Considering a short sale, what happens to the sellers?

Question

I may have a deal with a short sale.  I can run the numbers, but what happens to the current owners when they do a short sale?  Will there be any long lasting negative effects to their credit?  Anything else negative that will follow them around?  From my understanding, I should expect the process to take months and the bank will eat difference between the sale price and principal.

Joe Splitrock · Answer

@Rory Compton there are only 12 states that are non-recourse and VA is not one of them. If the owner is current on their payments, the bank is not going to approve a short sale. That means your friend needs to go into default on payments. Even if the bank does approve a short sale, being that he is a doctor with good income, the bank will collect on the deficiency judgement. It will sit on his credit report until he settles the amount with the bank.

A better situation is buying it subject to existing financing. The loan stays in their name, title transfers to you and you start making payments. You buy it for remaining loan amount, but avoid financing fees and the loan doesn't show on your credit report. This is a great deal for you because you have $0 invested into the property and you can take advantage of the sellers preferential loan terms. The advantage to the seller is it doesn't hurt their credit and they get to just walk away without owing anything. If you pay all the closing costs, that is your only cash into the deal.

There is no situation where your friend walks away with money and you buy it for less than he owes.

Account Closed · Answer

They will have to prove hardship and be behind on their payments in order for the bank to consider a short sale. It also matters what kind of loan it is. FHA, VA, Freddie Mac, Fannie Mae, etc. It will be likely the bank will want proof of income and tax returns and a letter of explanation. The chances of them doing a short sale for someone who can afford the payments is between slim and none, and I'd take a wager it would be none.

The better option is for the owner to sell the house to you on Seller Financing or Subject To. That keeps their credit intact and still gives you what you want.

The question would be: If you are in Guam and the house is in Virginia in a time of Covid-19 and there is little or no equity, how would you benefit from buying it? Can it be done without hurting their credit, sure, if you know what you are doing, Should it be done? I can't see a reason that I would do it, but maybe you are such a great friend to them that risking thousands of your dollars for them is how you roll. The deal doesn't make since from a business point of view.

To make money on the deal, the owner sells on a lease option and gets 10% down and cash flows the property, but he may not know that trick.

Bill B. · Answer

You’re benefit is $100/mo unless one thing breaks, or it’s empty one month then you’re negative. They should drop the price $30k and break even after commissions. Drop it $60k and lose $30k, it’s still better than your offer. If their payment is $1600 and you’re offering $1100 for ten years. Their plan is to lose a$60k plus increases in insurances and taxes along the way. Please make sure they have the very expensive vacancy housing insurance or they won’t be covered if it’s been vacant more than 60-90 days.

Helen Lowery · Answer

From what I understand, a number of states have passed laws preventing short-sale judgements, but Virginia is not one of them.  This risk can be mitigated, however when negotiating a short sale with a bank.  You would ask the lender to sign a written agreement that waives or at least limits their ability to seek judgement deficiency.   However, I am not a lawyer and I would advise you to seek professional council on something like this.

Brett Goldsmith · Answer

@Rory Compton If your associate is current and if you are saying the home has equity, a short sale is likely not going to be an option. Hopefully they can structure some sort of break even sale with someone and get out from under this. If a break even sale isn't possible at a minimum, then the next logical step would be attempting a short sale.

Jonathan R McLaughlin · Answer

@Rory Compton I think you are jumping the gun?

If they don’t have negative equity and they can make the payments they likely wouldn’t have to do a short sale—where they have to work with the bank to take less than the bank is owed—they likely just have to bring cash to close. Used to be done a lot in less forgiving environments. This is by far better for them. No credit hit, no debt forgiveness tax, maybe even a useful tax loss.

Rory Compton · Answer

@John Farady I’m fine with the location, I have a network their. How to make it a win-win, as you pointed to, is what I am trying to figure out.

John Teachout · Answer

Just curious as to how they have negative equity in the property during a time of property value increases? Did they refi it? Pay too much? Make a zero down loan? Not made payments and have lots of late fees? And if they can't make the property solvent, do you want it?

Wayne Brooks · Answer

@Rory Compton They will also receive a 1099, and owes taxes, on the amount the ba k shorts/forgives.

Brett Goldsmith · Answer

@Rory Compton Hey Rory, it would take me some time to elaborate on these topics that have been written about in detail on other sites. If you google Virginia deficiency laws you will likely the find to most of these questions. Is your associate current on the mortgage? If they are current often a short sale is not possible without being able to prove imminent default. Most borrowers who are in default face worse ramifications from foreclosure than short sales so it's a lesser evil. A decision to attempt to go short on a current mortgage with a solvent borrower is a more delicate situation, especially if they have other assets, are high income earbners, or  have substantial funds in the bank.

Considering a short sale, what happens to the sellers?

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