How to Sell Your Home When You Owe More Than its Worth... Doing a Short Sale
When you own a home that is worth less than the sum total of all the existing loans against it, then the property is said to be “upside down.” Selling your home, or any real estate property that is upside down, requires that you negotiate with your mortgage lender (or lenders if you have more than one loan against the property) to take less than what is owed. This is called doing a “short sale.”
There are several easy steps that need to be followed for a successful negotiation.
Step 1: Determining the Value of Your Home
There are several ways that this can be done. One method is to hire an appraiser to do a formal appraisal of your home. This will give you the most accurate valuation, but this method will also cost between a few hundred to several thousand dollars. In addition, most mortgage companies will not accept your appraisal and will insist that you do an appraisal from their approved list.
The cheapest method is to ask a real estate agent to do what is called a broker’s opinion of value. This is nothing more than comparing other similar properties to yours to determine what they have sold for and what they are currently being listed for sale. Most real estate agents will do these for free as a means to market themselves in the event you may want to sell your property.
With the valuation at hand, you have an idea of your home’s value.
Step 2: Get all your Relevant Documents Together
If you want the mortgage company to take less than what is owed, you need to provide documentation that you cannot pay them the difference. Remember this: Your loan contract states your promise to pay the loan regardless of the property’s value.
The mortgage company MAY accept your application if you can prove you do not have the difference to pay them when you sell the property. You will need to provide all your banking statements, investment accounts, stocks, and anything else that you can sell to pay the difference. Then you need to provide your sources of income. The next items will be for you to document your expenses.
All these documents will be required since the bank will most likely ask you to fill an application similar to the application you filled when getting the loan.
Step 3: Submitting your application.
The next step is submitting the application. If the mortgage company likes what they see, they will most likely want an appraisal done (and guess who will pay for it!).
Now, you need to be proactive here. There are two things you may want… let me say need… to do to stack the deck in your favor.
The first is that you will need to provide a good hardship letter. I cannot stress the need for a good hardship letter with ample documentation. The reason is that unless there is a reason why you need to sell the place (a good reason… a real good reason) the mortgage company will turn you down.
Good reasons are for example… loss of income and not being able to afford the mortgage payment, medical reason with bills piling up, job transfer and not being able to meet two housing payments. You need to explain why you need to sell the place. You also will need to stress, that is imply, that failure to do so may jeopardize your continual contractual payment. There is nothing more disturbing to a mortgage company than having a good loan go bad. They are more likely to negotiate if you can help them save money by avoiding a future foreclosure.
The second is to get a real good inspection report done on the property with lots and lots of pictures detailing everything that is wrong with the property or that may hinder its sale. For example: Something that may hinder the sale of the property is that the carpet is too old and needs to be replaced. The house is too small for the neighborhood and these properties take a long time to sell. What you are doing is acting as a selective buyer who can pick any property they want. The reason for this is that the account manager assigned to your case may feel that taking back a really nice property, in case you default, is not too bad of an outcome. That is why a laundry list of problems, or at least issues, may deter that kind of thinking.
Step 4: Having the Property Listed for Sale.
Find a real estate agent that has experience and success selling short sale properties is REALLY IMPORTANT. Don’t worry that there is no equity to pay their commission. The bank will pay their commission from the proceeds of the sale. Then you want to start the listing price for what is owed plus the selling costs. (You want to show the mortgage company you tried to market the property at a price so they could get 100% of what was owed). Make gradual reductions until you reach the price that it will sell.
There is nothing like have a buyer’s purchase contract come along with your short sale application. Especially is this market where money talks.
These are the four simple steps to get out from under an upside down property and having a successful short sale.