Realtor Tip 1: Does Your Client Qualify for a Short Sale?

This article is the first in a new series of realtor tips related to short sales. Do you have a topic or question you would like us to address? Email us at info@oyezz.com with your suggestions.

Homeowners who are behind on their mortgage payments may be eager to get out from under their loan, even if it means losing money on the sale of their house. If your client is asking you to negotiate with their lender, you first need to determine whether the homeowner meets the two necessary criteria to qualify for a short sale.

First, a homeowner must be upside-down in the house. The easiest way to determine whether the client owes more than the house is worth is to find out from the homeowner what he or she owes on the total balance of all loans, which may include a first mortgage, second mortgage, home equity line of credit, and hard money loan. To quickly determine the value of the home while your perspective client is on the phone, visit the county appraisal district (CAD) website and look up the address. The website will list the county’s assessed value of the property. Although the CAD listing is not 100 percent accurate, it will give you a ballpark estimate of the probable value of the house to help indicate whether the homeowner is upside-down. What qualifies for a short sale is that the amount owed to the lender is higher than the CAD value. A more accurate method is to perform a CMA (Comparative Market Analysis) when you have more time to prepare for one.

Even if the CAD valuation is a little higher than the total amount the homeowner owes, if it is within 10 percent, the homeowner probably qualifies for a short sale. For example, if a homeowner says he owes $100,000 and the county appraisal district’s assessed value is $110,0000, he is probably upside-down because he would have to account for realtor fees and closing costs if he tried to sell the property. These costs could add another $10,000 to the amount he already owes, bringing the total up to $110,000.

In addition to being upside-down in the house, a homeowner must be in financial distress to qualify for a short sale. Years ago, the banks were more stringent about the definition of financial hardship. You had to prove you were out of work or your income had gone down significantly. Today, you simply have to prove that you cannot afford the mortgage. Common reasons for being in financial distress include the loss of a job, loss of income (e.g., from a pay cut or loss of hours), divorce or death of a spouse, high medical bills (from an illness or accident), or having too many bills and debts overall (e.g., from credit cards). In short, the homeowners’ expenses must exceed their income.

To prove financial hardship, the realtor should look at every penny the homeowner is spending – not just the major expenses, like the mortgage, but also smaller ongoing expenses. At Oyezz Real Estate, we have created a worksheet that categorizes every possible expense they have in order to get an accurate tally of total spending on everything from utilities, car payments, and retirement fund contributions to groceries, toiletries, and pet supplies. We developed this worksheet to accurately determine whether a homeowner is truly in financial distress and be able to accurately document that their expenses far outweigh their income.

If your client meets both of the above criteria – they owe more on the mortgage than the home is worth, and they are in financial distress – then they can qualify for a short sale. At this point, you will need to look for a suitable buyer, as well as contact the lender to begin negotiations, to get the ball rolling and help your client make a fresh start.

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