Recovery Success Story: A Short Sale

Context:

A short sale is a property sale in which the optimal sale price is less than the amount currently owed on the property.

In this case, a Lakeview homeowner wanted to sell a Katrina flooded home. The house had not been gutted and there was an outstanding mortgage balance. The owner received an offer of $95,000, which was approximately $20,000 short of the mortgage payoff. The buyer intended to pay cash for the house, so their was no mortgage company on their end.

Goals:

The objectives were to appeal to the owner's mortgagee
1) to allow the sale to proceed in spite of the fact the sale price was below the mortgage payoff and
2) to forgive the remaining balance due on the mortgage note.

Scenario:

Upon contacting the owner's mortgage company, the mortgagee’s representative said this was the first such request the “investors” had received. They required the following information to proceed.

--purchase agreement;
--financial statement (a form prepared by the mortgagee) listing assets and liabilities;
--paycheck stubs or other proof of income;
--a detailed letter explaining the circumstances of the mortgagor and why a “short sale” was being requested.

The latter was accomplished in a “hardship” letter describing the condition of the property, neighborhood, an approximate number of houses in the area, the percentage of flood damaged houses in the city, the fact there are many houses for sale, the fact it is a buyer’s market and the mortgagor is fortunate to have a a buyer, etc. Given the circumstances in the New Orleans it is not difficult to draft a “hardship” letter.

In this particular case there was a delay because the mortgagee’s representative lost track of the case. After getting back on track, different representative was assigned from the default management department.

After further discussions, in addition to the above requirements, the investors required an appraisal to verify the value of the house and to ensure that the sale price was legitimate. This was not a problem because the investors paid for the appraisal, which turned out to be very helpful. The appraisal came in below the price offered for the house.

Moreover, the mortgage company representative became very sympathetic after seeing photographs of the flood damaged house. The representative was pleasant but it was striking how she was moved by the photographs.

In conjunction with the purchase agreement the mortgagee must have a “HUD 1” form, also known as the “settlement statement. This is the form which delineates expenses, costs and the like which are to be paid by the buyer and seller. The bottom line is the mortgagee wanted to know, to the penny, how much money it would receive from the sale.

It worked out well for the owner. The most important thing is the mortgagee has allowed the sale to go through without being paid the balance at closing. There will be some money owed to the mortgagee but it is less than half of the balance and it will be due in the form of an unsecured promissory note--interest free over a period of years. There was a good chance that the entire balance of the mortgage would be forgiven, but the owner conceded an ability to pay a portion of the balance.

Lessons learned:

- Send before and after photographs of the property with the “hardship letter.”
- If contact with the mortgagee is lost, re-establish it as soon as possible

Contact:

If anyone knows of anyone with a short sale issue feel free to send any questions about it to zulucoconuts@yahoo.com

Further reading:

http://www.ehow.com/how_8132_short-sale.html