Short Sales
I work short sales, list short sales, I sell short sales, and most importantly; I KNOW SHORT SALES

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 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.

This Process may be difficult to believe but it is a definite possibility. As stated below there are hoops to jump through. Banks are willing to allow individuals to assume the loan if they meet the required criteria. This is a system that works because the banks do not want to hold property for one but they also do not want to pay a fee (at times up to $25,000) in order to send the property through the foreclosure process.

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 eat the loss. Banks will not look favorably upon a borrower that they determine lied to get the loan.

Second, will approving the short sale leaves the bank in relatively the same position as they are likely to be in by going though the foreclosure process and then selling the property? 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.

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 so they may take a deep discount to get something out of the property.

Short sale sellers need to be careful because there is no free lunch. The seller may end up with taxable income in the amount of the debt that is forgiven. The seller may also end up with adverse entries in their credit history. Any property owner considering a short sale needs to seek the advice of competent legal and tax advisers before entering into the transaction.

I would advise anyone facing foreclosure to discuss their situation with an experienced Realtor. Short Sales are not a part of real estate basic training but there are a number of educational seminars a Realtor can take to get up to speed. Lenders will pay a reasonable selling commission so Realtors have an incentive to get involved in Short Sale situations. The basic requirements for a Short Sale are a Listing Agreement with a Realtor and a Sales Contract from a Buyer which 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, the mortgage holder can be anywhere and certainly not 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. Your Realtor can meet with the Agent doing the BPO and offer information supporting the offer, such as the average time on market of comparable homes, recent selling prices and point out any defects in the home. Most Lenders will accept an offer lower than the BPO, but usually not much more than 10% lower, though that will vary depending on the company. The sales contract should specifically state that the offer is contingent on the Lender accepting the purchase price in full and forgiving the Seller the deficiency on the mortgage. Yes, there can be tax consequences. The Seller does receive a 1099 on the forgiven part of the mortgage, but there are provisions in the tax code for the offset of the phantom income due to insolvency. Most Short Sellers will satisfy the insolvency requirements or the Lender would not be allowing the Short Sale in the first place. Be aware too that if the home goes to foreclosure, a 1099 is received for the FULL amount of the mortgage, plus late fees, legal fees etc. Obviously every individual situation is different so a CPA or tax attorney should be consulted.

The process does all take time and Lenders are swamped, expect at least 2-3 months before a sale can be finalized, even if the Lender accepts the first offer. If they do not, the price can be negotiated.