Well that's a good question. What do you think? Most folks would probably answer this question with a resounding YES! But...what if I told you the answer is "No....you don't necessarily need a hardship to qualify for a Short Sale. You may be able to do a Strategic Short Sale". Heck, big business and lenders do them all the time.
One reason lenders/investors may approve the Strategic Short Sale is that the hardship in no way changes the financial outcome of the Short Sale for the lender. The numbers are still the same. In fact, the numbers may even be better for the lender on a Strategic Short Sale because the Seller is in a financial position to contribute. So why wouldn't they approve it?
Now while you may not have to have a hardship to do a Short Sale you may very well be required to be delinquent on your payments. This is mostly due to government intrusion into the process. For example HAFA (Home Affordable Foreclosure Alternative) requires the mortgage to be: "delinquent or default is reasonably forseeable."
Also, if you have an FHA loan: "At the time the PFS (pre-foreclosure sale) closes the loan must be in default (i.e. delinquent more than 30 days)." FHA DOES require a hardship.
If you are way upside down on your mortgage and see no light at the end of the tunnel then you have to ask yourself some hard questions. The reality is that most of us will have to move for some reason over the next 5-7 years. So ask yourself:
- If I'm upside down on my mortgage today will I still be upside down in 5 years if I have to move then?
- Would my family be better off if I took the financial hit today instead of waiting?
- If I did a Strategic Short Sale today would I be able to rent a property for my family and save a substantial amount of money each month?
- How will going through a Strategic Short Sale affect my credit and will my interest rates on my credit cards go up drastically?
- How will a Strategic Short Sale affect my job (security clearance)?
Ask yourself hard questions. Seek legal advice from an experienced Attorney. Talk to your CPA. Have a family meeting.
Then if you decide that a Strategic Short Sale is the option for you, remember, there are no guarantees it will work. You may be asked to contribute to the "Short". What I tell potential Sellers when they ask the question is... "If you have no hardship and you have assets or sufficient income the bank may very well want some of it. You may have to bring a cash contribution to closing and they may also want you to sign a promissory note. But you may very well have your Strategic Short Sale approved."
These are difficult times and that require making difficult decisions. Let me know if I can help.
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Hi Bryant-
Most simple solutions are not at all simple once the process is commenced. It requires forethought and commitment. You are giving great advice to those who are considering short sales. There is a lot to consider. Take the time to consider it all.
--Sara in San Antonio
Bryant - Great post, because this is one subject that most consumers really don't understand. It deserves the big reblog.
Honestly! I don't know how the banks even know at this point WHAT KIND of short sale they are looking at. You do offer up great information here.
It is important to consider all the options and make the best decision based on current circumstances. Seek professional guidance and the help of an experienced short sale real estate agent.
Proving a "hardship" is so subjective anyhow. There is probably a very grey area between a strategic default and many "hardships".
Bryant - Those are perfect questions. As short sale listing brokers, we have to strongly consider the situations before we go forward, too.
BB, I honestly wonder if banks EVEN LOOK at the hardship letter as much as just check the block on their checkoff sheet of docs required for a complete package. Having done about 25 shorts in the past year and a half, for investors as well as owner occupants, I have yet to have a bank question the nature of the hardship. AT ALL. So there you go! ;-)
These are great reminders. I have noticed that many times strategic default short sales also take a little bit longer than the ones with a verifiable, strong hardship case.
I am very, very supportive of families... sellers... who are facing some sort of hardship, and because of it, have chosen a Short Sale as their best alternative. As far as sellers who opt for a Strategic Short Sale... without having a hardship, I just have great difficulty being supportive at all.
Karen Anne, I just read your comment and totally respect your decision. On the other hand, I help all home owners who need to sell their properties. If they've decided to attempt a short sale I will help them. Granted, some hardships are easier to understand than others; but, I've made the business decision to not be the one who stands in the way of a homeowner selling their home (for whatever their reason is).
The key with strategic short-sales is to have a team of expert negotiators working with you. This is not something that should normally be undertaken by an agent on his own because his ego will always get in the way and by the time he is done mucking things up, the owner probably already will be in pre-foreclosure status. Let it to the pros, wouldn't you agree?
Bryant, to answer your question it is not always necessary to have a hardship. That is reality and has nothing to do with whether it is right or wrong.
As an agent my job is to not decide if it is morally correct.
Another excellent post BB. We are getting calls daily from sellers who want to do a "strategic" short sale, and we always offer the same advice. If it's good for the banks, the seller, and the buyer, then it's a win-win-win situation.
Back in the 90's when the banks had not caused the problems in the real estate market like now - there was usually only one loan, the buyer had put 20% down and the amount "short" was smaller. Many times the seller would bring in substantial money to cover the short.
The bank is the one experiencing the 'hardship' if they are not getting a monthly payment!! It really comes down to the banks... 'savings over a forceclosure'! Great Post!
I just did some research on local price trends, we haven't been hit as hard as some areas. Still, it looks like people who bought as far back as 2002 are underwater, though only by a little. So you're right about them thinking ahead 5-7 years and wondering if they might still be underwater.
Far too many attorneys fail to understand that the lenders often do not "require" a hardship that is on the "traditional" list, and discourage sellers from pursuing a short sale "because the banks won't approve it due to lack of a "valid" hardship".
Bryant ~ Great blog. I actually just had a seller come to me 2 days ago wanting to do a short sale but they are financially okay and there is just no hardship there. They are underwater and just want out. These are some great things to think about and I am surely going to pass this along!
If there is not a good case for hardship, people need to understand that they risk a post closing debt. There is no such thing as a cheap real estate problem.
Of course EVERTHING IS RELATIVE. And CHEAP IS IN THE EYE'S OF THE BEHOLDER. I've helped homeowners walk away from about $200K in deficiency by signing a $20K promissory note. THEY WERE THRILLED. Not bragging here - and as much as I value hypothetical conversations - a good dose of reality usually adds to the discussion as well!
Bryant, IMO all your questions are great questions for a homeowner to consider. Great post,
great ponts... i actually know a real life example of this working for an individual with major assets...
the bank did say yes and he moved on...
cheers BB and TLW
I've found that lenders always want some sort of contribution on a strategic short sale. As you say, it makes sense, and often times, for the sellers too.
Bryant- Yes, you can do a strategic short sale and we do them all the time. On the other hand most strategic short sales can be spun into a hardship because hardship is relative. If you are in your late 60's, have over a million in assets but have no means of producing income and need that million to live on for the next 30 years- well- that is a going to be what we call an eventual hardship. We get those through all the time. So much of it depends on your negotiating skills and persistence and who the note owner is. Portfolio loans seem to be the easiest to get through with strategic shorts. On one hand, you can argue that anyone in Florida who bought a home between 2006 and 2007 is automatically a hard ship because they are at least 50% under water.
It really comes down to a business decision as it should be and the gov't needs to stay out of it. Nothing they do works anyhow. Katerina
Thank you for the helpful information, Bryant! I have just listed my first short sale, and this information is so helpful. It looks like I may need to ask a couple more questions of my seller...
Happy birthday to TLW!
I believe you said it best when you said "Make the move that is best for you and yours!" We see all kinds of different situations and circumstances here in Nevada! And the best thing to tell or do for your sellers is to educate them on the short sale process, advise them to seek legal advice or and talk to their tax professional. In the end, they will always make a decision based on what works best for them.
When I have short sale questions or delemas I always turn to Short Sale Superstars. I always get the answers I need by reading and learning from other professionals who work and deal with short sales just like I do! It's a great group Broker Bryant, thanks for creating it!
Hi Bryant, I'm not all that sure that most of the lenders even know what the realities are for the distressed sellers ! Even if they do fully comprehend the facts it still depends on a lot of low level staffers making the right decision !
I don't even see how it is possible to determine "hardship" because many times hardships are self-induced through poor decisions. Others may have made all the "right" decisions only to find themselves in a situation which can be remedied through a "strategic" short sale. I don't distinguish between the two and it's not my place to judge the homeowner's actions; it is what it is. I have found that those sellers who have tried to do the right thing all along and for whom keeping the property will eventually cause quite a hardship are often not opposed to making a contribution because they feel they should.
Bryant, great discussion, and so true. Everything is negotiable. If a lienholder chooses to accept a settlement on the payoff of a loan, that is that lender's perogative. Homeowners who don't necessarily fit into the scenarios that would be considered acceptable hardships can obtain short sale approvals. Like you, we tell our clients that they should expect to have to bring some cash to the closing.
The property owners don't come out unblemished -- credit reports are damaged and they probably are paying a settlement fee.
Not all agents are comfortable with the concept. And not all agents are skilled enough to get past a potential initial decline either.
Bryant, while I certainly understand and respect a stragetic short sale, and it's certainly not my place to judge the motive or perhaps the needs of a seller, the fact is that a strategic short sale ... especially where one is financially capable and current ... can be very very difficult and far more likely not to be accepted by the bank. As usual, this is question, at least in my mind, for a competent short sale attorney who can give them advice. I hesitate to take on a strategic short sale because the seller just wants to sell -- short because the house is worth less -- and then not be successful at obtaining bank approval. That's incredibly frustrating for the seller, and expensive for us.
Well, it depends on how you define a short sale. If your defanitition is simply a sale that will not result in enough to pay off the loan balance, then no you don't. If your defanition of a short sale is one where the lender accepts the loss of the deficiency, then yes you will need a hardship.
Here's the logic behind that....If the sellers situation has not changed thus they are able to make their payments just fine, then it's not in the bank's best interest to take a loss when they have an owner who can make the payments. If they choose to sell, then most banks would let them, so long as they paid the deficieny off or at minimum signed an agreement to pay it off.
But here is the thing that I think comes up a lot. The sellers claim they can't afford their payments yet when you ask them about hardship, they say they have none....THIS IS BS!!! SOMETHING changed in their situation if they were able to make the payments before but now they can't. OK maybe they didn't loose a job but maybe they started incurring extra expenses? Kid went to college and now they have to pay for it? They had a baby? The home needed some unexpected repairs which took a lot of money? Guess what those are hardships too.
If their "hardship" is that they chose to go to disneyland instead of making their mortgage payment this month, well then I don't know what to tell you. I would just smack them up side the head and tell them they are idiots and what did they expect? They're going to have to own up to that dificiency.
Opening question is related to: Do I need some integrity in my life?
Answer: No, but it sure helps when life gets tough.
I understand completely why someone would want to walk when they are many years from breaking even on their house, but THEY need to understand that there is a price to be paid. Honest hardship, now that's a story we all want to give our best shot to help alleviate. For the other guys? Not so much.
I think this can be so confusing for homeowners. Heck, it's confusing for me. Thanks for shedding some light on this subject.
These are important questions for a seller to consider before deciding whether or not they should pursue a short sale.
I really like this blog. and you put a different light on strategic short sales. I liked this and it equips me to ask some different questions to potential sellers who think it is not possible. Thanks!
I'm going to do what is best for my client. I realize that if they have one million dollars in the bank, a short sale is not an option but then again, these are not the folks asking for help.
Even investors run into hard times and a Strategic short sale just makes good business sense as after all it is business.
Good info Broker B.
Interesting times... MAybe a law practice will sprout up around this very issue...
Jeff #33:
"Here's the logic behind that....If the sellers situation has not changed thus they are able to make their payments just fine, then it's not in the bank's best interest to take a loss when they have an owner who can make the payments. If they choose to sell, then most banks would let them, so long as they paid the deficieny off or at minimum signed an agreement to pay it off."
Short Sales are a matter of math. If a homeowner has stopped making their payment or plans to, the sale is happening, either through a short sale or a foreclosure. With that in mind, it's simply a calculation: What will net the bank more money? One penny better short sale vs. foreclosure, and it is in the bank's best interests to do the short sale. Cash at closing or a prom note may be required by the bank, and no one is saying the deal will be a slam-dunk, but the sooner we agents focus primarily on "The Numbers," the sooner our jobs will get easier.
Hi BB! Excellent advice and points for those considering a short sale. It's ALWAYS best to consult an attorney and CPA FIRST, for certain. Those who are well-versed in these matters can shed a better light on the topic to help them make the right decision for their individual situation.
the new short payoff refi program is also a viable option, one that requires you to not be in default. So its good for those who can afford it, want to lower their payment, and lower their debt.
Martin (Synergy)# 12. I agree it needs to be a pro but I disagree that that can't be the agent. Good agents negotiate fora living. A short sale is nothing more than organization and negotiations. If an agent is successful in real estate then they should already have these skill sets.
Kent # 11. I aaaagree completely. It's not our job to judge. It's our job to sell real estate.
Stacey#26. If you have just listed your first short sale you definately need to join our network at http://ShortSaleSuperStars.com Don't go it alone!!!
Terrie #28. Thanks for the testimonial!!!
Folks you have to remember that in my area property values are down 75% and in some communities as much as 85%!!!! There are people that purchase with 30% down and they are still up side down by 280%. This means they bought a house for $250,000 put 30% down so now owe $175,000 on a house valued at (75% less) $62,500!!! Their payment could be as high as $1,800 on a property they could rent for $650.
So if this were you...would you continue to throw away $1,150 per month knowing that it will take DECADES before yio are back on top of your mortgage. And then mostly because you managed to pay it down.
I'm going to write a post later today to show you exactly what these figures look like.
Outstanding material like always, Bryant!! Had to re-blog this one, since it's so relevant to my clients...
Here's the follow up tro this post.
WHY A STRATEGIC SHORT SALE MAY MAKE SENSE
good information!
Thanks for this two-part series on short sales, BB...it's terrific re-blog material! :)
Leilani