Short Sales Explained
Foreclosure on a home has many consequences. A single foreclosure will not only affect the homeowner’s family but also the community, the housing market, and the overall economy. In fact, a single foreclosure in your neighborhood can bring down the value of the surrounding homes by over 10 to 15%. Imagine what more than one foreclosure in a neighborhood could do to the values.
Let’s face it; foreclosures are just bad…However, the option of a short sale provides a solution to troubled homeowners that will prevent a foreclosure and help reduce many of the dire penalties associated with foreclosure
A short sale can be an excellent solution for homeowners who need to sell, and who owe more against their homes than they are worth. In the past, it was rare for a bank or lender to accept a short sale. Today, however, due to overwhelming market changes, banks and lenders have become much more negotiable when it comes to these transactions. Recent changes in corporate policy and the Obama administration have also improved the chances of getting a short sale approved.
What is a "short sale" exactly?
In essence, a short sale is a real estate sales transaction subject to a lien holder's approval in which the lien holder (or lender) consents to the sale of the subject property (the lien holder's security interest) for less than what is owed to them. The lien holder will agree to accept the net sales proceeds in return for releasing their security interest in the subject property, thus allowing the sale to be completed.
Such sales transactions require much paperwork and preparation on behalf of the property owner, lengthy negotiations with the lien holder(s), and usually proof of an economic or financial hardship on the part of the borrower in order for the lien holder(s) to agree to discount their loan balances.
Here's a brief description, the "short of it" if you will:
- A homeowner is 'short' when the amount owed on his/her property is higher than current market value.
- A "short sale" occurs when a negotiation is entered into with the homeowner's mortgage company (or companies) to allow for the sale of the property in exchange for less than the full balance of the loan (a short payoff) at closing.
- Thus, a buyer closes on the property, and the property is then 'sold short' of the total value of the seller's existing mortgage(s) and clean title is transferred to the new owner.
Typically, before applying for a short sale, the seller must have a ready buyer and all the paper work prepared to present to the lender. The buyer of the property must also be prepared for a protracted time period to conclude the purchase of the property.
Can any underwater homeowner short sale their home?
A short sale typically is executed to prevent a home foreclosure. Often a bank will choose to allow a short sale if they believe that it will result in a smaller financial loss than foreclosing. For the homeowner, the advantages include avoidance of having a foreclosure on their credit history and the partial control of the monetary deficiency. Additionally, a short sale is typically faster and less expensive than a foreclosure.
Extenuating circumstances influence whether or not banks will discount a loan balance. These circumstances are usually related to the current real estate market climate and the individual borrower's financial situation. Homeowners contemplating a short sale should seek the assistance of a local Real Estate Agent experienced and knowledgeable in short sales.
For homeowners to qualify for a short sale, they must fall into any or all of the following circumstances:
- Financial Hardship – There is a situation causing you to have trouble affording your mortgage.
- Monthly Income Shortfall – In other words: "You have more month than money." A lender will want to see that you cannot afford, or soon will not be able to afford your mortgage.
- Insolvency – The lender will want to see that you do not have significant liquid assets that would allow you to pay down your mortgage.
Important points to consider prior to a "short sale"
Not all lenders will accept short sales or discounted payoffs, especially if it would make more financial sense to foreclose; moreover, not all sellers nor all properties qualify for short sales.
If you are considering a short sale, there could be additional drawbacks. As licensed real estate agents, and not licensed lawyers nor CPA’s, we cannot advise on such consequences. As such, you should be aware that the I.R.S. could consider debt forgiveness as income, and there is no guarantee that a lender who accepts a short sale will not legally pursue a borrower for the difference between the amount owed and the amount paid (in some states, this amount is known as a deficiency balance). A lawyer can determine whether your loan qualifies for a deficiency judgment or claim.
For your protection, we suggest that all borrowers considering a short sale:
- Obtain legal advice from a competent real estate lawyer
- Call a tax professional or certified public accountant to discuss short sale tax ramifications
- Contact a local certified HUD counselor to discuss options that you may not be aware of that could result in being able to keep your home
This seems simple enough, but it is a complicated process that takes the expertise of experienced professionals. I hold the CDPE® Designation and am ready to identify all possible options and, when possible, assist in the quick execution of a short sale transaction.
Remember, a short sale may sound like a lot of work but it can save you from foreclosure, stop or limit the possibility of being hounded relentlessly by your lender for any deficiencies, and will impact your credit less than a foreclosure or bankruptcy.
If you have questions or feel you may qualify for a short sale, please contact me for a free consultation.
Understanding your options now could mean all the difference in the world.