KW Default Solutions
Last updated
For agents with a seller who's behind on payments: how to estimate what a sale would leave after selling costs and the loan payoff, in four steps.
Here's a situation you'll run into. A seller tells you the house is worth $300,000 and they owe $290,000. On paper, that looks like $10,000 in equity.
That $10,000 isn't money the seller can count on. Selling costs come out first. And the payoff the lender asks for can be different from the balance on the mortgage statement. Until you check both, you don't know if the sale leaves money or comes up short.
Being behind on payments doesn't answer that question. A seller can miss payments and still have equity. Another can be current and still not have enough to pay off the mortgage.
Your job is to get an honest estimate of what a sale would leave, and to be upfront about what you haven't checked yet.
In this article:
- The difference between equity and what the seller gets at closing
- The four numbers to check, in order
- A made-up example, tested at three sale prices
- How to mark each number as confirmed, estimated or unknown
01Equity versus what the seller gets at closing
Equity is generally the home's value minus the debt against it. What the seller gets at closing is smaller. Selling costs and anything else that must be paid at closing come out too. Estimated seller proceeds is the money left after all of that.
A net sheet is a worksheet that shows the money coming in and going out at closing. It's an estimate, not a promise of what the seller will get. The title or closing company still does the final numbers.
Start by asking the seller what they want. If they want to keep the home, they need to talk with their servicer and the right advisers. A servicer is the company that collects the mortgage payments and handles the loan. Running the numbers shouldn't quietly turn into a decision to list.
02The four numbers to check, in order
1. The sale price
Look at recent local sales, homes for sale now and the home's real condition. An online estimate is a starting point. It can't tell you what a buyer will pay for this house as it is today.
A fixed-up home and the same home needing major work can sell for different prices. Don't use the fixed-up price and then forget the repair cost. If you don't have many good sales to compare, use a price range instead of one exact number.
2. The mortgage payoff
The mortgage statement shows the unpaid balance. A payoff is the amount needed to pay the loan off on a set date, and it can include interest and other charges. 1
If the statement balance is all you have, use it as an early estimate and mark it that way. Then decide who will request the real payoff. Check it against the planned closing date.
Include every loan on the house, including a home equity line of credit (HELOC).
Watch for one mix-up. A reinstatement quote is the amount needed to catch the loan up, not pay it off. Don't add it on top of the payoff until you know what the payoff already includes.
3. Other liens and claims
A lien is a legal claim against the home that secures a debt. Ask the title company or closing attorney to check early for other mortgages, unpaid taxes and amounts owed to a homeowners association (HOA). They should also look for other recorded claims, like court judgments, city charges or an old loan that was never released.
A release is the paperwork that clears a lien from the title once it's paid.
Three questions belong to the title company and an attorney, not to you. Is the lien valid? Where does it rank? What does it take to release it? Where a lien ranks is called lien priority. It decides which claim gets paid first.
And if the seller says "there's only one mortgage," that doesn't prove the title is clear.
4. Selling costs
List each cost on its own line. Your list may include:
- Broker fees the seller agreed to
- Title or escrow charges
- Attorney fees, where they apply
- Transfer taxes or charges
- Prorations
- Buyer credits the seller agreed to
A proration splits a cost between buyer and seller based on the closing date. A buyer credit is money the seller agrees to put toward the buyer's costs.
These amounts depend on the location, the agreements and the sale. Don't treat a number from a practice example as a standard rate.
If the home needs repairs, there are three ways to handle it: fix it before closing, give the buyer a credit or lower the price. Treat these as separate options. Don't subtract all three for the same problem.
03Example: $10,000 in equity on paper, $8,000 short at closing
Every number below is made up for teaching. The $18,000 for selling costs isn't a typical fee or a recommendation.
Equity on paper vs. money at closing (made-up numbers)
| Step | Made-up amount |
|---|---|
| Estimated sale price | $300,000 |
| Minus estimated selling costs | $18,000 |
| Left to pay the mortgage | $282,000 |
| Minus estimated mortgage payoff | $290,000 |
| Shortage (estimate) | $8,000 |
The $10,000 gap between price and payoff didn't cover $18,000 in selling costs. With these numbers, the sale comes up $8,000 short. That's before any other liens or money from the seller.
That doesn't make it an approved short sale. It means there's a gap worth checking. A short sale happens when a home sells for less than the mortgage payoff and the lender agrees to take less so the sale can close. That agreement comes from the lender, not from your worksheet. 2
04Change one number and the answer changes
Keep the $300,000 sale price and $18,000 in costs, but say the payoff is $260,000. Now there's $282,000 to pay a $260,000 payoff. That leaves an estimated $22,000. If a confirmed lien needs $10,000, an estimated $12,000 is left.
The missed payments still need attention. But these numbers don't show a need for the lender to take less.
Now go back to the first house and test three sale prices. To keep it simple, the $18,000 in costs and the $290,000 payoff stay the same. In real life, some costs change with the price or the closing date.
| Sale price | After $18,000 in costs | After the $290,000 payoff |
|---|---|---|
| $285,000 | $267,000 | $23,000 short |
| $300,000 | $282,000 | $8,000 short |
| $315,000 | $297,000 | $7,000 left |
The house doesn't have one guaranteed result. Picking $315,000 because it makes the numbers work won't get a buyer to pay it. That's why you start with what the market shows.
05Mark every number: confirmed, estimated or unknown
For each number on your worksheet, write down where it came from. If it's still open, note the date and who is getting the answer.
| Number | Where it comes from | What's still open |
|---|---|---|
| Sale price | Your review of recent sales | Confirm the condition and test a realistic price range |
| First mortgage payoff | A dated payoff quote, or an estimate marked as one | Confirm it's good for the planned closing date |
| Other loans or liens | The title search and written payoff demands | Fill in missing amounts and sort out releases |
| Selling costs | Signed agreements and closing estimates | Update when terms or dates change |
| Seller's own money, if any | Where it's coming from | Confirm it's really there and that the deal allows it |
A payoff demand is the written amount a lender, HOA or other lienholder says it needs paid at closing.
Unknown isn't zero. If the HOA hasn't sent its demand yet, don't enter $0. That makes the worksheet look more complete than it is. Write "not confirmed" instead.
06What the worksheet can't tell you
This worksheet shows whether the sale money looks like enough, based on your numbers. It can't tell you whether the lender will take less, whether the seller will still owe money afterward or how taxes will work. Those questions need the right professional.
A deficiency is the unpaid amount left after the sale. How it's handled depends on state law and the loan documents. If the lender agrees to forgive it, the CFPB says to get that in writing. 2
So if the sale is $8,000 short, that doesn't mean the seller will be released from that $8,000.
Don't assume the seller can bring money to closing to cover a gap, or that they should. That depends on the real numbers and the deal, so check with your broker and the closing team first.
And a good-looking worksheet doesn't mean there's time to finish the sale. A foreclosure date, a contract deadline or a title problem needs its own plan.
07What to say to the seller when you don't have all the numbers
Here's how you might say it to the seller:
If the numbers look positive, don't promise the seller a check for that exact amount. It's fine to say "we don't know yet." Just say what you're waiting on and who's getting it.
08Checklist: before you call it a short sale
Before you tell the seller what kind of sale this is, make sure your worksheet has:
- A sale price or range backed by recent sales, the home's current condition and any limits on showing it
- Current payoffs, or estimates clearly marked as estimates
- Other liens and closing costs, with unknowns marked
- Selling costs listed one by one, based on this sale
- A check that nothing is counted twice
- The seller's own money shown separately and confirmed, if it's part of the plan
- Where each open number came from, the date and who is getting the answer
For practice, pick a past or made-up file and work through the numbers in this order. Explain what the estimate shows and what it can't tell you before you suggest a next step.
If you're working a file like this and want a second set of eyes on the numbers, reach out to the KWDS team.
Sources
- What is a payoff amount and is it the same as my current balance? Consumer Financial Protection Bureau (CFPB)
- What is a short sale? Consumer Financial Protection Bureau (CFPB)
This article is general education for real estate professionals. It isn't legal, tax or accounting advice, and rules vary by state, loan type and situation. All figures and examples are fictional.