I get asked this question often and it is never a simple answer.  Doing a short sale in Portland requires the answer to several questions first. Since this is a huge decision it should never be taken lightly.  In my opinion the following are the five most important questions. Get answers to all of them before you do anything. The answers will vary from homeowner to homeowner because of your personal financial situation and the bank that holds your mortgage.

1. Do I qualify for a short sale in the eyes of the bank? I’m going to assume at this point that you owe considerably more than your home is worth. Every bank has their own criteria for approving short sales but there are several common elements. First is the homeowners ability to pay. If you have sufficient income to make your monthly payment (but want to get out), the answer will be no. If you have had a hardship or reduction in income from a job loss or reduced hours that makes it almost impossible to make your monthly payment, the answer is maybe/yes. If you have other assets particularly ‘liquid assets’ (savings, stocks, investment and sometimes even 401k) that could cover the difference between what your home is worth and what you owe, the answer is no.  The bank is going to require the equivalent of a fully documented loan application up front to determine your eligibility. This includes but is not limited to tax returns, employment verifications, 3-months of pay stubs, bank statements, investment statements, copies of homeowners insurance and a letter stating your hardship. If you are self-employed be ready for an in-depth review of all your business financials.

Banks are starting to accept short sale requests directly from homeowners in advance of putting the house on the market. However it is far more common for banks and homeowners to wait until they have an offer to officially submit the request to the bank. Your real estate broker (if they know what they are doing) will require you to have all of your documentation together before they list the house. The final answer may not come until the very end of the process which can be frustrating for everyone involved.

2. What are the long term legal and financial ramifications? Early in the decision making process I strongly suggest that you speak to a real estate attorney. I can personally recommend Richard Mario of Buckley LeChevallier (ram@buckley-law.com) who charges $300. to sit down with you and review your specific situation. In some situations (particularly with second mortgages) you will still be responsible for paying back any unforgiven debt. This is why you MUST meet with an attorney first because he may advise another course of action.

It may also be necessary to talk to a CPA (Certified Public Accountant). Will a short sale affect your credit rating? YES, and for a few years. I have read a couple of different opinions on the subject but don’t expect to buy another house for at least 2-3 years. Fannie Mae will grant a loan with 20% down after 2 years. If you have less than 20% down, the waiting period is longer. If you sell short and stay current with your monthly payments you can get an FHA loan without a waiting period.  If you are able to stay current with all of your other monthly obligations and the mortgage is the only negative credit item on your report, your credit score will recover faster. Will I have to pay income taxes (federal or state) on any of the forgiven debt? Maybe, again that’s why you need good financial advise. Requirements for getting a Mortgage Loan after a Short Sale

3. Do I need to work with a Real Estate Broker? Yes. Banks will not deal with a For Sale By Owner asking for a short sale approval. To be perfectly honest, this process is long and difficult for those that do it for a living. Most real estate Brokers are not experienced in short sales and will significantly decrease your chances of a positive outcome. Hire only a CDPE (Certified Distressed Property Expert) certified broker or one that can prove a level of success in closing short sale transactions. My husband is a CDPE Broker with Prudential NW Properties (mash@prunw.com 503-887-0515) and I am a 20 year veteran Buyers Agent, so I know first hand what it takes to get the job done.  Do not hire or agree to pay a third party firm to work with your Broker to ‘negotiate’ with the bank, even if they say the buyer will pay the fee.  These companies (many owned by Brokers, sorry to say) are simply looking for more money. Some CDPE Brokers do work with third party companies that do not charge the Seller  a fee for their service, but add considerable value. Every bank and the investor behind the bank works in a different way. An experienced Broker will know what route is best for your personal situation. Buyers are very leery of short sales and for good reason, so expect some challenges.

4. How long will it take and where will I live? From beginning to end, many months. I would plan on a month doing your research and meeting with the professionals. Once a property is listed for sale I would expect approximately three months to get an offer. Once the short sale package is submitted to the bank I would expect two months for them to make a decision. Once you receive approval from the bank, closing will take 45-60 days.  That’s a total of eight months. Can that go any faster? Yes. If you have all of your paperwork ready at time of listing and update it every month with current pay stubs and bank statements; you hire the right Broker to represent you and you price the house right; you respond quickly (within 48 hours) to every request for documentation from the bank; your home passes the Buyers home inspection without major problems; your Buyer doesn’t have difficulties getting a loan; and lastly a bit of luck.  The best I would hope for would be three months if everything went like clockwork.

Where will I live? In the house. There is no reason to move out and incur additional living expenses. Depending on the advise you receive from an attorney it is quite possible that you will not be making any house payments during this time. I would suggest you save what you can and stay current with all of your other financial obligations. Continue to maintain the house and care for it like you always have. It needs to look good in order to attract a buyer. The bank will mostly likely start foreclosure proceedings after you are 90 days late. In Oregon it takes at least another 120 days for the process to complete. The bank may be willing to delay proceedings if you have a short sale offer in process, but there is no guarantee. In any case you will have plenty of notice as to when you will be required to move out.

5. If I don’t qualify for a short sale, do I have other options? Yes. Again an attorney is the best person to answer this question.  Bankruptcy is also an option that an attorney may suggest. Lastly, you can choose to stay in your home and continue making the payments (assuming you can of course) until the market recovers and you can sell it for enough money to pay off the loan. Remember you do have to live somewhere and the cost of rental housing is going up every month so look at the long term picture once again. If your mortgage payment is only a few hundred dollars more per month than rent would cost on an equivalent home, you might be better off staying put. Rent is not tax deductible like mortgage interest, so be sure to calculate that in when you are doing your rent/own comparison. Lastly if you can qualify for a refinance into a lower interest rate (4.25% as of Aug. 2010) you may be able to lower your monthly payment making it easier on your budget. However this is close to impossible if you owe more than about 110% of the market value, have any late payments or insufficient income to qualify for the new reduced loan amount.

This is a general outline of most important factors as I see it. I am a 20 year veteran in the Portland Real Estate market and actually care about the people we serve.  Each of these subjects go much deeper than I have written about and contain roadblocks and land mines. My hope is to provide a comprehensive overview that contains enough information to get you started in the right direction.  I am always happy to answer any questions to the best of my ability.  You can email me at jolynne@teleport.com anytime or  www.jolynne.com