The Ultimate Guide on Real Estate Short Sale Process in the State of Florida 2021
Even though the information on this web page is provided by a qualified industry expert, it should not be considered as legal, tax, financial or investment advice. Since every individual’s situation is unique, a qualified professional should be consulted before making financial decisions.
This guide will help you learn everything a homeowner needs to know about the short sale process in Florida. I will go over:
- What a short sale is and how it works for the Florida’s home sellers
- Comparison of the consequences of a short sale vs. bankruptcy, deed in lieu, and foreclosure
- When you can buy a house after a shot sale in Florida
- Pros and cons of a short sale
- Each step of a short sale process for the seller
- If there is a deficiency judgement after a short sale in Florida and whether the deficiency balance is taxable
Being a founder of a professional short sale processing company which processed over 2,000 short sale transactions for the last 18 years, I’ve been fortunate to help my own clients to successfully navigate through this unpleasant and quite complicated process. And now, I’m happy to share this information with you too.
Let’s start with an example of what a short sale actually is.
What Is a Short Sale in Florida?
Your first question might be “what actually is a short sale”? I am going to go through this with you very quickly. It’s very simple.
Basically, a short sale is a program that lenders — mortgage companies, banks — would have had around for over 20 years, and it’s designed to let people sell their property when the amount that they owe on the mortgage is more than what the realistic “As-Is” market value of their house is.
Short Sale Example
For example, let’s say you owe $200,000 on your mortgage that should have been paid off, but the comparable sales in the area are showing that your property, really, right now, is only worth about $150,000.
That means that if you had to factor in a $200,000 payoff and add on about 8% to that, which are commissions and closing costs, you would have to sell your property for $70,000 — $80,000 more than what other properties are selling for. Of course, no one is going to buy your house that way.
Before lenders started allowing people to do a short sale negotiation or sell their house through a short sale negotiation, there had been really no option. You were really going to lose your house, and that was it. So, actually this is a good thing the banks have done.
They will short sell the home, obviously, through a negotiated process, because this is something that doesn’t happen in 2 days. It can take anywhere between 2 to 6 months, if working with a short sale processing company. Maybe a little bit longer. In fact, working with a professional short sale processor simplifies a lot of things while also often being free of charge for the homeowner. If you want to learn more about short sale processing companies, I suggest that you also read the article What Does a Short Sale Processor Do for the Seller? also available on this website.
But what that means is that you can sell your house for what the property is worth, which is, say in this example, $150,000, and the bank will pay all of your closing costs. So, that means commissions for two realtors — your listing agent, and the buyer’s agent who brings a buyer — and the title company — all your title costs are covered.
So, you have zero out-of-pocket expenses, which is good. Let’s say the bank agrees, so you can sell the property for $150,000. You find a buyer and the negotiations take place. And then about 30 days before closing, you are going to get a short sale agreement letter.
This is the document that states the terms of what the bank is allowing to happen. It will state that they will only allow it to be sold to the buyer that has been approved, what the price is, etc.
And there will be clear language in the agreement that will state that any money left over will be forgiven or be written off and forgiven. So, that way you are not going to have any debt afterwards.
What Does a Short Sale Mean for the Seller in Florida?
Now, I wear three hats — I am an investor, I am also a mortgage broker, and I’m a licensed real estate agent. I can tell you, as someone who professionally looks at credit reports and deals with underwriters for people trying to get a mortgage to buy a property, that the easiest way to get out from under a bad credit situation is a short sale.
If people let the property go to auction, if they do a deed in lieu of foreclosure, or they try to do a bankruptcy, you are talking about 7 years before you can qualify for a government loan — which I mean FHA, Veterans Administration, VA, or USDA which is United States Department of Agriculture.
With anything having to do with a government backed loan, you are talking about 7 years minimum before you can qualify for a mortgage. But after a short sale, it’s only two years. So, it is by far the option that does less damage to your credit, and it gets you out from under a bad situation with no money out of your pocket. So, that’s what a short sale is.
This is basically what you need to know when considering a short sale. But if you want to learn about this in more detail, you can also read our other article How Long Does a Short Sale Stay on Your Credit Report and How Bad Does It Hurt It?.
How Does a Short Sale Work for the Seller in Florida?
There is very little difference between hiring a listing agent to have them sell your house and doing a short sale. Because your mortgage company is going to require the property to be listed. Whether working with a short sale specialist (short sale processor) or trying to do a short sale yourself, your lender requires you to hire a real estate agent.
You get a listing agreement and a 3rd party authorization form that allows the realtor and her negotiation team to be able to speak to the mortgage company about your mortgage. Because, obviously, without your written authorization the mortgage company is not allowed to discuss your mortgage with anyone else, for privacy laws.
So, the only difference between a traditional sale and a short sale for you, is that in a normal sale you would just sign a listing agreement to get started to sell your property. But in a short sale, you also have an additional document that states you authorize your realtor and their negotiation team to be able to speak to the mortgage company and do the negotiations.
Then you need to provide financial documentation. When you buy your property, you provide it to your mortgage broker to get a loan. In a short sale, it is kind of similar, but the only difference is that now you have to prove to the bank that you have a legitimate financial hardship which is causing you to ask them to allow you to sell the property at a discount, and a loss for them, so, they want you to still provide financial documents.
It is really pretty much the main thing that you are still going to show the property. And if you have a buyer who wants to buy your property and help you out, the banks have rules. The property still has to be shown, and the other offers still have to be presented.
Let’s take my company as an example. Our business is buying Florida short sale homes while processing short sales for free for homeowners. While we certainly hope, and we try our best to submit the best and the strongest offer to the bank, we don’t always win the contest.
But for our client, the most important thing is that we are going to make sure they get their property sold, no matter what. Even if we can’t buy it, we are going to make sure the short sale gets done for our client.
Once the contract is taken by the realtor, you wait. They are going to send their appraiser over, and they are going to establish a value and then at that point in time the real negotiation starts.
So, at that time you just wait and see what happens, but ultimately, at some point in time you are going to be issued an agreement letter and the agreement how to close.
The nice thing is that there is a chance that you can get some relocation money that has been sent up from the mortgage company. Usually, it is about $3,000 or $4,000. It depends on the bank, but with our own clients, we certainly fight for them to get that money as well.
What Is the Short Sale Process in Florida for the Seller?
Now, I want to give you a basic step-by-step overview of what happens in a short sale in Florida. We’ll discuss the short sale timeline, what is going to be required from you, what your short sale processor is going to do in your negotiations, and what the bank is going to do for the outcome that you want.
So here is how to do a short sale in Florida.
Step 1: Signing a 3rd Party Authorization form and Having the Agent List the Property for 14-20 Days
So, as we said in the previous video, you just sign the listing agreement and an authorization form to let your realtor be able to start the process. Now, the bank is requiring that the property be listed for at least 14 to 20 days before an offer can be accepted.
There is always some confusion about this, I just want to clarify this. They are not going to put a gun to your head and pull the trigger if you submit an offer before the 15 to 20 days passes, but they are not going to accept it.
Because they want to see that a good-faith effort was carried out by your listing agent and yourself to sell the property, to open up to as wide a pool of buyers as possible. So, you are going to have to show the property, even if you already have a buyer, like us, who wants to buy it.
Step 2: Accepting an Offer and Signing a Sales Contract
The buyer cannot sign a contract with you until your property has gone through that 14 to 20 day showing time. And sometimes it may be a little bit longer, it just depends, as every bank is different. So, at some point in time though, your buyer is going to be able to put a contract in, and the listing agent is going to look at any other offers that may have come in.
And then she is going to make a decision, obviously, consulting with you because this is your house, based on which the strongest offer is and which one is most likely to be accepted. After this showing period is over, you are going to sign a contract.
The contract is going to be conditioned on a third-party approval. In this case, the third party is your mortgage company, because they are the ones taking the loss, and they are the ones that have that big lien on your property. And so, nothing can happen to your property without your mortgage company agreeing to it.
So, this is going to be submitted, the contract will be submitted along with your financial documents that we talked about. And that is going to be two years taxes, 1040 form, two months bank statements, one month’s worth of pay stubs.
Step 3: Submitting a Financial Hardship Letter
The lender is going to want you to write a hardship letter describing why you are in the situation, why you are not able to continue making your payments and you are asking them to allow you to sell the property for less than the full payoff of the mortgage.
And just some other documents, like a permission to go to the IRS and double check to make sure your tax returns are accurate, and some addendums that usually have to be signed. And then, though every bank has their own form, they all want you to put on paper how much money is coming into your household, where it is going, how much is left, if any, at the end, and so on and so forth.
So, they want to get an idea that these documents and these financial worksheets prove that you have a legitimate natural hardship as to why you cannot pay your mortgage.
Step 4: Appraisal or BPO
At that time, everything is submitted to the mortgage company, and it will take anywhere between a few days to a few weeks. But the mortgage company is going to assign a negotiator, and at that time the negotiator is going to get your package, look through everything, and then he or she is going to order either what they call a broker’s price opinion, BPO, or an appraisal.
The only difference is that a BPO is conducted by a realtor, a licensed real estate agent, and it costs less to the bank. Your agent will come into the property, stay maybe 5-10 minutes, take pictures of the property.
And here she will look at the comparative sales in the area for houses with the same square footage and the same attributes as your house. They will come back to the bank and say: “according to this survey of the property and the comps and so forth, we think the “As-is” value of the house is X amount of money”.
An appraiser will do the same thing but it’s much more in-depth. And they charge more to the bank so sometimes the banks will just do a BPO. Sometimes they will just do an appraisal, and a lot of times, lately, we are seeing they are doing both.
So, you may have one or two people coming into your house to do their evaluation, and then it gets sent to the lender. And anywhere between a week to a couple of weeks or so that value will be given to the bank and your negotiator will have the value.
Step 5: Negotiating or Accepting the Offer
At that point in time, the lender is going to look at the offer, the contract you have with your buyer, and it can go one of three ways.
- If it comes in high and they are going to say “we are going to reject the offer” (unless they are going to counter backward at the bank’s price).
- They do discount. Let’s say for example, you need a new roof or you have got some plumbing issues or something with the house that the repairs need to be taken into consideration. So they will give you a discount. But, let’s say, maybe your buyer’s contract is maybe $10,000 or $15,000 or $20,000 below what the bank is countered back at. We call that kind of a “halfway pregnant scenario” where they did give a discount but not enough to meet your buyers amount.
- And then finally, the best-case scenario is that the appraiser comes in and establishes the value right in line with your contract. And if that happens, you are golden, you know, it works, and they will start the process to get that approved.
If the first two scenarios happen, then your realtor is going to do what they call a Value Dispute where your negotiating team is going to go in and try to find every single reason that can be justified as to why the bank should take your contract offer as opposed to the offer that they came back in.
Now you are looking at more estimates. Some contractor estimates about repair values, that is going to be studying the comparable sales that the appraiser or the BPO agent used trying to find a lower comp to justify the lower offer.
This can take anywhere from 2 to 3 weeks to close to a month. But if you are working with a professional short sale processor, they are going to go through and fight for what they can do to make sure that the contract is going to be accepted by the bank.
If it is an FHA mortgage, once you reach the point where the bank has said “we are not going to go any lower”, there is still opportunity, what they call “variance”, and you can still get it to come down anywhere between 88% — 84% off of the appraised value that came in. So, there is a leeway there.
So, the worst case scenario is if the buyer will not go up past a certain point, and the lender won’t come down past a certain point, and there is a gap, then your buyer is going to cancel the contract, and then your realtor is going to put it back on the market at a bank approved price.
So, that way any buyers coming to look at the property in the future are going to know that this has already been evaluated and this is the price. Now, that’s okay, that is good because for a lot of buyers that’s attractive because they know that the process is going to go more quickly.
If they come in with a contract with a bank approved price, it is going to get approved quickly, and they like that. They don’t have to wait months to go to the short sale process. So, lots of times you will see buyers waiting until a bank approved short sale comes on the market and they will make an offer on that.
Whereas, at the beginning they are going to hold off because they don’t want to go through the process of putting escrow money into the title company and then waiting for a couple months or whatever as the bank sets a short sale up and does the appraisal and so on and so forth.
Step 6: Underwriting
Once you have a contract and it is at the bank’s price, then it is submitted to the bank and it goes through underwriting, much like you do when you apply for a mortgage when you bought the house.
Step 7: Issuing a Short Sale Agreement
The bank will come back and issue a short sale agreement. And then we will have the terms that will state, like I have mentioned in a previous video, that the buyer is authorized to buy it at the authorized price, it has to close within 30 days.
And they will have specific language in there to state that you are not going to owe any money on it. Any money that is not paid off in full will be written off and forgiven.
Step 8: Closing
Once you have that and you set a closing date, all that has to happen at that point is your title company or our realtor will send in the proposed HUD Settlement Statement with all the costs involved in the transaction, realtor commission, title company charges, so on and so so forth.
And then they will set up a clear closing, and you have a normal closing. And that’s it, and that’s how it works.
Advantages of a Short Sale in Florida
As a licensed mortgage broker, knowing what underwriters want, what they look for, I can tell you that the hit that you take on your credit is much less in a short sale than it is if you let the property go to a foreclosure auction or if it goes to a deed in lieu of foreclosure, if you decide to go that route.
What is worse is what I call the double poison pill. This is when people decide to declare a Chapter 7 bankruptcy because of their debt, and they also end up having a foreclosure on their record, which is just a double whammy that no one needs to go through.
1. Lighter Negative Consequences for the Credit Score
So, talking particularly about credit score, by far, it is the softest landing that you can have on your credit. This is the advantage number one.
2. Shorter Waiting Period Before Buying a House After a Short Sale in Florida
The second advantage for doing a short sale is that the time necessary to qualify for a mortgage is only two years. If you file bankruptcy, if the property goes to foreclosure auction, or if you do a deed in lieu of foreclosure, then the minimum time that you have to wait until you qualify for a conventional or a government loan is 7 years. For a short sale, it’s only 2. So, those are two big issues right there.
3. No Out-of-Pocket Expenses and Closing Costs
Another pro about this, as I mentioned before in a previous video, is that you don’t have any out-of-pocket expenses. That is an important point because when you sell a property, as the seller, you have to pay the real estate commissions, which is 6% — 3% for your listing agent and 3% for, actually, your buyer’s agent who brings a buyer.
And then you also have approximately 2% worth of closing costs. In a short sale, the bank pays for all that so you don’t have to worry about that.
4. Relocation Assistance
And the last one, if you are still in your property and you haven’t moved out, there is a very good chance that you are going to get a relocation incentive from the mortgage company. It is not a lot, you know, usually $3,000. I have seen as high as $5,000.
I mean, previously, years back, they were offering $5,000 to $10,000 but those days are over. I would say $3,000 is probably the ceiling right now that you are going to get from the bank, and that’s really only if you are still occupying the property.
Those are really the main pros of doing a short sale. In fact, I don’t know of any better way to get out from under a bad situation like you have with your house. So, I think if you just look at these pros and cons, you are going to see that there is nothing better than doing a short sale, nothing.
Short Sale vs. Foreclosure
I often get questions from homeowners about what is the difference between a Short Sale and a Foreclosure, and, you know, it is completely apples and oranges. They are completely different things.
The foreclosure is when the mortgage company decides to hire an attorney and file a lawsuit against you because you haven’t paid your mortgage for over 90 days. The reason why they do that is they want to have the court give a judgement to the mortgage company and to conduct an auction where either the bank itself or an investor will buy it at the courthouse steps.
At that point in time you would lose ownership of the property and the court would give a certificate of title to the new owner. About 90% of the time that is the bank, because usually the bank doesn’t want an investor to get a great deal and have them losing money.
What generally happens is the bank will buy it and then, obviously, you will have to vacate. Then they would put the property up for sale as a “real estate owned property” or a “bank-owned property”.
And then they would try to liquidate the property and get a portion of their assets or their collateral back. So, the foreclosure is a legal procedure in the court to force a foreclosure auction for the courthouse steps.
A short sale is a negotiated settlement with your mortgage company, so they are two different things. The short sale is where your listing agent and a negotiation team will negotiate to try to get the bank to allow the property sold for less than a full payoff of the mortgage that is owed right now.
Again, you owe $200,000, it’s worth $150,000. The offer is $150,000 and the bank accepts it. They pay your closing costs. The outstanding $50,000 is not covered in the sale. The bank writes it off and forgives it and you don’t have any debt anymore. That’s the difference between a Short Sale and a foreclosure.
Deficiency Judgement and Tax Implications of a Short Sale in Florida
Florida law doesn’t forbid for lenders to issue a deficiency judgement after a short sale, which means going after the seller to have them pay the difference between the sale price of the home and the amount owed. So it’s important that your short sale processing company arranges a written agreement with your lender stating that they are forgiving the deficiency amount.
However, the forgiven amount is taxable. There is a very common concern that comes up with my clients, who often say “well, I am going to get a 1099-C form and I don’t know if I want to do that or not…” So I am going to give you the whole scoop of tax consequences of a short sale in a short and concise answer here (for a long answer, you can read the article How Does a Short Sale Affect My Taxes? also available on this website).
Whenever a part of a mortgage balance is not paid in full and it is forgiven by a lender, then the homeowner is given a 1099-C form that states that the mortgage amount was forgiven.
According to IRS regulations, right now it is considered a taxable event, which means that if you have made, for example, $50,000 income during the year, you are considered to have actually made, for example, $70,000 that year, because of the forgiven debt. Even though you didn’t make any money on your pocket, that’s considered income.
Now, the commonest perception people have about short sales and 1099-C is they think they are not going to get 1099-C in other ways. For example, if they say “well if I do a deed-in-lieu of foreclosure then I won’t have a 1099”. That’s not true: you will get a 1099-C. The bank will issue it to you because the bank is taking it back for what they consider it’s worth.
And whatever is left over above and beyond the property’s worth is considered mortgage income that is forgiven. Therefore, you will get a 1099-C even after a deed in lieu of foreclosure.
Let’s say you decide to let it go to foreclosure auction and an investor buys it at the foreclosure auction, not for full price. Let’s say there is still $50,000 left over. Then you will get a 1099 for that, and it will be forgiven and it will be considered a taxable event for you.
Let’s say the bank buys it at the foreclosure auction. They pay $100, they get hold of the property, and what do they do? They put it up for sale with a realtor. It will be listed. Some people will look at it. Eventually, when someone buys it at that price, they will take that price and compare how much is owed to what it sells for. The difference will be considered income, you will get a 1099-C for that too. My point is that a 1099-C is unavoidable. You are going to get it no matter what.
I am not a certified public accountant. I make no claims to be. I cannot offer tax advice. All I can do is quote my CPA who advises my clients, for free as a service to me, and here is what he said.
When you are taking a big loss in a tax calendar year when that property closes, then he advises any tax preparers to file an addendum to the tax return that you suffered more loss than you had income that year, and therefore that should not be considered a taxable event.
I have not one time had any of my clients ever owe taxes on a short sale they have done through me. But again, you need to talk to a tax advisor for that to make sure that you are comfortable with that and that you know what your rights and ramifications are for any decisions you may have to do with your financial situation.
A good comparison of the aforementioned outcomes is made in the article Short Sale vs Foreclosure vs Deed in Lieu: Difference, Pros and Cons. But in this section I’ve already summarized everything you need to know about how they compare to each other: a short sale is simply the best possible solution overall.
How to Get Free Professional Help with Processing a Short Sale in Florida?
As mentioned above, you can turn to a short sale processing company who will help you complete the whole process from the beginning to the end. Some short sale processors offer this service to sellers for free, as they get compensated by the end buyer.
So, for homeowners trying to short sell their property, it’s a great opportunity to avoid having their home foreclosed on right during the short sale. Yes, this also happens — when a short sale is being processed incorrectly by an incompetent realtor or the homeowner.
My company is one of the Florida short sale processors that offer free short sale processing help to homeowners. After more than 18 years in the business, we have set up processes that allow us to complete short sales in the quickest and most convenient way for our clients because:
- our tax attorney consults our clients for free to help them avoid or minimize the due on the taxable deficiency amount.
- we have already established relationships with most Florida lenders. They know our team members by their names.
- we buy short sale homes ourselves. This prevents the short sale from failure or delay because of the lack of an interested buyer. And even if someone submits a better offer than ours, we will still process your short sale to the completion, at no cost to you.
- over almost two decades, we have automated our communication processes. One of the biggest problems in processing short sales is getting a hold of the bank after submitting every document. For us, it’s a routine — we know when and how to follow up to get everything done in the shortest possible time.
If after reading my article you have already decided that you want to talk to a professional short sale processor, or you just have any questions, fill out this form, and I will get back to you.