General Information

Selling a home in foreclosure may be the best option for Washington homeowners who are struggling to make mortgage payments.

Whether you have suffered employment loss, divorce, medical bills or other unfortunate circumstances that have prevented you from making mortgage payments, it is important to act fast to sell your home before foreclosure.

For most homeowners, selling a home due to foreclosure can be a gut-wrenching decision that can take weeks or months to reach.

However, if you are unable to continue to make mortgage payments, selling a home prior to foreclosure sale not only affords the homeowner piece-of-mind but also provides numerous long-term financial benefits, including:

  Protecting the equity in your home
  Saving your credit from a foreclosure reporting
  Avoiding a deficiency judgment
  Avoiding bankruptcy, and
  Saving thousands in monthly mortgage payments.

The sale of a home in or facing foreclosure can be a challenging endeavor. After making the decision to sell, it is important that you retain an expert in selling homes in foreclosure.

We have heard horror stories about homeowners who retain agents inexperienced in selling a home in foreclosure and wind up losing the home to a foreclosure sale because the real estate agent failed to follow the proper protocol.

Below is a brief overview of the steps necessary to sell a home in foreclosure:

 Calculating Equity

The first step in selling a home in foreclosure is to calculate your equity.

Equity is the amount of money you will receive in the sale of your home after all mortgages, liens, encumbrances and costs of sale are paid at closing.

The equity calculation is vitally important when selling a home in default or foreclosure. If you have little to negative equity, you must obtain the authorization of one or more lenders and/or lienholders to sell the home.

The sale of a home with negative equity is called a short sale.

To calculate equity, the first step is to determine the market value of your home.

Market value can be obtained by either:

1. an appraisal performed by a licensed appraiser;

2. a comparative market analysis (broker's price opinion) performed by a licensed real estate broker.

An appraisal usually costs $500-$700, whereas a comparative market analysis is usually performed for free by a real estate broker.

After you determine the market value of your property, the next step is to determine the total amount of mortgages, liens and encumbrances that must be paid out of the proceeds of the home sale. To do this, we recommend you obtain a preliminary title report from a title insurance company.

The title report identifies all mortgages, liens and encumbrances that have been recorded against the property title.

However, we also recommend that you contact all lenders in order to obtain up-to-date loan pay-offs for each mortgage loan. The loan pay-off will identify the amount due and owing on the mortgage loan along with all late charges, attorney's fees, trustee fees and other costs related to late or missed payments and foreclosure fees.

In addition to determining what is owed against the property, it is also important to calculate the costs related to selling the home when calculating equity. As a general rule of thumb, costs of sale for homes over $200,000 run approximately 8% of the sale price, and 10% for homes under $200,000.

 The Short Sale

In the event there is no equity in your home, then you must obtain the authority of one or more lenders and/or lien-holders to sell the home.

This is called a short sale.

More specifically, a short sale occurs when the property's sale price is less than the balance of all mortgage loans, tax arrears, liens/encumbrances thus requiring the approval by any lender or lien-holder who does not receive full value for monies lent against the property.

The first step in executing a short sale is to determine what lenders maintain a mortgage on the property and the amount of the lender's pay-off. Additionally, it is important to review the title to the property to determine if any other creditors such as the IRS or county taxing authority, judgment creditors such as credit cards or ex-spouse may have obtained a lien on the home.

The next step is to contact an attorney or real estate broker experienced in negotiating short sales in order to obtain advice on how to proceed with your short sale. You may also want to contact an accountant to advise you of the tax consequences in selling your home for less than you owe.

If you retain a professional to represent you, the attorney or real estate broker will contact those lenders/creditors who will not receive full value on their loan/debt.

Most lenders require that you execute a limited power of attorney that authorizes the attorney/real estate broker to negotiate on your behalf. The attorney/real estate broker will not only negotiate the short sale but will also negotiate on your behalf to force the lender to forgive any debt remaining after the short sale.

The appropriate contact for a mortgage lender is usually the loss mitigation or loss remediation department. Loss mitigation units were established by lenders in order to avoid the significant losses incurred by lenders who are forced to sell a home at a foreclosure auction. On average, lenders receive 20-40% less than the market value of the home at a foreclosure auction.

While every lender has different short sale requirements, most lenders require the homeowner to complete a short sale questionnaire that contains questions about the homeowner's current financial situation. The lender may also require the homeowner to draft a letter describing why the homeowner fell behind on the mortgage payments (The attorney/real estate broker can assist you in drafting the letter).

In addition to the questionnaire and hardship letter, lenders usually require the homeowner to submit paycheck stubs, profit-and-loss statements (for self-employed persons) and tax returns. An estimated HUD-1 may also be required. The HUD-1 details all closing costs to be incurred in the short sale.

With respect to the lender requirement to provide paystubs and tax returns, be advised, that if you misrepresented your income when applying for a mortgage loan, you may risk potential civil/criminal actions for mortgage fraud.

Consult an attorney if you have any questions regarding the submission of disparate income information.

After completing the short sale paperwork and providing the required documentation to your lender, the next step is to identify comparable properties for sale in your neighborhood for submission to the lender. Although usually not required by the lender, the submission of comparable properties can go a long way to educate the lender on the current market conditions in your area.

Once comparable properties have been identified, the next step is to price the home for sale. Given the short time period you have to sell the home, you must price the home aggressively in order to attract buyers and offers.

By retaining a real estate broker to market your property for sale, your home will be advertised to thousands of real estate agents who represent potential buyers. The real estate broker will upload your home on the multiple listing service (MLS) website where real estate agents search homes for their buying clients.

If the home is priced aggressively, it will likely receive a lot of attention from real estate agents who have clients looking for homes in your area. Conversely, if the home is priced too high, then it will undoubtedly be ignored by agents and buyers alike.

Once you have received an offer, the offer must be promptly submitted to the lender for approval.

An experienced real estate broker will have developed a good working relationship with the lender and will be in regular contact with the lender's loss mitigation specialist to follow-up on the offer submission.

Once the lender has formally accepted the short sale offer, the buyer will proceed with inspection (if an inspection contingency is contained in the offer) and will work with his or her lender to obtain financing to purchase the property (if the offer is subject to the buyer obtaining financing).

WARNING: When facing foreclosure, be very wary of investors who claim to be able to negotiate short sales on your behalf.

An investor is not working in your best interest, but rather cares only about the amount of money the investor can make off of your misfortune. Oftentimes, investors will waste valuable time while claiming to be negotiating the short sale.

If the lender declines the investor's meager offers to purchase your property, your home will be foreclosed upon despite your belief that the investor will be purchasing your property.

Short Sale Summary:

1. Calculate Equity

2. Obtain title report to identify all mortgages, liens, encumbrances, and recorded judgments

3. Obtain updated pay-off sums from mortgage lenders, lien-holders and other secured creditors

4. Contact an attorney, real estate broker and accountant experienced in short sales

5. Complete short sale questionnaire, obtain paycheck stubs (profit-and-loss statement for self-employed individuals), draft hardship letter.

6. Work with your real estate broker to identify comparable properties in your area for submission to the lender.

7. The real estate broker will prepare an estimated HUD-1 statement for submission to the lender

8. Price and market the home for sale

9. Submit offers to lenders for approval (Make sure that offers contain a contingency that the offer is subject to lender approval)

10. BE VERY WARY OF INVESTORS WHO OFFER TO PURCHASE YOUR PROPERTY AND NEGOTIATE A SHORT SALE ON YOUR BEHALF AND SO-CALLED FORECLOSURE RESCUE FIRMS.

 Preparing the Home for Sale

Once you have calculated the equity in the property, the next step is to prepare the home for sale.

A licensed real estate broker should be consulted in order to provide you with insight on current market conditions as well as ideas on how best to prepare and market your home for sale.

As you may be aware, curb appeal can be the difference between a home buyer choosing your home over other homes for sale in your neighborhood. So, begin by viewing your home from every available angle and from far away and close-up. Also, invite friends and family over to obtain their recommendations on curb appeal.

Below is a short list of cost-effective ideas for preparing your home for sale:

  Conduct a yard sale to dispose of unwanted items and clutter and donate unsold items to a charitable organization

  Remove all interior clutter and maintain the appearance of the home's interior in immaculate fashion

  Remove all clutter and mow the yard and manicure hedges, trees and foliage so the home can be easily seen from the street. Consider hiring a lawn maintenance professional who can further enhance curb appeal

  Store personal collections, photographs and other non-neutral décor to allow potential buyers to envision their own decorating ideas

  Repair leaky faucets, toilets and tubs

  Thoroughly clean windows, doors, and the front entryway and consider painting the front door a neutral color

  Replace broken gutters

  Repair broken stairs, siding and other outdoor woodwork

  Consider interior painting if walls are stained or if existing paint is chipping

  Consider adding or replacing window treatments

  Plant a variety of flowers close to the home's entryway (in-ground, pots or hanging baskets) to enhance the visual and aromatic appeal for buyers walking into the home. Also, consider adding potted plants near the garage or in any area that may be visually awkward

  Pressure wash decks, driveways and carports

  Replace all light bulbs and consider replacing conventional light bulbs with energy-efficient bulbs

  If you are financially-capable, consider painting the exterior of the home with a neutral color.

 Sale / Leaseback

A sale/leaseback is a transaction in which an investor purchases your home then leases it back to you with the option to repurchase the home at a later date for an inflated price.

The investor usually represents that he or she will negotiate a short sale on your behalf in order to purchase your home. The investor will then lease the home back to you.

This option is very dangerous for several reasons.

First, if the investor fails to successfully negotiate a short sale with the lender you lose valuable time in selling the home on your own.

Second, the monthly lease payments offered by the investor are likely much higher than you would be able to lease a comparable home. The catch here is that the investor uses the fact that you will not have to move out of your house as leverage to receive the inflated lease payments.

Third, the re-purchase price is usually much higher than market price. Moreover, because your credit has been damaged as a result of the missed mortgage payments and short sale, you will not likely be able to obtain financing within the time frame to re-purchase.

Therefore, the likelihood of repurchasing your home is slim to none.

If you desire to enter into a sale/leaseback arrangement with an investor, it is important to seek legal representation in the transaction in order to fully understand what you are getting yourself into.

 More Information

For more information on selling your home in foreclosure or to discuss a short sale with an experienced foreclosure attorney, feel free to contact us. We can be reached by phone at: (206) 442-9500 (Toll-free: 1-800-206-6122).

To receive a free consultation regarding your (or your friend or family member’s) debt problems, please contact us today.