickles in because original lender may request more paperwork, the buyer's lender may make changes, as well as the sellers, or even the buyer themselves. These glitches are common with all types of purchases, not just short sales. Escrows can close
Step 8. Taxes.
When a house is sold with a deficiency, whether by short sale or after a foreclosure, the government wants their tax money. The lender doesn't want to pay for the lost loan amount, so they report the loss to Uncle Sam, who turns around and then asks the ex-owner to pay for the difference between what the property sold for and what was owed on the loan. For example: A buyer got an original loan for $325,000, but the house sold in short sale for $300,000, creating a $25,000 deficiency. The bank will submit the loss to the government and the government will ask the individual(s) who got the original loan for the difference of $25,000. The recourse the ex-owner can take is to file a Form 982 with your tax return to prove solvency at the time of the short sale. It is a discharge of indebtedness(and Base Adjustment 1082). Doing a short sale instead of a foreclosure will help in proving solvency at the time of sale, because you have proved hardship to the bank already and cooperated with the bank. This information is meant to assist you in pointing you in the right direction. I am not a tax professional and it is my suggestion that you speak with your tax specialist about the specifics of Form 982. This information is directed to California residents. It may apply to other states. Check with your tax preparer.