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Is it Time to Do a Short Sale?

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Question: Is it Time to Do a Short Sale?
A reader asks: "My house has been underwater for a great many number of years. It's not getting any better. I have tried to do a loan modification and I keep getting turned down and rejected. The bank says I should try to short sale, but I don't know if I'm ready to do a short sale. How do you know? If the bank won't do a loan modification, why would they do a short sale? Will I just get turned down again? How can I tell if it is time to do a short sale?"
Answer: The short answer to how do you know when it's time to do a short sale is when you are ready to move. The long answer is somewhat more complicated. Don't laugh over the short answer, though. Because, believe it or not, there are people who do not understand that to short sale means you have to sell your home.

Some people think a short sale is another form of a loan modification, and it is not. When you complete a short sale, you have sold your home. After a short sale, the home is no longer yours, and you no longer own it.

Renting Back Your Short Sale

You might also hope that an investor will buy your home and let you rent back. The likelihood of that happening is pretty slim. Most banks will ask you to sign an arm's-length agreement of some kind, and typically that arm's length prevents a rent back. There are a few exceptions to this but they are rare.

Let me add that some people think it's OK to violate the arm's-length agreement. Their thought process probably falls along the lines of: who will know? Will the bank check up on you after closing to see if you remain in the home? My answer to thoughts like that is they are foolish thoughts. There are so many other homes you could rent -- why take a chance on breaking the law and being discovered? In California, for example, violating an arms length agreement could be grounds for the bank to rescind your release of liability. It might be considered short sale mortgage fraud. It's better to keep your nose clean.

Loan Modification vs. Short Sale

Homeowners are often confused about a loan modification vs. a short sale. They think the requirements for both are the same. They are not.

Just because you were rejected for a loan modification does not mean you will be rejected for a short sale. It means the opposite. When you are turned down for a loan modification, you are generally much closer to qualifying for a short sale than you may think. Banks want to short sale. Banks tend to resist loan modifications.

When It's Time to Short Sale

Dealing with the fact you are about to sell your home is a huge first step. When you are getting ready to list your home, take a few moments to say goodbye to every room. You've built memories in your home, and it's normal to feel a little sadness about leaving it.

Envision the lockbox. Some short sale sellers say when the lockbox is attached to the gas meter or the front door, that's the time when reality begins to sink in. Picture the sign in the yard. If these thoughts cause you uncontrollable pain and you cannot bear the thought of parting with your home, then this might not be the time to do a short sale. You might need more time to adjust to the short sale process.

Before Delaying the Time to Short Sale

Are you behind in your payments? How far away is your auction? You might not have the luxury of time to wait before you short sale. If you have not been paying your mortgage and you want to delay your short sale, you might consider making a few payments. But first talk to a lawyer and your tax accountant.

There could be a problem with paying your mortgage. If you make a few payments, the bank might not be so eager to do consider a short sale because the bank might think you can afford to make your payments. Although a delinquency is not always required, and especially not for Fannie Mae or Freddie Mac short sales, the danger of imminent delinquency is always a concern.

Ideally, you want to start the short sale process with plenty of time to close your transaction before the auction. The closer you get to the auction date, the more at risk you are to lose your home to foreclosure. Do not wait for the last possible minute because you might run out of minutes.

Call a local short sale agent and ask a few questions. Describe your situation and ask for advice. Most short sale agents who specialize in a short sale will have the answers you need. You might be able to plan your short sale for a time that is more convenient for you and when it's easier to sell your home. You may discover that a little pre-planning can be a big advantage to you when figuring out when it's time to short sale.

If the agent seems to be pushing you into a short sale and is not listening to you, that person might not be the best short sale agent for you. Look for an agent who tries to solve your problems and explains the process in a way that makes you feel comfortable. Listen to your gut instincts.

At the time of writing, Elizabeth Weintraub, DRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.

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