Let’s Separate the rumors from the facts and establish the truth. The bottom-line on short sales is this: Short sales represent the most powerful foreclosure alternative for homeowners who absolutely need to sell but owe more on their homes than what they are worth. As with anything powerful though, myths, rumors and lies develop that can cloud an otherwise clear and concise process.

Rumor #1 – Banks Would Rather Foreclose Than Do A Short Sale

This is a very common myth that is very far from the truth. The bank does not want your property as it represents a liability to them. Banks are in the business of loaning money, not holding property. Foreclosing on a property represents a huge financial loss for a bank and contributes to the bank’s insolvency (a term used to describe an institutions liabilities vs. its assets) and cripples their ability to lend money. Furthermore banks net substantially more money through a short sale a suppose to foreclosure.

To qualify for a short sale you must demonstrate the following:

1. Financial Hardship – You have unforeseen circumstance that has made your mortgage unaffordable.
2. Monthly Income Shortage– You are not making enough to afford the mortgage
3. Insolvency – You do not have significant liquid assets that would allow you to pay down your mortgage.

Rumor #2 – Short Sales are Impossible to Get Approved and Never Close

This is completely untrue. While the national averages for successful short sales are lower than to be desired, thousands of short sales across the nation are getting approved and closed every month. Recent studies show that 40% of all homes being sold are short sales. An article in Florida Today called short sales the “hottest trend” in real estate. Make no mistake short sales can be challenging to work with at times but far from impossible. A skilled investor or Realtor can navigate through the proper channels to get short sales approved relatively quickly.

Rumor #3 – Short Sales Take 12 to 18 Months to Close

This is another HUGE barrier for entry for many buyers and sellers but represents a gross distortion of the truth. I have personally negotiated and closed short sales in as little as 21 Days. My office is currently running an average of about 95 days from contract to close on our short sales. The 12 -18 month time table represent is not normal at all and represents abnormal files. Many recent legislative changes will actually end up speeding the process up even faster.

Rumor #4 – There is Not Enough Time to Do a Short Sale Before My House Foreclosures

First understand that the foreclosure process is just that, a “process.” Every process takes “time” to unwind. There is ample time in the foreclosure process to make decisions that can totally change the course of your financial future for the better.

In most cases the lender (who really doesn’t want your property to begin with as we established in Myth#1) can cancel a foreclosure sale up to the final day of auction! I have seen foreclosures canceled 39 minutes prior to going up for auction. In the current market lenders will put off a foreclosure with as little as a phone call from homeowner explaining that they to sell, and almost all lenders will stall a foreclosure with a legitimate contract. Expert investors and Realtors, who understand foreclosures and short sales, are equipped to save homeowners from foreclosure right down to the last hour.

Rumor #5 – You Must Be Behind on Your Mortgage to Negotiate a Short Sale

This used to be true, but not anymore. After taking a larger hit by forcing homeowners to go delinquent before considering a short sale, lending institutions have wised up. At present you do not have to stop making payments on your home in order for the bank to approve a short sale. What the bank needs to see is a legitimate reason for your inability to continue making your monthly payments and/or need to sell (loss of job, relocation, divorce, etc.). Due to the current market conditions the banks generally understand why the short payoff is being requested – whether you have missed payments or not.

Rumor #6 – Listing My Home as a Short Sale is an Embarrassment

Consider a change of your viewpoint in this subject. Losing your home to a foreclosure auction is an embarrassment. Listing the home as a short sale shows you are responsible! Foreclosures have severely damaging effects on your credit that can last 7 – 10 years, while short sales can put you in a position to purchase another home in as little as 24 months.

Recent estimates are showing that about 40% of all U.S. sales are short sales and about another 18 – 20% are foreclosures. That means that roughly 6 out of 10 homeowners on the market are in the same situation as you are. You are not alone. Take the proper steps to get the help you need and change the outcome for the better.

Rumor #7 – I Owe Too Much and the Bank Won’t Take Such A Low Pay-Off

After the collapse of the market in 2007 real estate prices have continued to decline all over the country. Sellers are often astonished to find out that their home might be worth 50% or less of its original value when the seller purchased it. Banks understand this fact and make their decisions accordingly.

Moreover, banks will do their own independent research to determine what the home is worth, and derive a solid value conclusion. More importantly, banks uses their own derived value to determine what they could expect to get out of the property if they took it back as an REO (bank foreclosure). The value determined by the bank is not based on how much you owe but rather what similar homes are selling for in the current market.

Rumor #8 – Lenders MUST see the property listed at full market value for at least 90 days.

In the current foreclosure climate it is irrelevant to the lender what the home is listed at. The lenders will do their own independent valuation of what the property is worth in the current market. Based on what that value comes in at the lender will do an internal matrix and determine what they will accept on the property. Back in 2007 and early 2008 lenders used to require properties be listed for at least 90 days. Today this is no longer the case.

Rumor #9 – I Will Have to Pay Federal Income Taxes on my Primary Residence

The new Mortgage Forgiveness Debt Relief Act of 2007 all but eliminates the extra financial ‘hit’ a debtor would take due to tax liabilities. It was first introduced in the House in September, 2007 and finally signed into law by President Bush on December 20th, 2007. Now, the act is law and is termed Public Law No. 110-142.

Prior to the enactment of this law, a debtor would not only suffer the loss of his home to foreclosure and the negative impact to his credit rating, but he would also incur the additional debt arising from federal tax laws that made the difference between what the home sold for and what he owed on his mortgage, taxable as income.

Public Law No, 110-142 (H.R. 3648) amends the Internal Revenue Code of 1986 to exclude discharges of indebtedness on principal residences from gross income and for other purposes. It does not, however, apply to homes purchased for investment and subsequently rented out. It only applies to homes where the owner has resided there.

Rumor #10 – If I do a Short Sale I Won’t be Able to Buy Another House

As of January 15, 2010 Fannie Mae’s underwriting criteria allows for homeowners who have performed a short sale on their property to purchase a new home 24 months from the closing date of the short sale. This assumes that the homeowner has kept current on all of their other debt obligations.

Now technically speaking, you can purchase another home the same day as you close on a short sale, assuming you had the cash to do so! However if you are borrowing the money (which is assumed above) you have a 24 month wait using conventional financing.

The Conclusion: In my short sale business I am not only tasked with saving homeowners from the damaging effects of foreclosure, but also dispelling the rumors and myths that prevent from getting help. The video to the left is one of my favorite youTube videos of all time. I embodies my day to day business. This is what I do for a living!

Warm Regards,

Aubrey Kipp, Investor
OrlandoShortSale.TV