Short Sales Help You Avoid Foreclosure!
A short sale means you sell your property for less than what is owed to the bank and the bank takes the loss. You must be able to show a financial hardship and preferably it is your primary residence. A short sale hurts your credit badly but not as bad as a foreclosure. After a short sale you cannot purchase a home again for ~2 years, whereas it is 3-7 years for a foreclosure. The IRS used to tax you on the loss as if it was unrealized income, but there is currently a 3 year moratorium (ends January 2010) on primary residences. In most cases we are able to get a full satisfaction of debt from the bank, so that you do not have any further obligation to them.
Each lender has their own process for handling a foreclosure and/or a short sale. But in general it goes like this. An owner who can no longer afford their mortgage due to job loss, medical or other hardship stops making payments or continues for less damage to credit. The banks sends notices of delinquency to the owners for about 1-4 months and then files legal summons (Lis Pendens or notice of foreclosure proceedings with the county court). Foreclosure usually occurs 12-18 months after the homeowner stops making payments.
To avoid foreclosure, ideally the home owner should list their home for sale as soon as possible after the financial hardship occurs. It is vitally necessary to use an agent well versed in the short sale process. If done correctly the property is priced such that an offer occurs in 1-4 months. If the seller accepts the offer it is then sent to the bank along with the seller’s hardship letter and other documentation to prove the hardship. These documents are very similar to those required when applying for a mortgage. Then negotiations begin with the lender (or lenders when there are other mortgages on the property). Once the bank accepts the offer (1-3 months), then a closing is scheduled very much like in a normal sale.
It usually takes 1-3 months to get an offer. And then it takes 2-4 months to negotiate with the bank. Once the bank accepts, it closes in 15-45 days.
My approach to listing short sales is to price it at or just below market value. Then I reduce the price every 2-4 weeks until I am the lowest in the neighborhood or until I know that the bank won’t take any less.