Short Sales-What's it all about?

The real estate market is all "abuzz" about Short Sales. What exactly is this?

In these troubled real estate times with decreasing property values, an ever increasing supply of inventory, and the mortgage market problems, many sellers are faced with tough choices. They can't sell their house or make their mortgage payment and the value of their home has decreased to the point where they owe more than its worth. One answer may be using the Short Sale. This is a alternative method of disposing of your home or property without having the lender foreclose on you. It is an arrangement made with your lender where they will allow you to sell your property for less than the amount of the current mortgage, and (hopefully) forgive the difference.

A Short Sale should be considered only if the other final alternative is foreclosure. It can be a detailed, lengthy, but fairly straightforward process that can work to benefit all parties involved- Buyer, Seller, and even the Lender. The Buyer gets a good price on the property, the Seller gets to avoid foreclosure and the complete destruction of their credit, and the Lender avoids the delay and considerable expense of foreclosing a home they really don't want to own, plus impact their ability to make future loans.

Typically, it is easier to qualify for a short sale IF: the market value of your home has decreased to the point where you are "upside down"; in other words, if you owe more than the current value, AND you have suffered some type of hardship; for example a divorce, loss of a job, health issues, significant pay cuts, or loss of retirement benefits due to restructuring, AND you no longer have any significant assets to bail you out.

Not all lenders will allow a short sale. Their decision depends on a number of factors: location of the property, the loss involved to the Lender, the possibility that a speculator/investor will pay more at a foreclosure sale, a BPO (Broker's Price Opinion) and of course, the seller/owner's particular situation.

The first step is to determine if your situation will qualify as a short sale. You should contact your financial (CPA) and legal advisors first to determine the potential risks. Contact the Lender after you fully understand the risks involved, including potential mortgage fraud. Make absolutely certain that even if the Lender approves a short sale, you will not be obligated to make up the difference, which is called a deficiency.

There still may be tax consequences involved with the forgiven debt of a Short Sale. Under Federal law, when a debt is forgiven, it can be treated as ordinary income on which tax must be paid. You will get a 1099C at the end of the year from the lender for the deficiency. This is considered income even though you did not receive it. Currently they are trying to get this law changed to help relieve the costs involved for the overwhelming number of owners in this situation.

After you are satisfied that you understand the concept and the penalties involved, and are prepared to move forward, you, or your authorized agent, should contact your lender to determine if your Lender will agree to a short sale. Usually, the Mortgage Company has a Loss Remediation Department that handles these matters. Ask to speak directly with the manager of the short sale department. You will get way more accomplished starting at the top.

Once you determine that your hardship case applies and the bank is agreeable to allowing a short sale, the following steps should follow: 1. List your house on the Multiple Listing Service, preferably with a knowledgeable Realtor, 2. Negotiate a Sales Contract from a willing and able Buyer. The sales contract should specifically state that the offer is contingent upon the Lender accepting the purchase price in full and forgiving the Seller the deficiency on the mortgage. 3. Include these with a comprehensive package explaining why you are requesting the short sale and include your Hardship Letter explaining why you cannot continue to pay the mortgage. Also include any supporting documents such as tax returns, bank statements, that will help build your case. Finally, your packet should have information and photos of your property, and a list of comparable homes that have recently sold or are currently on the market. Your proposal should be as specific as possible. And emphasize the hardship. The more documentation you can provide the Lender, the faster the decision will be.

Make sure you go to Closing knowing exactly the terms and conditions on which your lender will accept the short sale, including whether or not you will have to come up with any money at the settlement table. It helps to provide the Lender with a detailed expense sheet or net sheet showing all costs involved, who is paying what, and what the bank will get in the end. It is extremely important that the bank is accepting this as a final settlement of the loan and this should be in writing.

Currently lenders are swamped with these requests, so this process can take up to 2-3 months. Thus, the earlier you can start the process, the better chance you have of getting it approved.

The short sale process works, but is complicated, time-consuming and uncertain. If you can start now -- before you are actually in default -- you will be ahead of the game. Hire a good attorney, a knowledgeable realtor, and consult your accountant to get the best advice to get out of a sticky situation and save your credit rating.

Please consider this as only a simple and condensed guideline on how Short Sales work. All banking institutions and Lenders have their own policies and procedures regarding Short Sales and it is in your best interest to seek qualified advice.

And finally, please, please, please, act as soon as you realize there is a problem. I would much rather help a homeowner avoid losing their home altogether by giving free advice on getting a loan modification from their Lender or some other alternative way other than taking a short sale listing!