a homeowner's guide to short sales

A Homeowner's Guide To

Short Sales

Getting Out While Remaining Sane

Kris Lindahl

A Homeowner's Guide to Short Sales i

Disclaimer

The information contained in this book is for general guidance on matters of

interest only. The application and impact of laws can vary widely, based on

the specific facts involved. Given the changing nature of laws, rules and

regulations, there may be omissions or inaccuracies in information contained

in this book.

Accordingly, the information in this book is provided with the understanding

that the author and publisher are not herein engaged in rendering legal,

accounting, tax, or other professional advice and services.

As such, it should not be used as a substitute for consultation with

professional accounting, tax, legal or other competent advisers. Before

making any decision or taking any action, you should consult with the

necessary professionals.

A Homeowner's Guide to Short Sales ii

Copyright

Published by: Kris Lindahl.

All rights reserved. No part of this book may be reproduced or transmitted in

any form or by any means without express written permission of the author,

except for the inclusion of brief quotations with mention of the author for use in

a review of this book. To request any permission, contact the author.

A Homeowner's Guide to Short Sales iii

About the Author

So, what qualifies me to not only give short sale advice, but also to write a

book on the subject? Two reasons stand out, overall.

First, I am an active real estate agent, licensed in Minnesota and

Wisconsin, dealing with short sales on a

weekly basis. I have learned the nuances of

the process by actually using them during the

course of serving my clients. I know enough

about the process to – well – to fill a book.

The second reason that I think you‟ll want to

pay attention to the information in this book is

that I am the leading short sale agent with the

leading Minnesota brokerage, Edina Realty.

Finally, I have received extensive training in

not only helping distressed homeowners, but in

dealing with lending institutions as well.

Throughout my tenure as my broker‟s leading short sale agent, I‟ve built an

extensive database of the direct telephone lines to the decision-makers at all

of the major lending institutions. This network is vital to making sure your

short sale paperwork doesn‟t sit at the bottom of the pile on every bank‟s short

sale negotiator's desk.

While I don‟t find myself all that interesting, and I don‟t like to brag, I do feel

the need to let you know that I am qualified to not only help you personally

through the short sale process, but to write about it as well.

A Homeowner's Guide to Short Sales iv

With that said, I‟ll show you my credentials and then we‟ll get to the real

business of this book: everything you need to know about short sales.

Five Star Short Sale Certified.

Equator REO Certified (Platinum).

Equator Short Sale Certified (Platinum).

Res.net Short Sale Certified.

Res.net REO Certified.

Certified Short Sale Expert.

CRS (Certified Residential Specialist).

Preferred Wells Fargo Short Sale Agent.

Preferred Bank of America Short Sale Agent.

As you read this book, I‟ll be sharing (with their permission) some of my

clients‟ personal experiences with the short sale process. I hope to show you

that, while you may be feeling alone, and maybe even embarrassed, there is

life after a short sale. My aim is to get you there.

Best Regards,

A Homeowner's Guide to Short Sales v

In The Kris Lindahl Team We Trust

"Kris Lindahl has formed a technology-based real estate powerhouse in the

Twin Cities area of Minnesota."

REALESTATE.COM

"Kris turned what was beginning to look like a nightmare short sale into a

smooth one. His experience, network of contacts and easy-going manner

made our short sale happen much quicker than we expected. Thanks, Kris."

MONTY AND LILY V. - BLAINE, MN

"You guys were great. Being a single mom, I was a bit scared and

overwhelmed with the whole foreclosure and short sale process. I checked

my credit report last week and it only dropped 20 points! The best part is, you

guys were successful in getting my $120,000 deficiency judgment waived."

AMY S. –NEW BRIGHTON, MN

“Kris Lindahl is one of the leaders in the country with Wells Fargo short sale loans, and has a proven record in getting short sale loans approved."

VIRTUALSTRATEGY.COM

"Thank you so much for all of your hard work. I would recommend you to everyone that is in a short sale situation. Your expertise with short sales is truly worth noting."

NICK AND HANNAH H. - MINNEAPOLIS, MN.

"I concur with your short sale expert claim. Your team is a well-oiled

machine. If someone in Minnesota is thinking about doing a short sale and

A Homeowner's Guide to Short Sales vi

they are unsure where to start, the first thing they should do is call Kris.This

guy knows the ins and outs of the short sale process. Thanks!"

TOM B. - ST. PAUL, MN

"Well done guys! Thanks for allowing me to sleep at night. I tried contacting

my lender for months to get a loan modification with no success. These guys

were able to get my short sale done in 35 days. I only had 60 days left in my

redemption period. These guys stepped up to help when I needed it most.”

JULIE R. - EDINA, MN

"All I can say is thank you. You were the third company I talked to about

short sales. Your professionalism along with your helpfulness separated you

guys from all other companies. I am glad I made the decision that I did. You

guys truly cared about my outcome. I am so happy to have no deficiency

judgment!"

SHARI D. - MINNETONKA, MN

"I can’t thank you enough for all of the help. Your communication made me

comfortable with the whole short sale process. I have recommended you to

my other family and friends going through these same tough times."

JAMES T. - SHAKOPEE, MN.

"You guys make up quite the team. Our short sales were extremely

complicated with all of the other real estate we owned. Your attorney was able

to sort through all of our real estate and makes this process seem easy. I think

the greatest part of our short sales was we had zero out of pocket. These

guys really do fight for your best interest. Two thumbs up!!!"

JONATHAN AND DEBBIE L. - APPLE VALLEY, LAKEVILLE, PRIOR LAKE, MN

A Homeowner's Guide to Short Sales vii

“Newman's first law: It is useless to put on

your brakes when you're upside down.”

—Paul Newman

A Homeowner's Guide to Short Sales viii

Table of Contents

Chapter 1: What is a Short Sale? 1 Short Sales, Then and Now • Why Would a Bank Agree to a Short Sale? • Why Banks Deny

Some Short Sales

Chapter 2: Advantages and Disadvantages of the Short Sale 4

Tax Ramifications • Credit Impact • When Can I Buy Another Home?

Chapter 3: How to Qualify for a Short Sale 7

How Do I Qualify for a Short Sale? • Too Much Month at the End of the Money • Writing

the Sob Story

Chapter 4: The Traditional Short Sale: Step-by-Step 10

Hiring an Agent • Contacting the Lender • The Short Sale Package • Getting the

House from Listed to Sold

Chapter 5: Choose Your Real Estate Agent Carefully 15

Why the Agent You Hire is the Most Critical Step in the Process

Chapter 6: The HAFA Short Sale 20

What is HAFA? • Advantages of a HAFA Short Sale • Disadvantages of a HAFA

Short Sale

Chapter 7: FHA Short Sales 24

How is a FHA Short Sale Different? • The Rules • Am I Eligible?

Chapter 8: VA Short Sales 27

Am I Eligible? • What Are the Requirements? • Taking the Steps

Chapter 9: Private Mortgage Insurance and the Short Sale 30

What is PMI? • How Will it Affect My Short Sale? • The Good News

Chapter 10: Tax Ramifications of the Short Sale 33

Will the IRS Come After Me?

Chapter 11: Should I Wait for the Market to Recover? 35

How Long Will it Take for My Home to be Worth What I Owe?

Afterword 39

A Homeowner's Guide to Short Sales ix

Appendix i: Duties of the Short Sale Listing Agent 40

Appendix ii: Questions to Ask in the Real Estate Agent Interview 42

Appendix iii: Contents of the Short Sale Package 43

Appendix iv: Letter of Authorization 44

Appendix v: Sample Hardship Letter 45

Appendix vi: Homeowner Financial Worksheet 46

Appendix vii: Short Sale Contingency Addendum 48

Appendix viii: Short Sale Glossary 50

A Homeowner's Guide to Short Sales x

Introduction

“Foreclosure avoidance” may just be the real estate buzz phrase of the

new millennium. An entire cottage industry has sprung up, offering distressed

homeowners a variety of remedies to help save their homes and their credit

ratings.

While visions of riches dance in the heads of the masterminds of these new

industries, homeowners who can no longer make their mortgage payments –

for any number of reasons – sink ever deeper into despair and confusion.

What to do? Where to turn for help and information?

Probably the most heartbreaking moment in the process is when the

homeowner, already distressed over not being able to meet his mortgage

obligation, attempts to sell the home to get out from under the financial

burden, only to learn that his home is worth far less than what he owes the

lender.

This financial position is known as being "upside down" or “underwater” on

the mortgage, and it aptly describes the distressed homeowner‟s feeling of

drowning in a debt she cannot pay.

I know it feels as if you‟re completely alone in this underwater nightmare

but, believe me, you‟re not. National news articles are full of stories about

everyday folks on the brink of foreclosure. Even the rich and famous haven‟t

escaped the real estate Grim Reaper.

For example, the NBA‟s Allen Iverson and both the NFL‟s JaMarcus Russell

and Terrell Owens all experienced close encounters with foreclosure, and

were saved by the short sale process.

A Homeowner's Guide to Short Sales xi

Knowing you‟re not alone in this situation most likely brings little solace.

However, realizing how so many Americans got here helps make sense of the

situation.

From 2006 to 2009, our housing market saw a 30 percent decrease in

home values. Couple that with the recession that brought about high

unemployment rates, and the recipe for disaster for millions of American

homeowners was complete.

I have helped many people avoid foreclosure by steering them through the

sometimes perilous short sale process. While you‟ll find shelves of books that

teach investors how to profit from the misery of the unfortunate short seller, I

decided to devote this book to assisting the homeowner during what might be

the most stressful period of his life.

Remember, above all else – with the possibility of foreclosure ever looming

for those that miss mortgage payments – time is of the essence if we are to

get your home sold. That said, I hope you will take the time to read through

the short sale process to become better acquainted with what lies ahead.

A Homeowner's Guide to Short Sales 1

Copyright © 2012 ● Kris Lindahl ● HomeOwnersGuidetoShortSales.com

Chapter 1: What is a Short Sale?

In this chapter, we'll take a look at short sales, then and now (i.e., how they've evolved

over the past five years or so). I will answer the question: "Why would a bank agree to a

short sale?" You will learn why banks deny some short sales.

So, what is a short sale? Maybe it‟s easier to tell you what a

short sale isn‟t: short. There is nothing about the entire process

that is easy or quick, which you‟ll realize as you learn more about

it.

A real estate short sale is a type of real estate transaction

wherein the lender agrees to accept a payoff of your mortgage

that amounts to less than what you owe.

Now, why on earth would anyone agree to write off such

substantial sums of money? There are several reasons, the most

significant of which is that if the lender doesn‟t agree to a short

sale, there is a high likelihood that the property will end up in

foreclosure. Lenders don‟t like foreclosures for the following

reasons:

Lenders are in the business to loan money, not to carry a portfolio of real estate

holdings.

Studies show that lenders realize more money from the short sale than they do

when a property is sold after foreclosure. This is mainly due to the fact that homes

that are occupied by a homeowner are in far better condition than vacant homes.

The short sale requires fewer of the lender‟s resources, since the homeowner and

The Typical Short Sale

The homeowner purchases a

$300,000 home, with 5 percent

down, just before the real estate

market tanks.

He loses his job and can no longer

make his $1,662.50 per month

mortgage payments, so he decides

to sell the home.

In the meantime, property values in

his area depreciate by 30 percent,

and the current market value of the

home is now $210,000. Yet he owes

his lender most of the original

$285,000 debt.

The homeowner is upside down in

his mortgage, to the tune of

$75,000.



his or her agent take over the marketing duties.

A short sale helps the lender avoid the legal costs incurred from foreclosing on a

home.

Real-estate-owned properties (REO) – those the lenders take back when they fail to

sell at a foreclosure auction – are expensive to maintain, insure and secure until

they sell.

Lenders didn‟t “get” this until a few years ago. Back in 2008, when both the job and

housing markets imploded, lenders weren‟t quite sure what to do with the massive number

of borrowers that couldn‟t make their mortgage payments, and frequently made decisions

that ran counter to their best interests. In fact, although I haven‟t conducted a scientific

study, I would be willing to wager that many lenders lost billions of dollars due to such

ignorance.

A good example of this comes from an agent friend of mine in Las Vegas. He told me a

story about a client he worked with back in 2008. She – let‟s call her Chris – had an

adjustable rate mortgage and, as fate would have it, the rate adjusted just as her boyfriend

decided to move out of the house, sticking Chris with the entire mortgage payment. Now,

this wasn‟t a tiny hike in her payment. Chris‟s mortgage payment went from around $1,600

to $2,200 a month.

Again, fate stepped in, and because the recession brought tourism in Vegas almost to a

standstill, Chris was laid off from her bartending job in a well-known, high-end casino. So,

here she is with no job, no job prospects, and a $2,200 a month mortgage payment.

The first thing Chris did was call her lender. While today this might be a smart move,

back in 2008, it got her nowhere. She begged, she pleaded, she beseeched – over a

period of weeks – to get her lender to work with her on adjusting her loan to make it more

affordable while she found employment. No dice. The lender simply would not budge, and

made it quite clear that foreclosure was looming.

Finally, Chris decided to try a short sale. She hired my friend (the Vegas real estate



agent), and finally sold the home for $114,000. Her loan balance? $356,000.

If the lender had worked with Chris on modifying her loan, the lender wouldn‟t have lost

$242,000. Had the lender actually proceeded with foreclosure, which was exactly what

they planned, the home would have lost even more value. Shortsightedness, thy name is

lender – at least back in 2008.

Thankfully, the situation is different today. Lenders have learned, through situations such

as Chris‟s, how to deal with underwater homeowners. Be that as it may, not all

homeowners are provided the short sale opportunity. Why would a lender deny a short

sale request? Here are a few reasons:

The mortgage holder believes it will have a qualified buyer at auction.

The offer to purchase is too low.

The short sale package is incomplete.

The homeowner has enough assets to work out a repayment plan with the lender.

The buyer doesn‟t qualify for a loan.

The lender sold your loan, and no longer retains the authority to approve a short

sale.

That said, short sale denials are rare. The value of the home, the homeowner‟s

hardship, and the buyer‟s qualifications are top priorities when lenders determine whether

or not to grant a short sale.

If you qualify for a short sale, and have an experienced short sale expert at the helm,

you should have nothing to worry about.



Chapter 2: Advantages and Disadvantages of the Short Sale

It‟s bad enough to feel like you are perched on the edge of homelessness; but then to

be told that all of your options to avoid this disaster will, in one way or another, impact your

credit or add to your tax burden, is downright frightening. Since we‟re discussing just one

of your options when faced with foreclosure, let‟s look at the advantages and

disadvantages of the short sale.

Short Sale Disadvantages

The Lender May Foreclose Anyway

It ain‟t over „til the fat lender sings. In other words, you can still lose your home to

foreclosure during the short sale process. The mere fact that your home is on the market

won‟t stop your lender from pursuing delinquent payments, or even resorting to

foreclosure. Time is, once again, of the essence when you fall behind on your house

payments and decide to short sell. We need to act quickly and efficiently.

You Are Not in Control

The lender and its loan servicer are in charge of the transaction. You may think the offer

to purchase your home is sterling, but the lender may feel otherwise. Even though you are

the first to accept offers, those offers may be declined by the lender.

All That Work and No Money

Let‟s say that your best friend is putting her house on the market. Would you volunteer

to do it for her? Would you take on the responsibility of cleaning, repairing, staging, hiring

an agent and keeping the home immaculate for showings to get the home sold? Would

you do so, knowing full well you wouldn't get a dime for all of your hard work?

That‟s the short sale, in a nutshell. You will do all the work while the lender gets all the

money. It‟s a tradeoff that you must accept, unless you want to spend the entire time the

home is on the market feeling cheated and resentful.



Time Intensive

A short sale is time consuming. Even with recent legislation aimed at speeding up the

process, it still moves at a snail‟s pace. In fact, the average time between the beginning of

the short sale process to the close of escrow is 16.6 weeks, according to the National

Association of Realtors.

Because the short sales that I helm typically take far less time than that, I‟m of the belief

that most of these protracted transactions are led by inexperienced real estate agents that

lack a network of contacts with the largest lenders.

Agents that aren‟t familiar with the process find themselves in way over their heads,

“stuff” falls through the cracks, and the whole process takes longer than it should – if the

deal doesn‟t completely fall apart.

The Credit Impact

Short sales impact credit ratings; there is no getting

around that. First, there is the matter of the delinquent

mortgage payments – late payments have a huge impact

on your credit. Since a lender typically won‟t approve a

short sale unless you‟ve missed payments, the first credit

ding is inherent in the process.

While the Fair Isaac Company (more commonly known

as FICO) is just one company responsible for determining

your credit score, it is the company most lenders use.

Employing a complicated formula, they use data submitted

to them by the "big three" credit tracking and reporting

agencies: Equifax, TransUnion and Experian.

The credit reporting agencies have no standard method

of reporting foreclosures, short sales and deeds-in-lieu of

foreclosure; thus, they generally report all three as “Debt

not paid as agreed.” FICO, therefore, has no way of knowing whether you foreclosed,

Fix Your Credit After

the Short Sale

Sure, it feels like you’ll never have

even a barely passable credit score

again after a short sale. You might

be surprised, though, by how quickly

you can rehabilitate your credit.

Studies show that even scores

that drop to 625 can be raised to

over 700 in as few as nine months

after the short sale.

Bring your debts current as

quickly as possible, and keep them

current for nine months.



used a short sale, or gave the deed back to the lender in lieu of foreclosure. This is why

short sales have the same impact on credit scores as foreclosures. Read on, though, and

you'll find out why the short sale is actually better for your future credit than a foreclosure.

That said, one of the items FICO scrutinizes when compiling your score is your payment

history. Therefore, the number of late mortgage payments will impact your score.

Tax Ramifications

Time is of the essence. I know I‟ve said this several times, but I need to say it again,

especially if you‟re considering a short sale. Make the move, right now. Unless Congress

steps forward before the end of 2012, the Mortgage Forgiveness Debt Relief Act will

expire. If it does, the tax ramifications of a short sale may be quite painful. (I discuss this in

depth in Chapter 10.)

Short Sale Advantages

If your mama was anything like mine, she most likely pointed out to you, over and over,

that every dark cloud has a silver lining. The short sale "dark cloud" is no different.

Although you‟re in an untenable situation, when choosing whether or not to undertake a

short sale, it‟s a good idea to know the best of this bad situation.

Avoid the Alternatives

Choosing to short sale your home, provided you begin the process in a timely fashion,

allows you to avoid some of the more onerous options, such as bankruptcy and

foreclosure.

Buy Another Home Sooner

When you read that a short sale is “better for your credit” than a foreclosure, what the

confused writer is trying to say is that, although the short sale impacts your credit score in

the same way as a foreclosure, it is viewed by lenders more favorably. The waiting period

to purchase a new home, under Fannie Mae guidelines, is three years after performing a

short sale. After a foreclosure? You may have to wait anywhere from five to seven years.



Chapter 3: How to Qualify for a Short Sale

The short sale qualification process has evolved over the years, and common

misconceptions persist. Let's see if I can clear these up by giving you the facts.

The three qualification guidelines most lenders demand include:

Insolvency – If you hold major assets, you will be expected to dissolve them to pay

down your debt to the lender.

Financial hardship – You are unable to meet your current monthly mortgage

payments.

Insufficient equity – The proceeds from the sale of the home at current market value

are insufficient to pay what you currently owe on the property.

Let‟s take a closer look at these guidelines.

Insolvency

While the word may conjure images of the unfortunate guy that lives under the freeway

overpass, insolvency simply means that your debt exceeds your assets. What the lender is

looking for when considering insolvency is whether you have any means to pay down the

deficiency after the short sale. If you own a boat, stocks, or have any other assets, you will

be expected to liquidate them to help pay down the balance of the loan.

This is not to say that you must be flat broke and ready to join the guy under the

freeway; only that the lender is assured that your financial situation isn‟t going to improve

any time soon. Money in the bank to cover basic living expenses won‟t disqualify you from

a short sale.



Financial Hardship

Your lender wants to know how you got into this pickle.

What hardship came about that makes it impossible for you

to pay your mortgage?

Now, one man‟s hardship may be another‟s minor

annoyance. A famous athlete that has his multi-million

dollar per year contract cut in half is still amazingly wealthy,

but that cut in his finances is a hardship, just as it is to the

single mom who loses her well-paying job and is now

working for minimum wage.

The most common hardships that befall homeowners are

the loss of a job or a reduction in income, medical

problems and the ensuing bills, involuntary job transfer,

and the death of a spouse or other person who contributed

to the household‟s income.

Insufficient Equity

While it‟s tempting to many homeowners, a lender typically won‟t grant a short sale

simply because you no longer want to make payments on a house that‟s lost a significant

portion of its value. If you have the means to make your payments, or pay the shortfall,

believe me, your lender won‟t entertain a short sale.

When a borrower is insolvent and proves a valid hardship, the lender next looks to how

much money the house will bring on the current market. This requires the compilation of a

broker‟s price opinion (BPO), an analysis of the home's current market value.

Market value is simply what a buyer is willing to pay for the home. The only way we can

determine this amount is by comparing your house with those that have sold over the past

several months. (These are called “comps,” short for "comparables").

Comparable is the operative word here. Although your home may be lovely, it isn‟t worth

the same amount of money as a home that is larger, newer, or in better condition, with in-

Acceptable Hardships

Loss of income, divorce, job

transfer, major illness,

unexpected medical expenses

and the death of a spouse

qualify as hardships.

Military deployment,

incarceration, and divorce are

also valid hardships.

Pregnancy or adoption

(increasing the size of your

family) is typically not

considered a hardship.



demand amenities.

After compiling a list of several comps within close proximity to the subject property (i.e.,

your house), the homes are compared according to age, size, condition and upgrades. In

other words, a three-bedroom home is generally not worth as much as a five-bedroom

home. A 4,500 square foot home is worth far more than a 1,200 square foot home. A

remodeled home is typically going to sell for more than a fixer-upper.

Of course, if the three-bedroom home has been completely remodeled with an

expanded kitchen and new "everything," it will sell for more than the five-bedroom fixer-

upper. The process of determining current market value is complicated, and it requires an

agent that is experienced in the procedure.

Once we know the current market value of your home, we‟ll deduct that amount from

what you owe on the house. If the result is a positive number: Congratulations – you have

equity!

On the other hand, if the result is a negative number, you have insufficient equity to pay

off your debt with the lender.

Now that you know whether or not you qualify for a short sale, let‟s dive into the process.



Chapter 4: The Traditional Short Sale: Step-by-Step

The short sale transaction is very much like a traditional real estate transaction with a

few exceptions. These exceptions, however, cause short sale transactions to be

cumbersome and protracted. The more people involved in any process will typically slow it

down, and, unlike a conventional sale, there are teams of people involved in a short sale.

Like any process, however, there are certain steps that must be taken to arrive at a

successful conclusion.

Step 1: Determine Who Owns Your Loan

The only way to determine which short sale program you need is to find out who owns

your loan. Get out your payment booklet or statement and have it handy when you meet

with your real estate agent for the first time. Your agent will find out what type of loan you

have and who owns it. Sometimes the bank you make payments to is merely a servicer,

and doesn‟t own your loan. This is important information to help you determine whether

you need to do a HAFA short sale, an FHA short sale or a conventional short sale.

Step 2: Hire a Proven, Certified Short Sale Listing Agent

Read any book or any article by any expert on short sales, and notice the typically large

amount of time the author spends addressing the topic of hiring a real estate agent. This is

the most important step you will take, as your agent can literally make or break the deal.

(We‟ll take a closer look at the process in Chapter 5).

Avoid any agent who has a “day job” and works in real estate part-time. Avoid agents

who have never handled a short sale, as well as those who have only handled a few. Only

agents that perform shorts sales on a regular basis can keep up with the ever-changing

guidelines and necessary strategies to get the deal done quickly to avoid foreclosure. Only

a high-volume short sale agent has the inside connections at various lenders to help

facilitate a quick process.



Step 3: The Agent Contacts Your Lender

The first thing I will do is prepare the Authorization Letter, a copy of which you will find in

Appendix iv. By signing this form, you, the homeowner, authorize the lender to release

information to me, which allows me to communicate with the lender on your behalf.

Examples of information that I may need to facilitate your short sale include:

Your lender‟s requirements for a short sale.

Information about your loan.

The status of foreclosure proceedings, if any.

Step 4: Prepare the Short Sale Package

The short sale package contains all the documents your lender requires to determine

whether you, the home, and the buyer qualify for a short sale.

To save time, I counsel my short sale clients to gather all of his or her required short sale

package documents well in advance of when we will need to submit. That way, when we

receive an offer, we won‟t waste time compiling the package. (See Appendix iii for a list of

the contents of a typical short sale package).

Step 5: Market the Property

Your listing agent, if you choose wisely, will market the home as he or she markets all of

her other listings. This includes, at the very least, photographing the home and entering

the home‟s information into the Multiple Listing Service database.

I typically go above and beyond what other area agents do. Since I‟m known as

somewhat of a tech nerd, my listings generally end up on the first page of Internet search

engine results, causing the home to receive far more exposure than it would had it been

listed with another agent. Again, I am not trying to toot my own horn here. In fact, the

lender requires proof that all the proverbial stops were pulled out in the marketing of the



short sale listing.

Step 6: Show the Property

Showing your home to potential buyers is a team effort between you, me and the

buyer‟s agent.

Your job as a member of this team is to ensure that the house is in top shape while it‟s

on the market: Clean, de-clutter and snazz up the curb appeal.

My job is, of course, to field calls from buyer‟s agents, and ensure that all potential

buyers actually have the credentials and money for loan approval.

The buyer‟s agent‟s job is, naturally, to bring in the buyer and keep her motivated during

the transaction.

Step 7: Negotiate with Buyers

This is my job and – ok, I am tooting my own horn here – I‟m darn good at this. While

certain negotiating techniques can be learned, tenacious negotiators and dealmakers are

born, not made. I happen to enjoy the art of the deal, thus, I have honed my negotiating

skills over the years to ensure my clients get the best deal possible.

Step 8: Agent Submits the Short Sale Package

Once we have an accepted offer, the purchase agreement and all addenda are added to

the short sale package; then off it goes to the lender. My job is far from over, however, as I

have to keep tabs on which stage of the process your file is in on a weekly basis. This

entails making lots of phone calls to my network of contacts at the various lenders.



Step 9: The Lender’s Processor

Keep in mind that your short sale package is most likely not the only one arriving at the

lender on any given day. Yours, as well as others, will end up with the processor who is

responsible for performing a complete audit, ensuring all required documentation is

included. Your information is then added to the lender‟s system. It may take up to one

month for your file to leave the processor and head over to the negotiator.

Step 10: The Lender’s Negotiator

The lender's negotiator is responsible for the negotiations on the lender‟s end, negotiating

the short sale on behalf of the lender. (This person used to be known as the “loss mitigator,”

but is now typically called “the negotiator”). Your short sale package will land on the

negotiator's desk after being entered into the system.

Keep in mind that the negotiator does not have the power to make the final decision. His

or her sole aim is to determine:

Whether you have assets that can be contributed to pay down the loan balance.

The value of the house.

How to negotiate for the most money the lender can realize in the sale.

Once the negotiator receives the best deal for the lender, and the lender approves, the

negotiator will send me a letter, confirming approval. At that time, we open escrow.

Step 11: The Escrow Process

When the lender officially accepts the offer, the buyer's agent collects his or her client's

earnest money deposit and places it in the listing broker's trust account.

Think of the title company as an unbiased third party that collects the money and all of

the documents required for the transfer of the property. Most of this activity happens



behind the scenes for both the seller and the buyer. The title company will perform the

closing, and usually gives the seller the option to pre-sign ahead of time to avoid sitting at

a closing with the buyer.

Step 12: Closing

In the meantime, your lender will assign a closer to the file. The closer works to close

the deal on the short sale bank's behalf. Most short sale banks require that they be

provided the final HUD-1 (Settlement Statement) 48 to 72 hours before closing to ensure

that all the information matches the data contained in the approval letter they originally

issued.



Chapter 5: Choose Your Real Estate Agent Carefully

According to the National Association of Realtors, 90 percent of their members

perform only one to four real estate transactions a year. Read that again – it‟s astounding!

In any profession, practice makes perfect. Those that do the work consistently, over

time, become experts. While many of these part-time agents may be perfectly capable of

steering a traditional real estate transaction to a close, it‟s doubtful they have the

knowledge to do the same with a short sale.

LeBron James walks onto a basketball court and makes the game look effortless. He

doesn‟t do that by playing one to four times a year. He didn‟t become an expert at his craft

without doing what he does over and over on a daily basis – for years – until the process

became second nature.

It‟s the same with short sale listing agents. Only those that have successfully handled a

large amount of short sale transactions should be considered experts or, as so many

agents label themselves, “short sale specialists” (even though they aren't). Only the agent

that handles short sales on a weekly basis is up-to-date on the latest rules and systems

and has built a network of lender contacts.

Speaking of which, avoid the agent that lacks relationships with asset managers at the

various big lenders. The time it will take that agent to determine who will handle the short

sale, how to reach this person, and finally speak with him or her to obtain a signature on

the authorization form, is time wasted. And, as you‟ll recall, in a short sale, time is of the

essence.

The Dreaded Deficiency Judgment

Think you‟re off the hook after the short sale for the money you lacked to pay off the

mortgage? Think again, my friend. The dreaded deficiency judgment can still rear its ugly

and expensive head – even years down the road.



Allow me to explain. Say you owe $300,000 on your mortgage, yet the short sale only

nets the lender $200,000. That extra $100,000 that you are short is known as a

“deficiency.” Releasing you from this deficiency does not go hand-in-hand with the lender‟s

authorization to short sell the house.

Whether the lender will pursue you for payment of the deficiency depends, first, on

whether you live in a recourse state or a non-recourse state. Wisconsin is a recourse

state, which means that its laws allow for deficiency judgments.

Minnesota is a non-recourse state, with anti-deficiency statutes. This sounds like good

news until you realize that the statutes don‟t apply to you. Our state‟s statutes prohibit

lenders from pursuing a deficiency judgment only if the home goes through the foreclosure

process. Since a short sale prevents a foreclosure, the statutes offer no protection to short

sale homeowners.

Imagine being represented by a real estate agent lacking in-depth knowledge of the

short sale process. Does he have the skills to negotiate with the lender of both the first and

second loan (if you have one), to waive the deficiency? Has he built the relationships

within the big mortgage companies that help to facilitate such negotiations? Are you willing

to be his test subject when it could mean being on the hook for an enormous pile of

money?

While it‟s easier to have the first mortgage deficiency waived, the second may be

challenging. This is where the agent‟s years of experience, and the level of trust she‟s built

within the various lenders‟ short sale teams, determines whether your second lien is

waived, or you have to come up with the money to pay it off before the lender will allow the

short sale.

Other Common Mistakes Inexperienced Agents Make

On any given day, your lender‟s short sale team may have up to 75 or more short sale

packageson their desks. Over 30 percent of these short sale requests will be denied

because of listing agent errors. Now, many agents unfamiliar with the process are quick to

blame the buyer‟s agent. However, the buck ultimately stops with the listing agent. Some

of the more common errors lenders see include the following scenarios:



The listing agent lacks the legal knowledge required to

conduct a short sale. Many homeowners have lost

their homes to foreclosure after lenders learn –

typically late in the process – that the transaction is

not at “arm‟s length,” thus canceling the transaction.

Inclusion of purchase agreements requesting repairs –

at the lender‟s expense – to be completed before the

close of escrow. Lenders won‟t pay for repairs, and,

since the seller is insolvent, neither will he. Short sale

specialists know that a repair contingency in a

purchase agreement will derail the deal so they won‟t

accept one. Instead, these specialists submit a

counteroffer to the buyer, insisting that he remove this

contingency.

The buyer isn‟t sufficiently pre-approved for a

mortgage. The inexperienced listing agent will leave

the vetting of the buyer‟s loan approval up to the

buyer‟s agent – a big mistake. It is up to the listing

agent to foresee anything that may prolong, or even

kill, the transaction.

The offered purchase price is less than what the lender would realize from a

foreclosure sale. The short sale expert understands market value and what the home

will likely bring at auction. Submitting an offer for less than what the lender will make

at auction is a waste of time.

The listing agent asks the lender which forms to use, how to fill out the contract, and

for any number of other pieces of advice that he or she should already know. The

lender‟s short sale negotiator typically isn‟t a real estate attorney or broker, and

doesn‟t have time to school the novice short sale agent. Are you willing to wait while

your real estate agent learns the process? Is your lender?

Arm's Length

Requirement

One of the negotiator’s most

important tasks is to determine

that the lender is receiving the

most amount of money possible for

the sale of the house.

This assurance comes from

several processes: the Broker’s

Price Opinion; proof that the home

was effectively marketed to the

public; seeing the physical proof of

all offers received; and determining

whether the short sale transaction

is one known as “arm’s length,”

meaning none of the parties have

close ties, such as family members,

friends or business associates.

The arm’s length requirement

came about as a result of

homeowners performing back-

room deals at the lender’s expense.



The short sale package is incomplete. Inexperienced agents frequently make this

mistake. What happens then is that the homeowner‟s file goes to the bottom of the

stack until the lender's short sale team receives the appropriate documents. Again,

anything that delays the process puts you in danger of losing your home to

foreclosure.

Although it may sound unbelievable (with all of the news reports about how lengthy

the short sale process can be), I have had inexperienced buyer‟s agents submit

offers to purchase with 30-day acceptance clauses – meaning the buyer is insisting

that the lender respond to the offer within 30 days. I have also heard of inexperienced

listing agents counseling their clients to accept these offers, and then sending them

off to the lender. There is no way a lender will accept a 30-day acceptance period, so

these agents‟ ignorance present yet another risk to you, the homeowner.

Agents who don't perform a lot of short sales, especially those working on their first,

typically take the homeowner's word that he or she doesn't have PMI (Private

Mortgage Insurance). Since it is entirely possible that the lender took out a policy

without the homeowner's knowledge, the experienced short sale expert knows to

verify the homeowner's claim. PMI companies can stop the short sale process, so it's

vital to know whether the home has a policy. (See Chapter 9 for more information on

PMI).

Although the short sale is a time-sensitive transaction, and the urge to rush the agent

hiring process is common, take the time to ensure that you are hiring the right agent. Here

are a few tips:

Don’t Be Sentimental

Your short sale is too important to your financial future to entrust to Aunt Tillie who,

although she has been in real estate for decades, is not a short sale expert. Although real

estate agents typically expect family members and close friends to throw their real estate

deals in their direction, the short sale is an exception, and where you should put your foot

down.



Be Relentless

As a real estate agent, I would love to be able to counsel you to choose me to handle

your short sale. While I am the best choice in Minnesota and Wisconsin, that advice would

be self-serving. This book is meant to teach you about the short sale process, not to toot

my own horn, and, like any other part of the real estate transaction, this process requires

due diligence on your part.

My advice to you is to interview at least three agents for the job of listing your short sale.

Like any other job interview, you need to ask lots of questions, and ask for documentation

to back up each agent‟s claims. You must be relentless in your vetting of the agents. (See

Appendix iifor more tips and questions to ask potential listing agents).



Chapter 6: The HAFA Short Sale

It stands for Home Affordable Foreclosure Alternatives, but most folks know it as HAFA.

This program is a component of the U.S. government‟s Making Home Affordable program,

which aims to both streamline and simplify the short sale process, and to help underwater

homeowners move on with their lives by providing financial assistance.

Because HAFA short sales are only offered to homeowners with mortgages owned by

Fannie Mae, Freddie Mac, and to those who hold non-government sponsored lenders

(government-sponsored loans would be FHA or VA loans – these loans have their own

short sale programs, and we'll look at these in forthcoming chapters), it is imperative to

know who owns your loan before proceeding. If you took the time to carefully choose your

listing agent, he or she can assist you with this.

To help you decide whether a HAFA short sale is the choice for you, let‟s look at the

advantages and disadvantages.

Advantages of a HAFA Short Sale

It‟s difficult to imagine that losing your house has any advantages whatsoever, but when

the loss is unavoidable, it‟s best to look for the most painless way. HAFA has some

attractive advantages that are lacking in the traditional short sale:

The homeowner is released from the mortgage debt – including the amount he or

she is “short.”

Homeowners may be eligible to receive $3,000 in relocation assistance.

HUD housing counselors are available, offering free advice.



The homeowner, the listing agent, and the lender work together to determine the

best price for the home.

HAFA short sales are easier on the consumer‟s credit report than conventional short

sales. This is because they usually close quicker, eliminating the amount of missed

payments.

The lender pays your agent‟s commission, as well as customary closing costs.

Disadvantages of the HAFA Short Sale

While the advantages far outweigh the disadvantages, it is important to weigh the pros

and cons of any real estate transaction to ensure that it is right for you.

HAFA provides $8,500 to pay off a junior lien, such as a second trust deed. Many

second lien holders are unwilling to accept only $8,500. If you hold a substantial

home equity loan balance, for instance, HAFA may not be a viable option for you.

If the lender doesn‟t accept the short sale, or the lender fails to close escrow within

120 days, the homeowner is expected to submit a deed-in-lieu of foreclosure.

Homeowners with cash reserves equal to three month‟s mortgage payments or

$5,000 (whichever is greater) may be disqualified from the program.

To make matters even more confusing, Fannie Mae and Freddie Mac use different

HAFA forms. Freddie Mac requires an accepted short sale agreement before you list the

property. Although the programs are almost identical, there are other subtle differences

between them that only a real estate agent thoroughly familiar with the HAFA process is

aware of.

Eligibility Requirements

If the HAFA sounds like something you‟d like to pursue, take a look at the following



eligibility requirements to see if you qualify:

Fannie Mae or Freddie Mac owns your mortgage.

You have lived in the home for the past 12 months.

Your primary mortgage balance does not exceed $729,750.

You owe more on the home than what you can realize when you sell it.

You obtained the mortgage before January 1, 2009.

You are able to prove a valid financial hardship that makes it impossible for you to

pay your debt.

You are more than 60 days delinquent on your mortgage.

You‟ve not been convicted of felony larceny, theft, forgery, tax evasion, fraud, or

money laundering in connection with a real estate or mortgage deal over the past

10 years.

The home is not condemned, abandoned or vacant.

Applying for the HAFA Short Sale

Short sales, whether conventional or through a government program, are paperwork

intensive. As you can imagine, the government programs have mountains of forms for the

homeowner to fill out and submit.

If you feel that you qualify for a HAFA and wish to pursue this type of short sale, it is

imperative that you employ a short sale certified real estate agent. These agents typically



have the Fannie Mae and Freddie Mac forms required to get the process started.

HAFA, like many recent government programs that aim to help homeowners, has a shelf

life. The deadline for performance of a HAFA short sale is December 31, 2013.



Chapter 7: FHA Short Sales

As you no doubt realize by now, short sales come in a variety of forms, depending on

who owns your mortgage loan. If you have a loan backed by the Federal Housing

Administration (FHA), the government has a short sale program just for you.

Known as the Pre-foreclosure Sales Program, and overseen by the U.S. Department of

Housing and Urban Development (HUD), this short sale program is quite similar to the

conventional short sale process.

The FHA short sale, however, differs in ways that benefit the homeowner:

All proceeds from the sale, despite the fact that they aren‟t enough to cover what

you owe the lender, satisfy the debt in full.

HUD pays the homeowner $1,000 if the home sells within 90 days of the date of

application.

HUD allows for your real estate agent‟s commission and certain closing costs to be

included.

If the buyer is using an FHA loan, HUD will pay up to 1 percent of his or her closing

costs. Many buyers request 3 percent of closing costs, so the agent must submit a

variance to HUD to meet this request.

FHA Short Sale Rules

Like all short sales, the FHA short sale transaction must be “arm‟s length.” Additionally,

HUD has specific rules on which offers the homeowner can approve. HUD calls this the

“tiered net proceeds requirement,” and it looks like this:



During the first 30 days that the home is on the market, the seller is prohibited from

accepting any offer that is lower than 88 percent of the home‟s appraised value.

During the next 30 days, the homeowner is instructed to only approve offers that

amount to at least 86 percent of the home‟s appraised value.

From then on, HUD will only entertain offers with a purchase price of at least 84

percent of the appraised value of the home.

HUD also has rules about what concessions the seller can make to the buyer. The

following concessions are prohibited:

Money back for repairs.

Paying for the buyer‟s home warranty.

The seller can‟t allow for the payment of discount points on other than an FHA-

backed loan.

Contracts allowing for the payment of the lender‟s title insurance fee can‟t be

accepted.

Imagine an inexperienced real estate agent, unfamiliar with any of these regulations, at

the helm of an FHA short sale. These regulations are typically what trips up the novice

agent and cause these transactions to fail. This is why it is so important to take the time

necessary to completely vet each agent that you interview. Submission of a contract to

purchase that includes theseconcessions, or a lower-than-acceptable price, may end up

derailing the entire transaction, and pushing you into foreclosure.



Am I Eligible?

FHA Pre-Foreclosure Sales Program approval requirements are quite similar to those in

a conventional short sale:

The homeowner must occupy the home unless forced to move because of a job,

the homeowner is deceased, or the homeowners are divorced. In any of these

cases, the home must not have been rented out for more than 18 months.

You must prove that you can‟t pay your mortgage payments.

You must be a minimum of 31 days delinquent on your mortgage by the time the

sale closes.

.



Chapter 8: VA Short Sales

The United States Department of Veteran‟s Affairs (VA), like the Federal Housing

Administration (FHA), doesn‟t actually provide loans, but guarantees their repayment.

Lenders love these guarantees, and these types of loans

allow lenders to offer low-to-no-down-payment loans with

better interest rates and terms than conventional loans.

If you have a VA-backed mortgage and you can no longer

make your payments, and you can‟t sell the house for what

you owe your lender, you may want to consider the VA‟s

version of the short sale, known as a Compromise Sale.

While similar to a conventional short sale, there are some

distinct differences that you should know about.

First, the lender will receive the full balance of the loan,

not a shorted amount as it does in the conventional short

sale. Next, the VA will pay the veteran $1,500 to assist in

his or her relocation.

VA Compromise Sale Eligibility Requirements

The VA will first review your situation to determine whether you have any assets that

might be sold to satisfy the deficiency. Then the VA will consider your financial situation,

looking for a significant hardship. Those hardships considered severe enough to quality for

a VA compromise sale include:

A decrease in income.

Major medical expenses.

The death of any partner that financially contributes to the household.

Beware of Scams

The Veteran’s Administration

cautions veterans to be aware of

some of the scams that have

popped up during the housing

crisis.

Do not sign any paperwork

offered by any individual or

company, other than the VA or your

lender, that offers to pay off your

mortgage.



Involuntary relocation out of the area.

VA Compromise Sale Requirements

The VA will appraise the home to determine if the compromise sale will net it more

money than a foreclosure sale. If it will, the following rules are in place:

The VA will not accept less than current market value for the home.

The loan must have been taken out before December 31, 1989.

The lender must agree to write off that portion of the debt that exceeds the

maximum guarantee.

The home must have no other liens.

Steps to a VA Short Sale

While your real estate agent will go over the rules and requirements for the VA

compromise sale, there are certain steps to take to ensure a successful transaction:

Your agent will contact your lender's loss mitigation department to advise it that you

can no longer make your loan payments, and will be selling the home via a

Compromise Sale.

The home is listed and marketed to the public.

You must gather the documents required for inclusion in the Compromise Sale

package. Your listing agent will assist you with this, and send it to the lender with

the purchase agreement.



Once approved, the buyer‟s lender hires a VA-approved appraiser and checks the

property‟s title for liens and other clouds.

As with the other government-sponsored programs and conventional short sales, the

lender pays your agent‟s fees as well as customary closing costs. You are not expected to

bring any money to the closing table.

Are you ready for some more good news? A veteran is typically eligible to purchase

another home within two years of closing a compromise sale.



Chapter 9: Private Mortgage Insurance and the Short Sale

One of the many roadblocks that may pop up during your journey down the short sale

highway is your Private Mortgage Insurance (PMI) company.

What is PMI?

PMI is insurance for your lender. (Yes, you pay for it, but it only protects your lender). If

your down payment on the house equaled less than 20 percent of the sales price or the

appraised value, you were required to purchase PMI.

While most homeowners find this extra monthly charge onerous, without PMI, they

would not have been able to purchase the home unless they came up with a 20 percent

down payment. (So, it is a necessary evil).

The good news is that as soon as you reach a 20 percent equity stake in the house, PMI

is eliminated. The bad news is that the average American homeowner lost 30 percent in

home value during the recession. Thus, PMI is a prolific nightmare - for millions of

Americans - when it comes to short sales.

How Does Having PMI Affect the Short Sale?

When a homeowner defaults on a mortgage insured with PMI, the mortgage insurer

pays the lender a percentage of its loss. The size of the loss depends on whether the

home was short sold or foreclosed.

In a short sale, the loss typically includes the loan balance and accrued interest, realtor

commissions, and closing costs. If the home goes to foreclosure, the loss will also include

unpaid property taxes, legal fees, maintenance and hazard insurance, among other items.

What percentage the insurer pays varies as well. For instance, Freddie Mac and Fannie

Mae require that the coverage level of PMI be based on the borrower‟s loan-to-value ratio.



The first task of the insurer, when notified that there is a short sale request, is similar to

that of the lender: to determine whether it will realize more money from the short sale or

from a foreclosure. Mitigate the losses as much as possible.

The second factor taken into consideration is whether to pay the loss now (with a short

sale), or put off paying the loss until further down the road (with a foreclosure).

Now, tell me, which would you choose – pay now or pay later? The choice is obvious,

which is why many mortgage insurance companies don‟t care if the house goes into

foreclosure. This gives the insurer leverage over the homeowner when it comes to

accepting or denying the short sale request.

An Example

Allow me to introduce you to my clients, Monty and Lily. I determined that the lender‟s

loss, at the time of the short sale approval, was close to $50,000. The lender had not

initiated foreclosure proceedings at that time, so foreclosure couldn‟t possibly occur for

another year.

During that time, Monty and Lily would not be making house payments, and for every

month that they didn‟t, the amount of money the lender was losing would swell.

In Monty and Lily‟s case, that amount was $1,785 a month. By the time the lender went

through the foreclosure process, that $50,000 initial loss had ballooned. In fact, the

interest alone was over $20,000 and there were still all the additional costs of foreclosure

to tack on to that.

Obviously, in this case, the insurance company will best mitigate its loss by agreeing to

let Monty and Lily short sell the house. Had foreclosure proceedings already begun,

however, the company may not have been amenable to the short sale.

As in all things having to do with the short sale, however, there‟s a flip side to my client‟s

seemingly happy ending.



Remember, the PMI company has leverage over the transaction. The insurer says they‟ll

allow the short sale ifMonty and Lily sign a deficiency agreement.

There is Good News

When faced with the demand to contribute money to mitigate the insurer‟s loss, the

homeowner has several options:

Have the buyers increase their offer.

Contribute cash to help offset the insurer‟s loss.

Sign a promissory note for the contribution to the insurer‟s loss.

In Monty and Lily‟s case, the buyers refused to increase their offer and the couple had

no money to contribute to the insurer‟s loss. To get the deal done, they opted for the

promissory note.

The insurer wanted $25,000. I negotiated a deal that included a reduction to $10,000,

payable at $100 a month, interest-free.

The Moral of the PMI Story

Actually, there are two morals to this story:

If you have PMI, prepare yourself for the possibility that you may have to either

come up with some cash or sign a promissory note to get the short sale to the

closing table.

This once again illustrates how critical it is to hire a real estate agent that is a bona

fide short sale expert. The novice hasn‟t a clue about how PMI can kill the deal. The

rooky short sale agent lacks the negotiating skills required to knock down the

amount of money the insurer demands.



Chapter 10: Tax Ramifications of the Short Sale

Call me a teacher (I have an education degree), call me a dad, a husband, a sports

fanatic, or a real estate agent if you like: one thing you can‟t accuse me of is being a tax

professional. That said, I am legally prohibited from giving out tax advice. If you have any

concerns about the tax consequences of a short sale, I urge you to seek the advice of your

accountant or attorney.

I decided to include this chapter in the book because of the very real possibility of a

change in how the IRS treats the debt forgiven in a short sale. This will have a significant

impact on your taxes, and it‟s out there, looming on the horizon. If you are considering a

short sale, you need to act quickly.

The Mortgage Forgiveness Debt Relief Act of 2007

Once upon a time, when a homeowner had his mortgage debt forgiven in a short sale,

the IRS taxed him on the amount forgiven. For instance, if he owed his lender $350,000

but the short sale only resulted in $210,000, the IRS considered the $140,000 that the

lender forgave as “ordinary income” and the homeowner would have been taxed on it.

Now, I don‟t know about you, but the tax ramifications of an additional $140,000 to my

income would be quite painful.

Then, in December 2007, President George W. Bush explained, "When your home is

losing value and your family is under financial stress, the last thing you need is to be hit

with higher taxes. So I'm working with members of both parties to pass a bill that will

protect homeowners from having to pay taxes on cancelled mortgage debt."

President Bush was successful and, in December 2007, he signed The Mortgage

Forgiveness Debt Relief Act. Underwater homeowners now had a three-year window in

which to expect tax relief on distressed property transactions.

In October 2008, congress enacted legislation to extend the tax relief through 2012.



Some members of Congress have been pushing for another extension (H.R. 4290, the

Homeowner Tax Fairness Act, and S. 2250, the Mortgage Forgiveness Tax Relief Act).

Since the government seems to be looking in every nook and cranny of this country for

additional revenue, I wouldn‟t count on any extensions. In fact, GovTrack.us, a website

that keeps track of pending legislation, gives the House legislation a 3 percent chance of

passing and an 18 percent chance for the Senate bill.

The Insolvency Exception

Prior to the 2007 passage of the Mortgage Forgiveness Debt Relief Act, the IRS

included certain exceptions to their rules on taxing forgiven debt. One of these was the so-

called insolvency exception, wherein the IRS said that the debt won‟t be considered gross

income if the “discharge occurs when the taxpayer is insolvent.”

What do they mean by insolvent? Here‟s the answer: according to IRS Code Section

108, the term “insolvent” means “the excess of liabilities over the fair market value of

assets. With respect to any discharge, whether or not the taxpayer is insolvent, and the

amount by which the taxpayer is insolvent, shall be determined on the basis of the

taxpayer‟s assets and liabilities immediately before the discharge.”

The operative words there are “immediately before the discharge.” This means you must

have been insolvent at the time the short sold home closes escrow - becoming insolvent

afterward won‟t count.

Again, I am not a tax professional, but I do know that determining insolvency is complex

and requires the assistance of an accountant.



Chapter 11: Should I Wait for the Market to Recover?

Many struggling homeowners are sitting on the sidelines watching the real estate market

closely, hoping that it improves quickly enough to allow them to perform an equity sale, and

maybe even make a few dollars in the process.

If you‟re not in dire straits, meaning foreclosure isn‟t imminent, and (although it might be

a struggle) you feel you can remain in your home, your question is: "Should I?"

That depends on who you ask. Housing news over the past year has yielded a mixed

bag of opinions and forecasts. Although we‟re seeing pockets of improvement in home

prices, most experts agree that it will take several years for prices to return to their pre-

housing market crash levels – enough for you to recoup some of the value you have lost.

As I mentioned, there is some disagreement as to when the housing market will fully

recover. Let‟s take a look at the most recent MacroMarkets home price survey. This survey

is based on the combined opinions of over 100 economists, housing market analysts, and

investment strategists, and illustrates their expectations for 2012 and beyond.



As you can see, the experts predict an additional loss of 0.4 percent in values through

2012, and then a modest increase in 2013 and beyond. By 2016, the average American

homeowner may realize only a 3.5 percent increase in home value. Just this one study

alone shows me that it isn‟t worth it to sit on the home unless you plan on sitting on it until

at least 2020. To further explain, let‟s look at two scenarios.

Homeowner A:

Homeowner A purchases her home in January 2005. She obtains a $300,000 interest-

only, 10-year ARM at 6.25 percent interest. She also takes out a second mortgage at 7

percent interest.

Let's look at how long it will take her to break even on the loan (and no longer be upside

down).

As you can see, the break-even point on this loan, after paying all customary closing

costs, is 2021. This example assumes that housing prices begin to appreciate, and continue

that trend.



So-called 80/20 loans have been common during the past decade, and the above graph

is illustrative of why so many Americans are upside down in their mortgages. Sadly, the

chart also shows how very long it will take to break even.

On the following page, we'll look at another scenario.



Homeowner B:

This homeowner purchased his home for $250,000 in January, 2007. He obtained a 30-

year fixed FHA-backed loan at 5.5 percent interest.

Here‟s a look at how long it will take Homeowner B to break even on the mortgage:

FHA-backed loans are quite popular, mainly because they allow homeowners to get into

a home for as little as 3.5 percent down. The problem here is that a large portion of the

monthly payment goes toward paying the interest on the loan, so for the first five years or

so, the principle hardly budges.

The chances are good that your home's value, and what you owe on your mortgage, will

catch up with one another somewhere down the line. That "somewhere," however, may be

close to a decade away.



Afterword

I hope that you've enjoyed reading this book as much as I enjoyed writing it, and that all

of your short sale questions are answered.

When you're ready to begin the process, I would be honored to be the agent who guides

you through it. To get started, call me at 763-607-1415.

I'll get to work right away, creating a verifiable broker's price opinion that is sure to be

accepted by your lender. I'll also get busy creating a bullet-proof marketing plan that will

draw buyers to your home like a magnet. Finally, you and I will work as a team to put

together the ideal short sale package.

If, after reading this book, you think that perhaps your income is too high, or you hold too

many assets to be approved for a short sale, let's talk. Only by meeting with me will you

know for sure. Since my services are yours, free of charge, you owe it to your financial

future to at least set up a meeting.

Regardless of your financial situation, if you owe more on your home than what it's

worth, lets work together to get you out from under that burden.

I wish you all the best during this turbulent time in your life, and hope to be able to serve

your real estate needs.



Appendix i: Duties of the Short Sale Listing Agent

Since the agent is the most important component of the short sale process, I thought it

might be a good idea to let you know what you should expect of your listing agent.

Remember, an inexperienced agent is not going to understand the depth and range of

these duties as they pertain to the short sale.

Keep this list handy as you interview agents for the job of listing your short sale. Ask

each one to explain his or her duties during the process and avoid any agent that can‟t

rattle the following information off the top of his or her head. Your agent should be able to:

Contact your lender to obtain authorization to communicate on your behalf.

Explain the entire short sale process to you so that you have a thorough

understanding of what is going to occur at each step. Explain the tax and credit

ramifications of the short sale, and advise that you seek further counsel from your

attorney and/or tax professional.

Counsel you on how to ready the home for the market, and explain to you your

duties during the marketing process.

Compile the preliminary short sale package, ensuring that it includes a release of

liability to protect you from having to pay the deficiency after the sale.

Negotiate with buyers to bring in the amount the lender is most likely seeking.

Add the purchase agreement and the HUD-1 statement to the short sale package

and send it to your lender for approval.

Assist your lender in verifying the home‟s current market value.



Negotiate second lien payoffs with your lender.

Negotiate any demands from the holder of the second lien.

Follow up with the lender‟s short sale team on a weekly basis, and relay the results

of these communications to you.

Order the preliminary title report.

Comply, in a timely fashion, with all lender requests.

Compare the short sale approval letter to the HUD-1 to ensure everything matches.

Deliver the short sale approval letter to all parties involved in the transaction.

Review closing documents.

The above-mentioned duties are the basics and, believe me, anything can and does

happen that may require adjusting these duties and adding additional ones.

Only an experienced short sale listing agent knows what to expect and how to deal with

the unpredictable aspects of the short sale transaction as they arise. Only an agent with

contacts within the lender‟s short sale team can move the transaction along quickly.

Choose your agent carefully.



Appendix ii- Questions to Ask in the Real Estate Agent Interview

How many short sales have you performed in the past year?

How many of those transactions were successful?

Do you hold any short sale credentials?

I have a second loan on the house. How will this be handled if I hire you?

How do I know if I have PMI?

If I do have PMI, will that affect the short sale?

Do you have any direct contacts within my lender's short sale department?

On average, how many days do your short sales take to close?

Do you use Equator? (See Appendix vii).

How many offers will you submit to the lender? (The answer to this should be "One

– the best one.") If the agent says that all offers will be submitted, find another

agent.



Appendix iii: Contents of the Short Sale Package

When complete, the short sale package will contain:

The Authorization Letter, signed by all parties (see Appendix iv).

Your last two bank statements.

If employed, your last two pay stubs.

A hardship letter (see the Appendix v for an example).

The last two year‟s tax returns, and IRS Form W2 or IRS Form1099.

The signed purchase agreement(s).

Short Sale Contingency Addendum (see Appendix viifor an example).

Required bank addenda, such as the Arm‟s Length Affadavit.

A printout of your home‟s listing from the Multiple Listing Service database.

Samples of marketing pieces we've created to help sell the home.

Proof that the home is worth what we say it is – typically in the form of a Broker's

Price Opinion.

Exclusive Kris Lindahl Short Sale Report.



Appendix iv: Letter of Authorization



Appendix v: Sample Hardship Letter

(Sample Hardship Letter courtesy of the United States Department of Housing and Urban Development)



Appendix vi: Homeowner Financial Worksheet



Appendix vii: Short Sale Contingency Addendum



Appendix viii: Short Sale Glossary

1099-C

The 1099-C is an Internal Revenue Service form that is issued to homeowners receiving

debt forgiveness. In the absence of government amnesty programs, (such asThe

Mortgage Forgiveness Debt Relief Act of 2007, set to expire at the end of 2012), the

amount listed on the 1099-C that you receive from your lender after the short sale will be

treated as ordinary income on your tax return.

Closing/Settlement

Closing, sometimes called "settlement," is the last step in the short sale process. All

parties to the sale come together to sign documents and funds are disbursed, according to

the contract terms.

CMA/BPO

A CMA (Comparative Market Analysis) and a BPO (Broker‟s Price Opinion) are similar

methods used by real estate agents to determine and justify the estimated value of a

property by comparing it to similar properties that have recently sold.

Concessions

Concessions are items that sellers concede to buyers. They can include anything from the

home's furnishings to the payment of closing costs.

Contingencies

A contingency in a real estate contract is a clause that makes the sale of the property

dependent upon the outcome of some event. For instance, an inspection contingency

allows for the buyer to walk away from the deal upon dissatisfaction with the home

inspection. Contingencies are time-sensitive, and expire if not formally removed by the

specified time.



Equator

Equator is an online software service that improves the lenders' response time and keeps

track of important documents.

Financial Worksheet

Typically a spreadsheet, the financial worksheet lists all of your income and expenses,

savings and other assets. The lender typically requires supporting documents to back up

your claims on the financial worksheet. Examples of documents that you may be required

to supply include bank statements, investment account statements and paycheck stubs.

(See Appendix vi for a sample financial worksheet).

Hardship Letter

The hardship letter, addressed to your lender, explains your current financial situation,

how it came about and why it will persist into the foreseeable future. You will find a sample

hardship letter in Appendix v.

HUD-1 Settlement Statement

The HUD-1 Settlement Statement is a document that itemizes all funds that will be paid

or have been paid at closing.

Junior Lien

A junior lien -- typically a mortgage – is one that is subordinate to your first mortgage.

The priority of liens on your property is generally established by the date recorded, or by a

subordination agreement, authorized by junior lien holders to establish a refinanced first

mortgage as the senior or primary lien.

Letter of Authorization

A letter that allows me, as your listing agent and authorized representative, to

communicate or negotiate with the lender on your behalf. You‟ll find a sample letter in

Appendix iv.



Limited Third Party Authorization

A limited third party authorization gives your primary lender permission to discuss your

situation and negotiate with the junior lien holder.

Listing Agreement

The lender typically wants a copy of the agreement you sign with me, authorizing me to

list your home for sale. Some lenders also require a copy of the MLS listing for the home

and a log of all showings.

PMI

Short for Private Mortgage Insurance, PMI insures the lender should the buyer default

on the mortgage. See Chapter 9 for a discussion of how PMI may derail your short sale.

Promissory Note

A promissory note is a signed document containing a written promise to pay a specific

sum of money to a specified party.

Purchase Contract or Agreement

This is the contract submitted by the buyer of the property. The lender wants to see a

fully executed contract, along with any counter offers and addendums.

Servicer

A servicer is the financial institution that manages a lender‟s loan portfolio. Duties of the

servicer include receiving payments, sending bills, accounting and communication with

borrowers. Not all lenders use a servicer.

Short Sale Contingency Addendum

Every short sale agreement includes the implied contingency that the sale is predicated

on the lender agreeing to accept the purchase price, which is lower than the amount owed

on the loan. The short sale addendum is a separate form that makes this implication

concrete and requires acknowledgement by the buyer. The short sale agreement also

contains the amount of time the buyer will wait for approval. See Appendix viifor an



example of a short sale contingency addendum.

Short Sale Package

The short sale package includes a compilation of all the lender-required documents,

used to determine whether or not you qualify for a short sale and how much money it

stands to realize from the sale. You‟ll find a complete listing of what we need to include in

your short sale package in Appendix iii.



Kris Lindahl is a nationally-known authority on the short sale process. He holds real

estate licensure in both Wisconsin and Minnesota, and is the number one short sale agent

at Edina Realty.

Kris is a lifelong resident of Minnesota. Throughout his formative years, his athletic involvement fueled his competitive nature. Kris “hated losing,” which is why he believes he has become so successful in negotiating short sales. “When I negotiate with a bank, I want to win for my client – I‟m not here to lose!” The truth is: Homeowners looking to do a short sale are going to go with an agent who wants to “win” for them. Kris is that guy!

With an education degree from Minnesota State University, Mankato, teaching comes naturally to Kris. Coupled with his passion for helping others, Kris demystifies the short sale process, ensuring smooth transitions for his clients.

Kris currently resides in Minneapolis with his wife and daughter.

a homeowner's guide to short sales

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short sale advice

star short sale

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short sales i disclaimer

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