Real Estate Short Sale
If you are considering a short sale, please download and print our Short Sale Packet. After you review the packet, contact us for a confidential appointment.
What is a short sale?
A short sale is the sale of a property whose price is insufficient to pay off all encumbrances of the sale. If the lender is convinced that the owner is unable to continue making payments, they’ll often agree to take less than the full amount owed to facilitate the close of escrow. Banks are incentivized to approve short sales in that they get the opportunity to avoid a problem account on their books.
Under what circumstances is a short sale approved?
Before a lender approves a short sale, two questions must be answered:
- Can the owner afford to continue making the payments on the property? If the answer is yes, 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.
- Can the bank do significantly better by foreclosing? If yes, they’re likely to go that route rather than approve the short sale.
Important short sale facts
- Short sale sellers cannot receive any sale proceeds for themselves. In most cases, sellers won’t incur any out-of-pocket expenses.
- If there’s a junior lien holder, the discounts can be substantial (sometimes as high as 90% or more). If the senior lender forecloses, the junior may get nothing. As a result, they make take a deep discount to get something out of the property.
- The process does take time and lenders are overloaded. 2-3 months is a very common time frame 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.
Phantom Income
Sellers must understand the income tax implications of a short sale. 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.” The mortgage cancellation relief act of 2007—passed by President George W. Bush—was designed to waive this phantom income for the years 2007, 2008 and 2009. The federal government has since extended this waiver through 2012. If a 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 in all cases involving foreclosures or short sales. Sellers may end up with adverse entries on their credit reports in either situation.
Where realtors come in
Short sales are not a part of real estate basic training—they’re complex transactions that call for the counsel of an experienced realtor, who will 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 commission will be between 2-5% total.
Basic short sale requirements
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, supporting documents such as tax returns and bank statements, along with information and photos of the home and comparative home prices supporting the offer.
BPOs
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 the market of comparable homes, recent selling prices or 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).
The short sale process is a detailed but fairly straight forward 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.
Office: 949.498.7711 |
If you are considering a short sale, please call my office for more information and a confidential appointment.
