Short Sales:

What is a short sale you ask?

When the lender agrees to accept a payment less than actual mortgage balance as payment in full.

One of the most important components of a short sale offer is a bono fide appraisal that indicates that the current market value of the real estate is less then the mortgage owed on it.

Why are short sales important?

A short sale allows a homeowner who owes more money on their home then what its worth, to sell the home, and pay off the mortgage for less then the amount due without further financial obligation to the mortgage company.

Now there are complications that a homeowner should be aware of. They include potential adverse credit scores, tax liability and possibly a deficiency judgment.

Lets look at these issues one by one.

Many lenders will not even seriously discuss a short payoff for a homeowner as long as the current mortgage is being paid on time unless it can be documented that either some current event or future event will with certainty affect the borrowers ability to repay and make the foreclosure process an imminent event. However the bottom line is that most short sales begin because of a homeowner’s inability to pay their monthly mortgage payment which negatively affects their credit. Even if the lender allows for a short pay without an actual default, the short pay notation in the credit report will be considered a serious derogatory mark.

In one of the most bizarre definitions of income, the IRS has ruled that if you get a mortgage for $200,000 and the lender forgives you with a short sale payoff of $175,000 the IRS considers that income to you. Yes that correct. Now I can understand their logic when it comes to a credit card debt. You charge up $5,000 in goods or services and for some reason you can’t or won’t pay. The credit card company writes off the debt and in doing so may sent the IRS a 1099 for the money you received and owed but did not pay. The IRS considers that unpaid $5,000 income that you are required to pay taxes on. Ok, I may not like it or agree with it but I understand the logic. However in the case of a short sale on a mortgage like mentioned above, you never received $25,000 worth of goods or services. How in the world is that income! Well the good news is that the IRS will not consider mortgage short sales as income, at least not for the next couple of years. As I am not a tax professional you should verify this information with your accountant or CPA.

A lender may agree to a short sale but may ask the homeowner to reaffirm owing the balance of the mortgage in essence turning the amount short into a deficiency judgment against the borrower. I believe that this is highly unlikely but an attorney can give you more information.

The bottom line is that as long as you understand the resulting damage to your credit rating, a short sale may be an effective means of getting out from under an unmanageable mortgage debt.

What’s the process?

The process unfortunately is slow and cumbersome. Even worse most mortgages are paid to companies that no longer hold the mortgage but just service the loan. In other words, you could have gotten your mortgage from ABC Bank and make your mortgage payments to ABC Bank but ABC Bank sold the rights to the mortgage XYZ Bank. XYZ bank pays ABC Bank to collect the mortgage payment every month. In a bizarre twist however, if you stop making your mortgage payment, ABC Bank actually starts to charge XYZ Bank extra money for the services now required as the loan goes into default services. With some of these companies making more money on defaulting mortgages, it not hard to understand why they drag their feet with many of these short sale negotiations. And drag their feet they do. I have heard of some negotiations taking as long 3 months to complete and that’s after the buyers and sellers have already signed an agreement of sale. This process is starting to change due to the overwhelming number of homes entering the foreclosure process. Too many homeowners have just started to send in the house keys instead of their next months mortgage payment. So you should start to see more receptive consideration of all short offers.

Let’s get back to the process. First most lenders want the homeowner to complete some type of documentation as to their current financial status, income, employment and reason for the request of a short sale. The lender will at some point will engage an appraiser to estimate the current market value of the home. This appraiser works for the bank. The homeowner may want to retain their own appraiser who represents the their interest. Let’s face it the last thing the banks appraiser wants to due is under appraise the property causing his client an undue loss. I contend that the appraiser could be biased towards a higher value than justified. While an appraiser may not be an advocate, hiring your own appraiser can provide valuable ammunition especially if the appraisal prepared for you is superior in quality then the one they have.

In better times, lenders just foreclosed. Property values were such that it was the prudent thing to due and short sales were not considered justifiable. During those times a request for a short sale required an actual agreement of sale from a bona fide buyer and the negotiations would then begin between the lender and the buyer. While this still occurs there appears to be a new wrinkle.

If you want to sell and have a realtor represent you, the realtor needs to have some assurance that the lender will be willing to entertain a short sale. And lenders are saying yes! In fact lenders are agreeing to look at appraisals and agree to a listing price that is certain to net the lender a loss. This also helps shorten the negotiating process.