Short Sale

What Is a SHORT SALE?

Short selling your home has emerged as something people may hear about but may not fully
understand.

Due to the downturn of the economy, many homeowners find themselves in a position where
they can’t keep up with the mortgage payments. Others find that their home has decreased in value so
dramatically that they now owe more on the current mortgage than the house is actually worth. A few
years ago, the only real options for a Seller in this predicament were to let the house go to foreclosure
or to allow the bank/lien holder to own back the house by signing over the deed (deed in lieu of
foreclosure). Times have certainly changed.

Short selling presents an option to homeowners who need to sell their house but who can’t
afford to do so conventionally and pay off the mortgage in full. Lien holders provide an option for the
homeowner to sell the property to an interested buyer and take back LESS than the amount currently
owed on the loan. The lien holder will agree to take this reduced amount (a short) as payment in full for
the outstanding mortgage. This allows the Seller to get out from under the obligation of the mortgage
and allows the lien holder to recapture as much as possible on the loan so they can relend the money.

Why would a bank, or lien holder, agree to this? The lien holders allow this option because the
costs and time associated with foreclosing on a home, are less desirable to the lien holder than allowing
the short sale and getting the money in hand to immediately re-lend. In this current climate, it can take
the lien holder almost 3 years to foreclose on a homeowner and can cost the lien holder upwards of
$50,000 for the process! So the bank would often rather allow a reduced payoff than to go to all that
trouble and expense of foreclosing only to sell the home after foreclosure at a drastically reduced price.
Also, it is important to remember that mortgage companies are not in the real estate owning business.
They do not want to own people’s homes, and have to pay for upkeep, carrying costs and listing fees
when they re-sell it. The banks just want to get paid as much as they can on the loan and move on to the
next loan.

What are the advantages of a short sale to a Seller? The advantages are that the Seller saves
themselves from the stigma and impact of the foreclosure and the long road to recovery that comes
with a foreclosure on your credit report. The negative credit reporting that starts when mortgage
payments are missed, stops once a short sale is concluded. The credit impact can be softened the
sooner the short sale process is finalized. The Seller typically has all or most of their closing costs paid by
the lien holder at closing, so a short seller rarely has to pay money out of pocket towards the closing.

There are certain repercussions to a Seller who does a short sale, notably the potential of having
to pay income tax via a 1099-C issued to the Seller following a short sale. So homeowners doing a short
sale are always advised to seek the advice of a tax professional prior to agreeing to a short sale.

What is the short sale process? As far as the process goes, once an offer is obtained on the
property, that offer is submitted to the Seller’s lien holder, along with a short sale package consisting of
financial documentation from the seller and a letter detailing the current financial hardship of the seller.
The short sale lien holder will then review the package, obtain a third party valuation of the property,
and render a decision on whether the short sale is approved. This process can take several months, so
the parties involved should be prepared to wait out a decision which could take 3 to 5 months or even
longer.

The amount of the “short” that the lender is taking, is oftentimes less important to the lien
holder’s decision on the short sale than the difference between the actual sale price and the fair market
value (FMV) of the home. So the most important part of the process is the appraisal price that the bank
determines the house is worth. If the Buyer’s offer is within 85-90% of that value, they will typically
approve the short sale.

By way of an example, if a house is under contract for $300,000 and the lien holder determines
that the actual FMV of the house is $310,000, they would like approve the short sale since $300,000
is within 90% of the appraisal value of $310,000. Even if the Seller owes $450,000 on their mortgage,
which would cause a deficiency to the bank in excess of $150,000, the bank would still likely agree
because the offer is in line with what the house is actually worth. So a seller should not get discouraged
just because the amount they owe on the house is way more than the offers being made.

It is critical if you are involved in the short sale process, whether you are buying or selling via a
short sale, to align yourself with a real estate agent and an attorney experienced in these matters. They
can help navigate you through the sometimes tricky and always time consuming process and hopefully
bring your transaction to a satisfying conclusion.

Benjamin Cooper, Esq.