What About the Deficiency in a Short Sale?
Don’t Be Afraid of a Deficiency in a Short Sale
Short sales sound like a great idea to sellers until they hear the word deficiency. But what every seller who may face a deficiency has to realize is that the amount is less than what is owed on the home originally and Short Sale Facilitators of Florida are negotiating with lenders on the sellers’ behalf to eliminate the short sale.
In a short sale, most sellers have a home that is worth less than what is owed to the lender. That’s a house that’s under water. This is known as a deficiency: the difference between what a seller owes a lender and what the seller can get on the fair market value for the house.
Well they really don’t have much of a choice because the value is what the value is. You can’t sell the home for more than what it’s worth. That’s not realistic.
The Lender Decides the Deficiency
The lender decides what they’re going to accept. But on a short sale the lender gets to decide what it is and if there’s less money brought in through the sale than what is owed, there will be a deficiency.
But Alma tells sellers not to obsess over the deficiency. Every lender is different and Short Sale Facilitators of Florida has been very successful in eliminating the deficiency by negotiating with the seller.
Goal: Lender Waives the Deficiency
“Our main goal for sellers is yes, to have a lender, the short sale lender waive the deficiency,” Alma Korshak said. “That’s our ultimate goal. Do we know that right away? No! But normally you will see that once it goes through it often gets approved.
“Once it goes to their underwriting department and they review then that’s where it will state on the approval letter, ‘OK, we’re waiving our rights to pursuing you for a deficiency.’ They’ll waive that in the letter.
“We want everyone to be happy when they’re done with a short sale. We want everybody to get as much assistance as possible for the seller. And the buyer and realtor as well.
Cash Contribution From the Seller
And if there is a deficiency, the lender wants it as a cash contribution at closing or they may say – especially when there is a mortgage insurance company involved in the sale, because they’re the ones who are guaranteeing that the seller will be paying the lender after the sale—it’s like insurance.
Or there may be a couple things that the lender wants. They may say, OK bring cash at closing and we also want you to sign a promissory note for the deficiency.
Zero Percent Promissory Note
“But we wouldn’t just accept that final deficiency,” said Alma of Short Sale Facilitators of Florida. “What we would do is we would go and turn around and process this file challenge that amount and try to get a reduction. A reduction either in the prom (promissory) note or in the cash at closing.
“We don’t just accept what they’re offering us! We would then go back to the short sale lender and say, ‘here, we want to offer you this; will you take this much?’ We want to give you this instead of cash at closing and I will want less in that prom note.
“I then talk with the seller once we hear from the lender that if that’s the case and that’s what they want and to the realtor and also to the seller, mister seller this is what they want to offer you. They want a cash contribution for this much or they want a prom note. And these are the terms.
“And a lot of the time the prom note is zero percent. But they normally do not charge you a percentage rate. It’s normally no percent interest on say $10,000 or $20,000 and it’s for 10, 20, 30 years spread out with no other payments.
Alma said that the lender just wants the prom note for $10,000. “The reason we can’t tell you is that it’s just we don’t know. If we had a crystal ball and we could predict the future we would know but unfortunately we can’t.”
You Won’t Know Until the Short Sale Approval
“And you’re not going to know what’s going to happen until you get close to the approval,” Alma said. “So let’s say you have to go find the cash, maybe you’ll borrow it from a relative. A lot of our clients go and borrow the funds from a friend or a parent. A lot of the clients choose the cash vs. the prom note. They want to take the cash at closing because they just want to be done with the property. They will see if they can just come up with the cash.
“And then a lot of times when you can’t get the cash and you have to take the prom note, and you have to be ready to make that choice. The cash or the prom note. Which one is going to be more beneficial for them? And understand we will be working with the lender so that we are reducing that amount of the prom note as much as possible.”
The lesson from this is that a seller shouldn’t be afraid of a deficiency because there is no telling what the outcome of the deficiency will be because no one can predict:
1. the sale price of the home
2. the original deficiency set by the lender
3. the amount of the deficiency negotiated down by Short Sale Facilitators
4. the ways to eliminate the deficiency
–cash from seller
–zero percent promissory note
–waiving the deficiency