If you’re new to real estate terminology, you may be wondering, “What is a short sale in real estate?” A short sale is a process where the lender agrees to accept less than the amount owed on the mortgage when the property is sold. This typically occurs when a homeowner can no longer make the payments on a home, and real estate values have declined to where the market value is less than what is owed on the property. Short sales can be a complex transaction that takes months. Many lenders must also consult with insurers and investors before approving a short sale. Short sales must be approved by any junior lien holders as well. An experienced real estate professional is often needed to negotiate the sale with the bank. If you’re considering a short sale, you should also consult with your attorney and accountant before proceeding.
Finding a Real Estate Professional
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A short sale is a complicated process and not all real estate professionals are adept at handing them. While most real estate agents are capable of listing and marketing your home, carrying out a successful short sale depends on effectively negotiating with the bank on your behalf. You should work with someone who is experienced and has a strong track record for managing short sales successfully. It’s also crucial to interview several real estate agents to ensure that they communicate effectively and are someone with whom you have a good rapport.
The Short Sale Process
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A borrower must be experiencing financial hardship and be in default on their loan before the lender will consider a short sale. In addition, if you have filed for bankruptcy, you will not be eligible for a short sale. The first step in the process is to notify the lender of your hardship. It’s important to keep them informed, since once you default on the loan, they can begin the foreclosure process. Most lenders can be convinced to postpone the foreclosure process to allow time for short sale negotiations.
Lenders will not discuss any personal information without your consent. Therefore, if you have decided to have a real estate agent or attorney negotiate on your behalf, you will need to submit a letter of authorization. It should include the property address, loan number and the agent’s contact information. In addition, you must provide a hardship letter, detailing the circumstances of your financial difficulties such as job loss or illness. The lender will also require proof of income and assets including bank statements, stocks and bonds or other real estate.
Declining real estate values is usually one of the reasons a homeowner is unable to sell their home for enough to pay off their loan. If this is the case, the lender will request verification. Your real estate agent can provide a comparative market analysis (CMA) to confirm local real estate sales prices. Once a buyer is found, you must provide a copy of the listing agreement and purchase agreement to the lender. It is not unusual for the lender to renegotiate certain fees or refuse to pay for some items. If an agreement can be reached among all parties, the short sale will be approved.
The lender will provide a release which relinquishes their interest in the property and allows it to be sold for less than the amount owed. This does not satisfy the note. There is still a deficiency for which you are liable. In some cases, the lender may agree to accept a reduced amount to completely satisfy the debt. Similarly, it may be negotiated with a lender to refrain from reporting negatively to the credit reporting agencies; however, the lender is not obligated to agree to those terms.
Tax Liability to the Borrower
Until 2007, borrowers who received debt forgiveness from a lender in the course of a short sale were subject to tax consequences. The IRS required a 1099 to be issued for any debt forgiveness over $600.00. Therefore, borrowers were taxed on the unpaid balance of their mortgage as if it were income. In 2007, the Mortgage Debt Forgiveness Relief Act of 2007 was instituted. This allowed borrowers to exclude discharged mortgage debt from their primary residence from their income. It also enabled some investors to be classified as insolvent. Tax laws are updated frequently; therefore, you should always consult a tax professional.
Benefits to the Borrower
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A short sale benefits the borrower by allowing them to avoid foreclosure. A foreclosure can severely damage your credit. During the short sale process, you may be able to negotiate with the lender to avoid a negative credit rating. Even if the lender reports the short sale, it is much less damaging than a foreclosure. A short sale will remain on your credit report 3 to 5 years while a foreclosure is reported for 10. In addition, a short sale can prevent you from depleting your savings to pay mortgage payments you can’t afford.
Benefits to the Lender
A lender will usually recoup more of what is owed on a property through a short sale than if they foreclose on a property. A foreclosure is time consuming, and properties are often left to deteriorate during the process. In addition, a large number of foreclosed homes in inventory can be problematic for lenders. They are often a liability since many come with code violations, delinquent taxes and clouded titles. The lender will often find it more beneficial to write off the amount that is owed on the loan than to foreclose.
