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Go from Upside Down to Right Side Up (Part II): The Short Sale

In Part I of this article we discussed Loan Modifications and Payment Plans.  Let’s now move on to Short Sales and Sales of property in general.

When selling a piece of property it behooves you to get a real estate attorney.  In Connecticut nearly all purchasers are going to have attorneys, so you don’t want to be left without one on your side.  When conducting a sale generally, you’re going to have both a realtor and an attorney assist you.  The realtor will market the property, and the attorney will review and negotiate the deal, and make sure you get paid fairly.

In the case of a standard sale this will all be straightforward and hopefully as easy as breathing.  Unfortunately, due to the decrease in property values over the past couple of years, many owe more on their mortgage than their property is worth.  That’s all well and good if you’re staying in your home – you don’t really care what the value is most of the time anyway.  When it really, really does matter is when you need to get out of that home because you can no longer afford the mortgage.

If you’re “under water” or “upside down” – you owe more on your mortgage than your home is worth – and you can no longer afford the mortgage due to job loss or any other reason, your next step is to attempt a “short sale.”  That is, you’re going to try to sell the property for less than you owe.  Not only that, but you’re saying you don’t have enough money on hand to make up the difference.  In this case you enter the convoluted world of bank approval.  Even if you’re a daring soul who would normally sell a piece of property without an attorney, you shouldn’t even think about it in the case of a short sale.  The bank will have many, many requirements and many, many dates you must have things in by.  You’re going to have to prove to them that you can’t afford the mortgage and that they’ll get more money out of you by allowing a short sale – and taking a hit on the value of the loan – than they would by foreclosing on the property.

You’ll hire a real estate agent and find a buyer as you normally would.  The buyer is going to make an offer which is presumably market value, but below the value of the loan.  You’ll then have to submit that offer to the bank (along with following all of their other requirements) and see if they approve it.  Understand that they are under no obligation to approve it.  They will only do so if they think it’s the smart thing to do from a purely business perspective.  Their approval – or lack thereof – may have nothing to do with your perception of reality.

Should the bank accept the short sale you should generally be off the hook for the remainder of the loan.  It most likely will affect your credit rating, but not as badly as a foreclosure would.  Usually short sales take a long time to go through and require a lot of work.  Due to this, many real estate attorneys will not touch them.  Fortunately, there are always some that will.

Look for us next time when we talk about Deeds in Lieu of Foreclosure and Foreclosure itself in Going From Upside Down to Right Side Up, Part III.

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