Sacramento Short Sales - Frequently Asked Questions
First a note — Erin Stumpf is not an attorney and not a CPA. If you desire any sort of tax or legal advice, you should seek the advice of qualified professionals. I am a licensed California real estate broker (CA DRE# 01706589) and counsel clients on the nuances of greater Sacramento area real estate transactions.
What is a short sale? A homeowner who needs to sell ultimately owes more on the property than it is currently worth, so they list the house with a real estate agent who then attempts to negotiate a lower payoff with the owner's mortgage company so the owner can sell the house. For example, if the property is worth $500,000, however the owner has a mortgage for $550,000 the owner would not be able to sell the home and pay off the mortgage with the proceeds of the sale. The property would be listed for $500,000, an offer received from a buyer and accepted by the seller SUBJECT TO LENDER APPROVAL, and the agent would negotiate with the mortgage company to accept the net proceeds of that sale at its current market value.
Do I need to have a financial hardship to do a short sale? Usually, yes. Mortgage lenders typically need to see a financial hardship or another really compelling reason to sell on the seller's end for the mortgage company to entertain allowing a payoff for less than the mortgage amount owed. Financial hardships usually involve things like loss of employment or reduction of income, death of a spouse or co-borrower, divorce or separation from a co-borrower. Compelling reasons that are not necessarily financial in nature I have completed short sales for in the past have included things like job relocation, disability that requires a relocation, an increase in household size (marriage, birth, taking in family members), etc. You will have to explain and document your hardship for the mortage company.
Is a short sale quick? How long will I wait for approval? The term "short sale" is often confused with a quick time period and close of escrow. Short sales are not usually quick. While some mortage companies will provide for a pre-approved short sale process, the average waiting period for the seller's mortgage company to approve the short sale is probably 30-60 days once an buyer offer is submitted. Some take less time...some take A LOT more time. The fastest approval I have received on one of my short sale listings was 11 days. The longest was almost 2 years. Once a short sale is approved, then the seller's mortgage company(s) typically allows the buyer somewhere from 21-30 days to close the transaction. There are SO many variables that will dictate the length of time it takes to get approval...like which mortgage company services the mortgage, which entity owns the mortgage, how many loans there are on the house, how knowledgeable the listing agent is, how cooperative the seller is with the process, if the seller is trying to use a government short sale program, etc. There is also no guarantee a mortgage company will approve a short sale at all. So.......fasten your seatbelt.
Does the seller have to be delinquent with mortgage payments to get a short sale approved? No. I have successfully closed several short sales where the seller stayed current with payments. Who decides what the listing price is? The price listed in MLS may not be the price the seller's mortgage company is willing to accept. Usually the listing agent will set the price based on market value, and in consultation with the seller. Some mortgage companies offer a pre-approval process for short sales but I would guess that very few listing agents and sellers do this in advance of listing the property for sale. The seller's mortgage company will do its own valuation or appraisal (often referred to as a BPO - or Broker Price Opinion) to validate the offered price. The bank may counter your offer. Heck, they may counter a perfectly reasonable market value offer too... in addition to the possibility of countering the price you offer, the lender may counter the terms of your offer.
How much does a short sale cost the seller? Usually nothing out of pocket. AND — it's worth noting that there are all kinds of fraudsters out there looking to take advantage of people. If someone wants to charge you an up-front fee for anything in connection with a short sale or loan modification, that's typically A HUGE RED FLAG. There may be some expenses a seller incurs to prepare a home for sale — putting things in storage, moving, doing some minor repairs, doing some up-front inspections, etc. Usually the seller's mortgage company absorbs all the transaction expenses including agent commissions, title insurance, escrow fees, city/county transfer taxes, etc. and accepts the net proceeds of the sale in lieu of payoff in full. More details on transaction expenses below…
Who pays the real estate agent commissions? In a short sale scenario, the mortgage company(s) who agree to forgive debt and allow a short payoff of the loan(s) pay for the real estate agent commissions - generally by absorbing the costs of the commissions out of the proceeds of the sale. As a side note, oftentimes these commissions are re-negotiated by the mortgage company(s) during the process. Note: Real estate commissions are always negotiable and NOT set by law or local custom.
Who pays title insurance, escrow fees, and transfer tax fees? These are negotiable between buyer and seller when the offer is initially negotiated (before it is submitted to the seller's mortgage company(s) for approval). For example, perhaps the buyer and seller agree initially that the seller will pay for 100% of title insurance and escrow fees, 100% of county transfer tax, 50% the city transfer tax. The seller's mortgage company(s) may negotiate that the buyer pay a different split of these fees...however the portion that is paid by "the seller" is absorbed into the overall debt forgiveness and short payoff. Occasionally you will see a seller's mortgage company(s) agree to pay one of these fees, up to and not to exceed a certain amount (for example, they may agree to cover up to $750 of the escrow fee that costs $1200). Generally then, the buyer would cover the unpaid portion of that fee. So basically, again, the seller's mortgage company(s) will absorb many of those types of fees.
Who pays for a home warranty? This is negotiable between buyer and seller when the offer is initially negotiated (before it is submitted to the seller's mortgage company(s) for approval). Generally though, I would prepare any buyer of a Sacramento short sale property to expect to pay for this cost, even if you ask the seller or seller's mortgage company(s) to cover it. In my experience, this is paid by the seller's mortgage company(s) in less than 20% of my approved short sales.
Who pays for home inspections, certifications, or repairs? These are negotiable between buyer and seller when the offer is initially negotiated (before it is submitted to the seller's mortgage company(s) for approval). Most short sale seller's mortgage company(s) will not agree to cover things like the costs of pest or termite inspections, roof inspections, sewer line inspections, or any corresponding repairs or certifications. A lot will depend on the circumstances with the condition of the property, how many loans are involved, the buyers' loan program, if the property is in default, the length of time of negotiation, etc. As a safety net - buyers, do not expect that seller's mortgage company(s) will grant these requests. Generally short sale properties are sold "as-is" and sellers can not afford to make repairs anyway.
Will the short sale lender(s) give the buyer credits for closing costs or interest rate buydowns? These are negotiable between buyer and seller when the offer is initially negotiated (before it is submitted to the seller's mortgage company(s) for approval). I have seen this vary widely from the short sale seller's mortgage company(s) agreeing to pay up to 3% closing costs for the buyer, to the short sale seller's mortgage company(s) rejecting those requests. Again, much will depend on the circumstances surrounding the sale of the property.
Who pays delinquent property taxes or unpaid utility liens? It depends. Sellers, if you have not been paying your property taxes or county utilities, you really need to let your agent know this ASAP! I work closely with the title company on this to make sure that we know of any lien issues in advance, but because it can take several weeks or months to get approval, new liens may pop up during the lender negotiation process. When I negotiate short sales, one of my worst fears is that after the short sale is approved an unexpected lien will pop up. This has happened to me before, and for lack of a better way of describing it - this sucks! If you can let your agent know in advance that these items are unpaid, it will save lots of headaches all the way around. IF WE KNOW in advance that these liens exist, there is a great chance that the short sale lender will absorb these costs into their overall debt forgiveness and short payoff. IF WE DO NOT KNOW in advance that liens exist, once the short sale is approved - this will halt the transaction until we can find a way to pay these liens. The seller is often financially unable to pay them, the buyer usually does not want to pay, the agents commission has already been reduced, and the short sale lender has already taken a loss on the loan. Sellers - please save everyone a headache and communicate with your agent.
I have multiple mortgage loans on my house, can I do a short sale? Yes. There is added complexity when dealing with multiple mortgage companies because all have to agree, and the timing of their agreement needs to be in synch. Your “first mortgage” will get the vast majority of the net proceeds of the sale, while your second mortgage and/or home equity line of credit (HELOC) will usually get a small token payoff - perhaps up to about 10% of the principal balance of the loan. I have also seen accepted second mortgage and HELOC payoffs as low as $1,000.
I have IRS and FTB Tax liens, can I do a short sale? Yes. There is a parallel process to get what's known as a "valueless discharge" of liens when doing a short sale. This does not release you from owing IRS or FTB tax debt but it does release the debt from the property so it can be sold. Again, be up-front with your agent if these exist so your agent can initiate the paperwork and process asap.
I have unpaid child support liens, can I do a short sale? Maybe. Instances where I have had this sort of lien to tangle with have been partially successful. If the child is now over the age of 18, it is much easier. If the child is still a minor, the road to release these liens from a home has been more difficult.
I have leased solar equipment on my home, can I do a short sale? Probably yes, though candidly I have personally not dealt with this in a short sale yet. Solar leases were not prevalent during the Great Recession. Solar leases are typically assumable by your buyer, so if your buyer is willing and able to qualify for the solar lease assumption I do not think this would be an issue under most circumstances.
I have a PACE (aka, Ygrene, HERO, etc) loan on my house where I financed energy upgrades into my property tax bill. Can I do a short sale? The short answer here is this will make your short sale pretty complicated, and it may take a special buyer to purchase your home. The conundrum is that while technically a PACE loan can be transferred to a new owner — the financing for the new owner's mortgage may not allow for the new owner to assume a PACE loan. As of now, Fannie Mae, Freddie Mac and FHA (lending standards by which most residential loans are written to) prohibit the assumption of a PACE loan when placing new financing. PACE lenders will absolutely not take less than the FULL amount owed, and I have not yet seen a seller's mortgage company provide a full payoff allocation to a PACE loan. So it depends…if the buyer can payoff the PACE loans at the time of purchase, that is the only scenario I have had success with.
Can I buy a short sale property from my sibling/parent/cousin/spouse/relative? Generally no. Short sales usually must be "Arm's Length" transactions and all parties will have to sign an affidavit stating no parties are related.
Are there tax or legal ramifications for sellers who do a short sale? The best answer I can provide here is that you need to speak to a CPA or an attorney. I am not a CPA and I am not an attorney, so I can not and will not give any tax or legal-type advice. Every seller's circumstance is different. Some may face income tax on forgiven debt while others may not. Some mortgage companies can and may pursue recourse on forgiven debt while others may not. And so on. Please obtain 3rd party professional assistance there.
Are there credit ramifications for sellers who do a short sale? Usually yes. Your mortgage company will usually report a “settlement in full for less than the amount owed” to the credit reporting agencies, which by itself will ding your credit. Anecdotally, what I have seen have a far greater impact on credit scores seems to be missed mortgage payments. If on the road to completing your short sale you are late with your mortgage payment 30, 60, 90, 120+ days delinquent, then your credit score will be pretty badly messed up from that already. You may wish to consult a qualified professional relating to how a short sale will affect your credit.
How long after completing a short sale will I be able to qualify to purchase a home? It depends. You will need to talk to a lender to look at your specific scenario. Fannie Mae, Freddie Mac, and FHA all have waiting periods after the completion of a short sale before you will qualify to purchase again. There are other “portfolio” lenders who may qualify you for a mortgage with little to no waiting period based on your circumstances.
How do I get started? Call or text Erin Stumpf at 916-342-1372 or email at erin@erinstumpf.com.
Erin Stumpf, Coldwell Banker Realty, California DRE# 01706589