Navigating Short Sales: What to Do When the Sale Price Leaves You Short

If you’re thinking of selling your home, and you expect that the total amount you owe on your mortgage will be greater than the selling price of your home, you may be facing a short sale. A short sale is one where the net proceeds from the sale won’t cover your total mortgage obligation and closing costs, and you don’t have other sources of money to cover the deficiency. A short sale is different from a foreclosure, which is when your lender takes title of your home through a lengthy legal process and then sells it.

1. Consider loan modification first. If you are thinking of selling your home because of financial difficulties and you anticipate a short sale, first contact your lender to see if it has any programs to help you stay in your home. Your lender may agree to a modification such as: Refinancing your loan at a lower interest rate; providing a different payment plan to help you get caught up; or providing a forbearance period if your situation is temporary. When a loan modification still isn’t enough to relieve your financial problems, a short sale could be your best option if:

  • Your property is worth less than the total mortgage you owe on it.
  • You have a financial hardship, such as a job loss or major medical bills.
  • You have contacted your lender and it is willing to entertain a short sale.

2. Hire a qualified team. The first step to a short sale is to hire a qualified real estate professional and a real estate attorney who specialize in short sales. Interview at least three candidates for each and look for prior short-sale experience. Short sales have proliferated only in the last few years, so it may be hard to find practitioners who have closed a lot of short sales. You want to work with those who demonstrate a thorough working knowledge of the short-sale process and who won’t try to take advantage of your situation or pressure you to do something that isn’t in your best interest. A qualified real estate professional can:

  • Provide you with a comparative market analysis (CMA) or broker price opinion (BPO).
  • Help you set an appropriate listing price for your home, market the home, and get it sold.
  • Put special language in the MLS that indicates your home is a short sale and that lender approval is needed (all MLSs permit, and some now require, that the short-sale status be disclosed to potential buyers).
  • Ease the process of working with your lender or lenders.
  • Negotiate the contract with the buyers.
  • Help you put together the short-sale package to send to your lender (or lenders, if you have more than one mortgage) for approval. You can’t sell your home without your lender and any other lien holders agreeing to the sale and releasing the lien so that the buyers can get clear title.

3. Begin gathering documentation before any offers come in. Your lender will give you a list of documents it requires to consider a short sale. The short-sale “package” that accompanies any offer typically must include:

  • A hardship letter detailing your financial situation and why you need the short sale
  • A copy of the purchase contract and listing agreement
  • Proof of your income and assets
  • Copies of your federal income tax returns for the past two years

4. Prepare buyers for a lengthy waiting period. Even if you’re well organized and have all the documents in place, be prepared for a long process. Waiting for your lender’s review of the short-sale package can take several weeks to months. Some experts say:

  • If you have only one mortgage, the review can take about two months.
  • With a first and second mortgage with the same lender, the review can take about three months.
  • With two or more mortgages with different lenders, it can take four months or longer.

When the bank does respond, it can approve the short sale, make a counteroffer, or deny the short sale. The last two actions can lengthen the process or put you back at square one. (Your real estate attorney and real estate professional, with your authorization, can work your lender’s loss mitigation department on your behalf to prepare the proper documentation and speed the process along.)

5. Don’t expect a short sale to solve your financial problems. Even if your lender does approve the short sale, it may not be the end of all your financial woes. Here are some things to keep in mind:

  • You may be asked by your lender to sign a promissory note agreeing to pay back the amount of your loan not paid off by the short sale. If your financial hardship is permanent and you can’t pay back the balance, talk with your real estate attorney about your options.
  • Any amount of your mortgage that is forgiven by your lender is typically considered income, and you may have to pay taxes on that amount. Under a temporary measure passed in 2007, the Mortgage Forgiveness Debt Relief Act and Debt Cancellation Act, homeowners can exclude debt forgiveness on their federal tax returns from income for loans discharged in calendar years 2007 through 2012. Be sure to consult your real estate attorney and your accountant to see whether you qualify.
  • Having a portion of your debt forgiven may have an adverse effect on your credit score. However, a short sale will impact your credit score less than foreclosure and bankruptcy.

© Copyright the National Association of REALTORS®.

 

Author: Lee Gosselin, Associate Broker & Owner

Appraised Value vs. Tax Assessment

Appraised Value verses Assessed Value can be one of the most misunderstood concepts in property values.

An appraisal is a formal estimate of market value performed by a licensed appraiser using analytical procedures and formulas.  The appraiser will use the sales price of recently sold, nearby homes, with similar features (comparables), making adjustments for any differences between the subject property and the homes being comnpared.  Most commonly, the appraiser will use a combination of three formula’s to determine market value; 1) Market Data Approach (Direct or Comparable Sales) 2) Cost Approach (Cost appreciation/determining the cost to rebuild and/or 3) Income Approach (present worth of future income/income producing properties).

Appraisals are done most commonly when a property is to be financed or refinanced, but may also be requested for a variety of other reasons.  We suggest that homeowners perform an appraiser once every few years to establish a value baseline, especially in cases of Eminent Domain or other scenario’s which could negatively impact your home’s value.

Assessed Value is assigned to a property by local government as a basis for determining property taxes.  The City/County Assessor’s office uses basic property information provided when the home was built, plus any improvements made which required a permit, in combination with any recent sales/refinance history, to make their tax assessment.  Typically Assessor’s do not visit the inside of a home, so there assessments will most likely not include basic improvements like countertops, upgrades to light and plumbing fixtures, flooring, painting and other improvements which do not require a permit or general maintenance and cleanliness.  As such Assessed Values can vary widely and cannot accurately be used to determine a home’s Market Value.

That being said, keep in mind….

  • Assessment = Basis for determining taxes
  • Appraisal = Basis for determining Market Value

Here are a few great points by Kim Daugherty, Real Estate Checklists and Systems, http://www.realestatechecklists.com

  • Appraisals provide an objective opinion of value, but it’s not an exact science so appraisals may differ.
  • For buying and selling purposes, appraisals are usually based on market value — what the property could probably be sold for. Other types of value include insurance value, replacement value, and assessed value for property tax purposes.
  • Appraised value is not a constant number. Changes in market conditions can dramatically alter appraised value.
  • Appraised value doesn’t take into account special considerations, like the need to sell rapidly.
  • Lenders usually use either the appraised value or the sale price, whichever is less, to determine the amount of the mortgage they will offer.

© Copyright the National Association of REALTORS® – Used with permission from Kim Daugherty, Real Estate Checklists and Systems, http://www.realestatechecklists.com

Intro Author: Lee Gosselin, Associate Broker & Owner

Other HB 1907 Changes

VREB Disciplinary Authority

Every real estate Licensee, whether active or inactive, must fully comply with all Virginia Code and Standards of Conduct, which are enforced by the Virginia Real Estate Board (VREB).  Failure to comply will result in disciplinary action.

VREB has broad authority to discipline Licensees who violate the License Law, Rules, and Regulations.  This authority includes the power to impose monetary penalties (fines), and to suspend or revoke a Licensees license.  Additionally, Licensees have a professional duty to report violations.  In fact, VREB’s authority to enforce and impose disciplinary action, extends not only against licensees who violate the law, rules, or regulations, but also to those who “cooperated with others” in violating the law, rules, or regulations.

VREB Grounds for Disciplinary Action

The following frequently violated regulations regarding Agency, Duties, Disclosure and general conduct, which can result in VREB disciplinary action if violated:

Disclosure of Licensee’s Interest

Whether active or inactive a Licensee must disclose, in writing, that they are a licensed real estate person to all parties when acquiring or disposing of any interest in real property for:

  • Himself or herself;
  • Members of his or her immediate family;
  • Members of his or her firm; or
  • Any entity in which he or she has an ownership interest.

Financial Records

Licensees may be disciplined for failing to maintain, or timely produce, records to VREB.  Licensees must maintain records of all real estate transactions they participated in for a three year period.  HB 1907 permits these records to be maintained by a Licensee as an electronic record in accordance with the Uniform Electronic Transaction Act ((§ 59.1-479 et seq).  And unless the Board or Virginia law specifies otherwise, Licensees must produce their records to the Board within 10 days of request.

Conflict of Interest

Acting for more than one Client in a transaction (Dual/Designated Agency) without obtaining the written consent of all parties is undisclosed Dual Agency and is an illegal conflict of interest.  It is also an illegal conflict of interests for a salesperson or associate broker to enter into a Brokerage agreement directly with a seller, buyer, landlord or tenant.  Only the Principle Broker may enter into an agreement for Licensed services directly with a Client.

Referral Fees

The Licensee cannot accept a referral fee for surveys, termite inspections, appraisals, or other services unless the fee is Disclosed to the principals in writing.  The written Disclosure must be made prior to the time of ordering or contracting for the services.

Another violation frequently forgotten; a Licensee cannot incur charges on behalf of the Client.  For example, if the Licensee pays to have repairs made to a property in order to make a sale, the Licensee would be paying “valuable consideration”.  This is permissible only if the information is Disclosed and consented to in writing by the Client.  Otherwise incurring charges or other “valuable consideration” or to accept or receive money or valuable consideration from any person or entity for expenditures made on behalf of the Client without their written consent is grounds for disciplinary action.

Improper Dealing

Licensees must always deal with Clients and Customers honestly and fairly.  Not only is it required by law, but doing so protects the public and promotes the integrity of the profession.  Failure to comply may lead to disciplinary action for improperly dealing.

Disclosing Clients Confidential Information

Licensees must not Disclose a Client’s confidential information if it relates to a transaction, and if it was obtained while representing that Client.  Remember, this becomes more difficult when acting as a Dual Agent because then the Licensee must maintain the confidentiality of both parties to the transaction.

Delivery of Instruments

As soon as practical, Licensees are required to timely deliver an exact and legible copy of the document (instruments) to all signing parties.  If multiple parties are signing separately, the Licensee must provide another copy, containing both signatures, to all signing parties.  This applies to listings, leases, offers to purchase, counteroffers, addenda, ratified agreements, and other documentation required by the agreement.  Licensee must also notify all parties to an agreement, in writing, of any material change that occurred after the original signing.  Even changes you may consider to be minor, such as a change in the closing date or location, must be communicated in writing.

At the time the transaction is consummated, all parties must receive a complete, accurate, and legible copy of all documents pertaining to the transaction, including a complete and accurate statement of receipts and disbursements of monies received by the licensee.  If a settlement agent is conducting the closing, this responsibility shifts to the settlement agent.

Finally, upon request, Licensees must return any documentation in your possession to its rightful owner unless there is a legitimate reason not to do so.

Other HB 1907 Changes:

Required disclosures (§ 55-519.)

With regard to transfers described in § 55-517, the owner of the residential real property shall furnish to a purchaser a residential property disclosure statement in a form provided by the Real Estate Board stating that the owner makes the following representations as to the real property:

  • The owner makes no representations with respect to the matters set forth and described at a website maintained by the Real Estate Board and that the purchaser is advised to consult this website for important information about the real property; and
  • The owner represents that there are no pending enforcement actions pursuant to the Uniform Statewide Building Code (§ 36-97 et seq.) that affect the safe, decent, sanitary living conditions of the property of which the owner has been notified in writing by the locality, except as disclosed on the disclosure statement, nor any pending violation of the local zoning ordinance that the violator has not abated or remedied under the zoning ordinance, within a time period set out in the written notice of violation from the locality or established by a court of competent jurisdiction, except as disclosed on the disclosure statement.

At the VREB website shall include language providing notice to the purchaser that by delivering the residential property disclosure statement:

  • The owner makes no representations or warranties as to the condition of the real property or any improvements thereon, and purchasers are advised to exercise whatever due diligence a particular purchaser deems necessary including obtaining a certified home inspection, as defined in § 54.1-500, in accordance with terms and conditions as may be contained in the real estate purchase contract, but in any event, prior to settlement on a parcel of residential real property;
  • The owner makes no representations with respect to any matters that may pertain to parcels adjacent to the subject parcel and that purchasers are advised to exercise whatever due diligence a particular purchaser deems necessary with respect to adjacent parcels in accordance with terms and conditions as may be contained in the real estate purchase contract, but in any event, prior to settlement on a parcel of residential real property;
  • The owner makes no representations to any matters that pertain to whether the provisions of any historic district ordinance affect the property and purchasers are advised to exercise whatever due diligence a particular purchaser deems necessary with respect to any historic district designated by the locality pursuant to § 15.2-2306, including review of any local ordinance creating such district or any official map adopted by the locality depicting historic districts, in accordance with terms and conditions as may be contained in the real estate purchase contract, but in any event, prior to settlement on a parcel of residential real property;
  • The owner makes no representations with respect to whether the property contains any resource protection areas established in an ordinance implementing the Chesapeake Bay Preservation Act (§ 10.1-2100 et seq.) adopted by the locality where the property is located pursuant to § 10.1-2109 and that purchasers are advised to exercise whatever due diligence a particular purchaser deems necessary to determine whether the provisions of any such ordinance affect the property, including review of any official map adopted by the locality depicting resource protection areas, in accordance with terms and conditions as may be contained in the real estate purchase contract, but in any event, prior to settlement on a parcel of residential real property;
  • The owner makes no representations with respect to information on any sexual offenders registered under Chapter 23 (§ 19.2-387et seq.) of Title 19.2 and that purchasers are advised to exercise whatever due diligence they deem necessary with respect to such information, in accordance with terms and conditions as may be contained in the real estate purchase contract, but in any event, prior to settlement pursuant to that contract;
  • The owner makes no representations with respect to whether the property is within a dam break inundation zone. Such disclosure statement shall advise purchasers to exercise whatever due diligence they deem necessary with respect to whether the property resides within a dam break inundation zone, including a review of any map adopted by the locality depicting dam break inundation zones;
  • The owner makes no representations with respect to the presence of any stormwater detention facilities located on the property and purchasers are advised to exercise whatever due diligence they deem necessary to determine the presence of any stormwater detention facilities on the property, in accordance with terms and conditions as may be contained in the real estate purchase contract, but in any event, prior to settlement pursuant to that contract; and
  • The owner makes no representations with respect to the presence of any wastewater system, including the type or size thereof or associated maintenance responsibilities related thereto, located on the property and purchasers are advised to exercise whatever due diligence they deem necessary to determine the presence of any wastewater system on the property, in accordance with terms and conditions as may be contained in the real estate purchase contract, but in any event, prior to settlement pursuant to that contract.

Any buyer who is a party to a real estate purchase contract subject to this section may provide in such contract that the disclosures provided on the VREB website be printed off and provided to such buyer.

That the provisions of §§ 54.1-2135, 54.1-2137, 54.1-2139, and 54.1-2139.1 of this act shall become effective on July 1, 2012.

 

Author: Lee Gosselin, Associate Broker & Owner