The question that pops up for people who can no longer pay their mortgage is how much money they’ll have to come up with in order to get out from under their mortgage through a short sale. It is like the old catch-22 I’ve often heard where the client tells me that they want to seek bankruptcy protection but they don’t have the money to pay the attorney (of course, the answer to that is that the good attorneys I know will not charge for a preliminary consultation). It is an understandable conundrum, and I’ll do some math illustrations here.
First, in a typical sale, the seller has numerous expenses, but the big one are the real estate commission, New York State transfer tax ($4 per thousand), Attorney fee, and the big one-the mortgage payoff (typically the biggest check drawn at closings).
On a $500,000 house with a $400,000 mortgage balance, assuming a 6% commission (all commissions are negotiable of course) and a $1500 attorney fee, the seller is liable for the following:
- Commission: $30,000
- NYS Transfer tax: $2000
- Mortgage payoff: $400,000
- Attorney: $1500
- Total: $433,500
If you have the equity, all expenses come from the proceeds and you don’t give it another thought. Let’s look at a short sale scenario where the balance and market value are both $450,000:
- Commission: $27,000
- NYS Transfer tax: $1800
- Mortgage payoff: $450,000
- Attorney: $1500
- Total: $480,300 shortage of $30,300
In a short sale, the bank absorbs the loss and discharges (settles/forgives) the loan debt, with no post-closing obligation, even if there are back taxes and back payments. The reason is hardship. Lenders recognize that sellers do not have magic wands to wave and make the market values any higher, and that in selling the house the debtor is making a good faith effort to pay their debt. If you have hardship (which is typically why the house needs to be sold to start with), you should have a successful short sale. If you have $100,000 in the bank, you don’t qualify for a short sale. I should also add that my clients do typically pay a small attorney fee to defray the attorney expense for the workout, but in short sale situations where the lender refuses and returns mortgage payments, it becomes a relatively negligible matter.
This is the same structure in my short sales in Rockland County, the Bronx, Putnam, and Dutchess. Some municipalities such as Yonkers have a higher transfer tax. Of course, the broker or agent you choose matters as much as the surgeon you choose for an operation. You need a specialist or the results could be fatal. The lesson here is that homeowners experiencing hardship ought not put off acting because they don’t have money. You really don’t need any to get informed, get started, and get your life moving again. And the best part is that once the short sale is completed, the slate is clean. That day is the first day of the rest of your life.
J. Philip Faranda is Westchester’s Premier Short Sale REALTOR. Find out more at www.NYShortSaleTeam.com