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Short Sales - Simplified

By
Real Estate Agent with Keller Williams Integrity First Realty

There is a lot of talk about "short sales" these days so I thought you would be interested in this information that I've summarized based on a couple articles from different mortgage brokers.

A short sale is an "arrangement" between the owner of a home and their mortgage lender to accept an offer for less than the total amount owed on the home. The "deficiency" is the difference between the amount owed and what the bank collects from the short sale. There may be multiple stipulations within each "arrangement".  Each mortgage lender handles their "arrangement" a little differently. Anyone involved in a short sale, the seller or agent, should read and fully understand the bank's written policy.

A seller does not have to be behind on payments to request a short sale from their mortgage company. They just have to provide evidence that the house can't be sold for the amount owed. Initiating a short sale prior to late payments is a better choice than late payments forcing foreclosure or bankruptcy.

A bank owned (foreclosed) house is not a short sale. A seller deciding to lower their price and take less profit is not a short sale. A seller that owns their home free and clear, and decides to sell a home at a price under market value, is not a short sale. A "short sale" does not define a "good deal". For it to be a Short Sale, someone is getting "shorted" - either the seller or the bank.

In foreclosure, the borrower falls way behind on their payments and the bank repossesses the house and sells it. The bank typically will pursue the borrower for the deficiency. This situation typically forces the borrower to file bankruptcy and turn the house over to the bank.

Most short sales arise when a seller is "upside down" in their mortgage - they owe more on their house than it is worth. The owner of the home then attempts to make an "arrangement" with their lender to sell the house for less than is owed.

A short sale is not an easy alternative to foreclosure. The money owed does not just disappear. The "deficiency" will be accounted for. Some institutions may be willing to extend a 100% loan in the form of a promissory note with the seller or they may report the amount as 1099 income to the seller or may enter a judgment against the seller. All of these have their own set of issues. If the borrower couldn't make the payments in the first place, they may not be able to repay a note. If this 1099 income puts the borrower in a different tax bracket, now they have taxes to pay. Judgments are full of issues and have a long-lasting affect on credit.

The statute of limitations (SOL) on judgments is long -- usually 10 to 20 years and many are renewable (a judgment may be renewed if the creditor files a new suit seeking to renew the judgment prior to the expiration of the original judgment). This means a judgment could follow you around forever. Even if you pay a judgment you then have a 'satisfied judgment" on your record for 7 years from the date it was satisfied, not filed.

You should never let a "default" judgment be entered. Always attempt to dispute the validity or settle out of court. All efforts should be made to keep this off of your credit reports. Even if the debt is there, you have no way to clear it and it's still within the SOL timeframe, you should attempt to settle it out of court prior to the court date. The alternatives are not the best: wage levy or asset liens and huge damage to your credit.

A short sale is a long drawn out process for everyone involved, including a buyer. The bank is looking for the most that they can get back out of the property and will not accept just any offer. If there are two separate institutions involved, in the case of a first and a second on the property, the institution carrying the first will not be concerned with helping the seller pay off the second. Both must be addressed separately.


Many banks will not agree to a short sale in writing until you have a formal offer. Before your short sale is approved, the mortgage company will require a long list of documentation: an application, a hardship letter, financial statements, tax returns, pay stubs, the purchase agreement from the buyer, a HUD statement from the pending transaction, payoff letters from all lenders involved, and several other things depending on the lender. This documentation should be ready prior to submitting any offers for approval. Approval could take as long as 4-6 weeks, depending on the lender.

The lender's negotiators are not fiduciary advocates for the seller. Their only goal is to collect as much money possible for their institution and may be compensated accordingly. There are situations where it might not be a bad idea for the seller to seek legal counsel as to a least harmful path. Again, all parties involved should be fully aware of the lending institution's written policies.

It should be clear why a short sale may not necessarily be a good path for a buyer or an investor. The home may not be listed for a price at or under market value and the banks may not be willing to negotiate very much. There may be better ways to obtain undervalued homes for both investors and buyers. With a large inventory on the market, the odds are high that there may be a better alternative, but not always.

The Moore Team can help you or your referrals set up a search for great investment properties and primary or secondary residences. The market here in the greater Phoenix area, specifically Gilbert, Tempe, Chandler, Ahwatukee, Mesa, Scottsdale, Paradise Valley and Fountain Hills, is full of possibilities. Let us help you, your family, friends and clients make great real estate choices when buying or selling real estate.

Comments (5)

Michael A. Caruso
Surterre Properties - Laguna Niguel, CA

Great post!

Since we are working with so many short sale scenarios right now, this is good info to give the buyer so they can better understand the process.  Nice explanation.

Have a great week.

Michael A. Caruso

Mar 04, 2008 04:40 AM
Frances C. Rokicki
Fran Rokicki Realty, LLC - Bolton, CT
Broker-Mentor,CRS
Good points.  Here in Connecticut, we are having a pretty steady market.  Spring always brings out the buyers and relo families.  I refer questions about short sales, foreclosures and flipping to attorneys now.  It has really become tough for some folks and there are so many options now.
Mar 08, 2008 02:56 AM
Cheryl Powell - The Powell Team
Southern Homes of The Carolinas - The Powell Team - Harrisburg, NC
Concord,Harrisburg & Charlotte NC Area Real Estate

In the Charlotte NC area, many agents are listing homes as short sales/pre-foreclosures before a deal is even worked out between the lender and the home owner. 

The agent lists the home at a ridiculously low below market value price, which hurts other sellers in the same neighborhood.  The lender hasn't had a BPO (or appraisal) on the property yet and the agent doesn't have any idea what kind of offer the lender may be willing to take.  I don't know where these agents are coming up with these list prices... I think they are pulling them out of a hat!  When agents use this technique it takes as much as 2 months for the bank to respond to an offer to purchase!

I have listed and sold several short sales in the past, but I did things much differently than these agents are.  Initially I listed these homes at an amount that the seller would be able to break even on the deal if they received a full price offer.  Homes have to be listed before the lenders will agree to a short sale.  The seller negotiated a deal with their lender for them to accept a short sale.  The lender then ordered a BPO and once the results were in they told me how much I could reduce the list price to.  From that point we had 90 days to sell the house or the lender would either foreclose on the property or the seller could decide to do a deed in lieu of foreclosure. 

Personally I think that there needs to be some rules set up for agents listing pre foreclosures/short sales.  It is getting out of hand in our area and hurting other home owners who are trying to sell their homes at market value!

Mar 09, 2008 03:53 PM
Mirela Monte
Buyers' Choice Realty - North Myrtle Beach, SC
Myrtle Beach Real Estate
This is a great article!  Thank you!
Mar 20, 2008 04:08 PM
Stephanie Heron
Dressing Rooms LLC - Scottsdale, AZ
Weeber - Dressing Rooms

Thanks for this - as a Stager, not a Realtor, I often hear Real Estate terminology used and I am not entirely sure what they mean - this is a big help:)

Stephanie

Mar 26, 2008 05:06 AM