In real estate, a Short Sale refers to the sale of a property in which the sale price is insufficient to pay off all encumbrances and pay the expenses of the sale. If the Lender is convinced that the owner (for various reasons) is unable to continue making the payments, the Lender will often agree to take less than the full
amount owed to allow the sale to close escrow. The incentive for the Bank to approve a Short Sale is to have the property sell before the loan becomes a problem account on their books.

Before a Lender approves a Short Sale they will make two key decisions. First, can the owner afford to continue making the payments on the property? If they can there is no reason for the Bank to take the loss. In this case, the Bank may be willing to proceed with a Short Sale, but will most likely ask the borrower to
sign an unsecured note for the difference or the loss. Second, the bank will determine if a Short Sale is cost effective or if it will leave the Bank in relatively the same position. If the Bank can do significantly better by foreclosing, they are likely to do so.

The Seller must not receive any sale proceeds for themselves. In most cases, there is no out of pocket expense for a Seller to execute a Short Sale.

If there is a junior lien holder, the discounts can be substantial (sometimes as high as 90% or more). Question two is the primary determinant here. If the senior Lender forecloses, the junior may get nothing. As a result, they may take a deep discount to get something out of the property.

Short Sale Sellers need to be careful and understand the income tax implications. The Seller may end up with taxable income equal to the amount of debt that is forgiven which is commonly referred to as “Phantom Income”. Recently, the Mortgage Cancelation Relief Act of 2007 was passed by President George W. Bush. The Act was designed to waive this “Phantom Income” for the years 2007, 2008 and 2009. The Federal Government has since extended this waiver through the year 2012. Anyone considering a Short Sale or foreclosure must seek the advice of competent legal and tax advisers before entering into the transaction or letting your home go to foreclosure. Be aware that if the home goes to foreclosure, a 1099 is issued for the FULL amount of the mortgage, plus late fees, legal fees, etc. Every individual situation is different so a CPA or Tax Attorney should be consulted. The Seller may also end up with adverse entries on their credit in either situation.

Short Sales are not a part of real estate basic training. An experienced Realtor is required to handle the complex transaction. A Realtor must list the home, market the home, negotiate with the Lender, negotiate with the Buyers and successfully close the sale. Lenders will pay a reasonable selling commission so Realtors have an incentive to get involved in Short Sale situations. The price, terms, closing costs and Broker commissions are always subject to Lender approval. The Realtor will ask for a full commission, but in almost every case the total commission will be between 2-5% total.

The basic requirements for a Short Sale are a Listing Agreement with a Realtor and a Sales Contract from a Buyer. These documents are submitted to the Lender along with a Hardship Letter from the Seller explaining why they cannot continue to pay the mortgage and supporting documents (such as tax returns, bank statements, information and photos of the home and the Comps, or comparative home prices supporting the offer). The way mortgages are sold is that the mortgage holder can be located anywhere in the world and not be aware of local real estate conditions. If the package is complete, the Lender will order a BPO, or Broker's Price Opinion, from an independent Realtor. This BPO is the key to the whole process. If it is too high, the Lender will not accept a low offer. Sometimes your Realtor can meet with the Agent doing the BPO and offer information to support the offer (such as the average time on market of comparable homes, recent selling prices or the ability to point out any defects in the home). The sales contract should specifically state that the offer is contingent on the Lender accepting the purchase price in full and forgiving the Seller deficiency on the mortgage. The benefit of a Short Sale is that when Lenders agree to allow a Short Sale and the transaction is completed, all mortgages owed against the property are settled. If the property is let go to foreclosure, some debt may still follow the borrower (even after the foreclosure sale).

This process does take time and Lenders are overloaded. 2-3 months is very common for a Lender to respond to an offer on the property. Lenders do, however, have the ability to delay the foreclosure sale if there is an acceptable offer on the table.

The Short Sale is a detailed but fairly straightforward process that can work to benefit the Buyer, Seller and even the Lender. The Buyer gets a good price on a home, the Seller gets to avoid the disruption and credit hit of a foreclosure and the Lender avoids the delay and expense of foreclosing on a property they don't want to own and that would negatively impact their ability to make more loans.

If you are considering a short sale, please download and print my Short Sale Packet. After review the packet, call my office for a confidential appointment.