Can We Do a Strategic Short Sale Without a Hardship?
Question: Can We Do a Strategic Short Sale Without a Hardship?
A reader asks: "My wife and I bought a brand new home in Sacramento in 2005. We paid $515,000, taking out 2 loans, both with Bank of America. Our balance is about $505,000 but our home is only worth $210,000. We have no financial hardship, really. I am still employed with the same company; my wife works part-time although she's about to be laid off. Still, I make about $150,000 a year. We can afford our payments, yet we'd like to get out from this underwater home. Is there any hope for us? Or will the bank reject our short sale without a hardship?"
Answer: Generally speaking, sellers need a hardship to do a short sale, however; there are ways to do a short sale without a hardship. First, understand there is no guarantee that a bank will agree to accept a short sale and release the loan under circumstances that involve a hardship, much less those without a hardship. Every bank is different. Investor guidelines vary. Moreover, some PSAs really run the show.
What Is a Short Sale Hardship?
Sometimes a hardship is a matter of perception. A hardship is defined as a condition that is difficult to endure. It may involve a form of suffering. You don't have to be living in a cardboard box under a bridge to have a hardship. You can be an NBA star like Ron Artest, who bought a home for $1.85 million in Loomis, CA, and later sold it as a short sale for $1 million. His home's value fell by almost half. Artest was earning $7.5 million when he bought the home.
That income dropped to $5.85 million when he sold. Artest lost about 23% of his earning power -- that's a hardship.
Here are sample types of a hardship. Lenders will consider the following conditions, and they don't have to have happened personally to you. It could be a family member who supports you -- financially or emotionally or both -- or on whom you rely for support who has suffered a hardship such as:
- Reduced income (furloughs, new job, partner's loss of job, pay cut)
- Illness or medical emergency
- Job transfer (voluntary or involuntary)
- Divorce, separation or marital difficulties
- Exotic mortgage terms (an adjustable-rate loan)
- Military service
- Death in the family
- Increased expenses and excessive debt
- Unexpected repairs or home maintenance
The Strategic Short Sale Walk Away
The motivation of many sellers who want to do a short sale is the problem that their mortgage balances are generally higher than the value of their homes. They owe more than their homes are worth. These sellers do not want to go through foreclosure for a variety of reasons, and they hope to somewhat protect their credit rating.
The simple solution would be to do a loan modification that reduces the principal balance below the home's market value. In effect, this would be selling the short sale home back to its owner, thereby letting the owner stay in the home. That would make a lot of sense. But no, that's not how our system in the United States works.
To do a short sale, the seller must sell and move, rent for a few years and then buy a home very similar to or perhaps even nicer than the home the sellers already had.
I know, it's stupid.
The easiest way to do a strategic short sale is to write a strong and honest hardship letter. Put some thought into it. What may not be a hardship to your son's English teacher can very well still be a hardship to you. If you owned a home in South Dakota and your job transferred to you Hawaii, that's a hardship, even though some people might consider Hawaii to be one of the best places to live in America. Here are other steps:
- Hire an experienced short sale listing agent.
- Talk to a lawyer familiar with short sales.
- Obtain competent tax advice about possible tax consequences on canceled debt or, in the event of a refinance, mortgage over-basis considerations.
- Price your short sale in line with the comparable sales, which should be less than your mortgage.
- Assemble the paperwork required by the short sale bank.
Will Banks Let Sellers Walk Away Without a Hardship?
The answers are yes and sometimes no. More often than not, the short sale is granted. A hardship is not always necessary because sometimes the bank prefers to dump the property than risk taking it in foreclosure.
In your situation with a Bank of America short sale, unless you qualify for the HAFA short sale program, it is possible that Bank of America could ask for a seller contribution. However, that practice applies mostly to hard money loans and not to purchase money loans. The bank will probably net about $195,000 from your sale and eat the remaining $310,000.
At the time of writing, Elizabeth Weintraub, DRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.