Upside to Short Sales

• Seller and lender get the property sold without a foreclosure.
• Buyer may be able to buy the property below market value. This has been the primary reason buyers have been interested in dealing with a short sale. They have a chance to be an incredible deal on a property.

Downside to Short Sales

• Bank may not approve sale. It is not uncommon for buyers and sellers to wait 2 to 6 weeks for lender approval only to find out the lender will not approve the sale or places conditions on the sale that the buyer is not willing to accept.
• Bank usually takes 2 to 6 weeks to respond to buyers offer.
• Bank may bump one buyer out for a better offer.
• Property is sold as is with not repairs or guarantees.
• Seller may end up owing federal income taxes on the amount forgiven by the lender.

With the increase in foreclosures lately you may have heard the term “short sale” and wondered what it was. A short sale is when the lender will accept less than the full amount due on a mortgage when a property is sold. Usually, the lender will accept the short sale to avoid the time and expense of a foreclosure.

When a borrower is in default on a mortgage they not only owe the back payments but also may owe late fees, property inspection fees, attorney fees, etc. This can add up quickly to eat up all the equity the borrower had in the property. If the borrower is unable to bring the account current the lender will then foreclose on the property. With a foreclosure, the lender can lose up to 40% of the mortgage amount because of the extra costs involved with foreclosing on a property: attorney fees, court costs, lost interest, eviction costs, property maintenance costs, and selling costs. Foreclosing on a property can also take up to two years in some states. Therefore, it is sometimes in the best interest of the lender to accept the short sale.

It also can be in the best interest of the borrower. They will not have to endure the time and stress of a foreclosure and their credit may not be as adversely affected as it would with a foreclosure. It is quicker and easier and does not subject the borrower to the embarrassment of a foreclosure.

How does it work?

The first thing the borrower should do when they can no longer afford a property is to contact the lender immediately. The last thing a lender wants to do is foreclose on the property. Lenders typically have departments that work with people who are behind on their payments to resolve the situation. If you cannot resolve the default with the lender, and you want to see if they will accept a short sale, they will direct you to the department that handles short sales.

The lender will usually require the borrower to submit a lot of information to the lender in order to consider the short sale. The information required may include:

• Income documentation such as W-2s and pay check stubs to verify the borrowers’ income.
  
• Bank statements to verify the borrowers’ assets
  
• Hardship letter – this letter will describe for the lender the reasons the borrowers are in the financial position they are in and will ask the lender to accept the short sale. Borrowers should make this letter sound as sad as possible and back up the story with any documentation you may have such as medical bills, etc.
  
• Fair market value for the property – depending on the lender they may require an appraisal or may accept an opinion from a local Realtor know as a Comparative Market Analysis (CMA).
  
• Preliminary proceeds sheet from the sale of the property. This will show the proceeds of the sale of the property after the mortgage is paid off and all other closing costs and fees are paid. This will be negative in the case of the short sale and this negative amount is the amount of the shortage.
  
• Listing agreement and purchase agreement when they are available.
  

1. As a general rule, short sales are sold "as is."  This means that if
   a home inspection or final walk through inspections produce issues that
   need to be corrected, it is unlikely that the seller will be willing and/or able to pay
   for correcting those issues.  And, unlike most traditional sales, there
   is no proceeds for the seller once the transaction is closed, so they
   can’t pay for repairs from proceeds.
2. Secondly, they usually can’t or won’t help with closing costs
   for the buyer.  That is a big one in this market.  As a rule in the
   current Fredericksburg real estate market, an aggressive buyer agent is
   able to negotiate the seller paying the closing costs for the buyer in
   the majority of traditional/non short sale listings.
3. Thirdly, the process will likely be much longer than a
   traditional purchase, and loaded with other potential issues.  When you
   look for homes and buy a traditional listing, you can
   expect to settle the transaction and move into your new home in 30 days or less.  With a short sale,
   that same process can take 60 or 90 days or longer, with potential deal killing pitfalls all along the way.

In summary on this topic, a short sale MAY represent a good value
for a buyer… but make sure you and your buyer’s agent are fully
knowledgeable on how to protect your money and interests in this type
of transaction.

Short Sale Links and resources

• http://www.realestateabc.com/homeguide/short-sale.htm If you're a prospective buyer on such a property, beware!
• Short Sales in Real Estate - How to Handle Real Estate Short Sales at http://homebuying.about.com/od/4closureshortsales/a/shortsalebasics.htm
• Sellers beware of the short sale. You may owe taxes: at Foreclosure and Short Sale Taxes - Home Sellers Might Owe the IRS
• 2007. HR 3648 has been signed into law. It is the tax relief bill that may give some individuals who had to sell their home in a short sale, the relief of not being taxed on the deficient amount of their loan payoff. You must know what this Mortgage Debt Relief Act really means. It is NOT the cure-all and it is not even an option for all.  It does not encompass all “mortgage debt,” so be careful.  Take very careful note as to who this Act will help, and/or who it will not.   If you have refinanced your mortgage, have a second, a third or if this is an investment property - you likely do not fall under the protection of this act at all.
  • http://www.house.gov/jct/x-86-07.pdf 
    & http://www.shortsalefundamentals.com/blog/wp-content/uploads/2007/12/hr3648.pdf
  • http://keeperteam.com/?p=62 The newly-enacted relief for mortgage debt forgiveness is Congress’s response tot he problems generated by the subprime crisis, short sales, rising foreclosure rates and price corrections in some markets. Thus, when a lender forgives some portion of a borrower’s mortgage debt in a short sale, a foreclosure, a workout with the lender or some similar circumstance, the borrower will not be required to recognize income or pay tax on the forgiven amount. This relief applies to debts forgiven between January 1, 2007 and December 31, 2009.