Should I Sell my Home as a Short Sale?

Real Estate Broker/Owner with eXp Realty BR562939000

Short sales are all the buzz in the real estate market today, but as with anything else they aren't for everybody.  How do you determine if a short sale is right for you?

Look at your Financial Situation

If you're considering a short sale, then I am going to assume that you are having financial difficulties and are unsure about whether you will be able to continue making your mortgage payments.  However, there are other ways to remedy the situation if it is only temporary.  Considering the vast amounts of foreclosures and short sales going on now, most banks are willing to work with their borrowers to avoid both of those alternatives.  The first step is to call your bank, explain your financial difficulties and see if they are willing to defer a couple of payments.  Alternatively, they may be willing to offer you forbearance, which is a great option if your setback is temporary, because it allows you to keep your home.  By calling your bank and reviewing your options (and I only mentioned a couple of the many available), you demonstrate that you want to follow through with your obligation and you have a better chance of finding the least painful path to remedy the situation.

Note:  If you have a first mortgage and a second mortgage from different banks, you must consult with both of them.  If you do end up doing a short sale, they must both agree or you won't be able to proceed.

Consider the Costs

If you have determined that a short sale is your only alternative to foreclosure, then you should have a licensed Real Estate Agent do a market analysis to give you a realistic idea of what your home can sell for in today's market.  You already know that you will be getting less for the home than you owe on it, but it is important to get expert advice so you know exact numbers.  I also highly recommend retaining the services of a Real Estate Agent to represent you in the sale of the home.  Short sales are a lot of work and you have to finesse the bank, so to speak, to get things done in a timely manner.  There is also additional paperwork to file at all stages of the transaction.  The bank pays the real estate commission when you do a short sale, although it is added to the amount that they "forgive".

When a bank forgives an amount (the "short" amount), they will most likely issue a 1099 to you, the homeowner, for the difference.  Uncle Sam will see this as an amount of money earned, but paying taxes is usually preferable to paying the whole thing.  It is important to consult an Accountant because in some cases there is an exception for a nonrecourse debt and you may not be held responsible for the taxes on the amount the sale was short.  This is not always the case, however, and it is VITALLY IMPORTANT that you consult your Accountant beforehand so that you are fully advised as to the consequences of selling your house short.

Some banks may issue a deficiency judgement against you in order to recoup the amount that your sale fell short.  This would appear on your credit report and will leave you with an unsecured loan to pay off.  Some people choose not to pay these, but then you end up will poor credit, which is what the short sale was trying to avoid to begin with.  It's important to find out the procedure for your bank and your Real Estate Agent can help you do that if you'd like.

Move Forward

Once you have decided that a short sale is your best option, you need to call your Real Estate Agent and get your home listed on the market.  In many ways the sale is the same as a normal sale.  You will have open houses and your agent will market the home as usual.  However, when you get an offer, not only do you have to accept it, but the bank has the final say in whether or not the offer is accepted or countered.  Once the bank approves of the sale, you will continue in the same way as if you were selling your house without doing a short sale.  I will post more information on the process of doing a short sale tomorrow.

Posted by

Robin Siddle

Comments (6)

Martinelli Caputi
Martinelli Caputi & Associates, Ltd. - Warwick, RI
& Associates, Ltd.
Great information in such a short blog!  Nice job Robin!
Oct 11, 2007 07:37 AM
Jason Romrell
Business Attorney and Success Advisor - Los Angeles, CA
Good things to consider.  I wouldn't advise a client to attempt a short sale unless they could get a release from the lender on the deficiency...and I understand the IRS's rule on claiming the deficiency as income might be set aside for a short time.
Oct 11, 2007 07:38 AM
Stella Barbour
NoVa Brokers LLC - Vienna, VA
Principal Broker, Serving Virginia and Maryland

Great post.  One thing I consider when homeowners approach me to do a short sale is "how is it going to benefit you?".   Sometimes it is not the right thing to do.  With all the talk these days about it, homeowners are finding it as an "easy way out" because they don't like their adjustable mortgage loan that they have.  So many scenarios have been brought to my attention that in some cases, the homeowner is not educated to the outcome of the short sale, they just hear it is easy to do and as we know it is not easy to accomplish this task.  A lot of work.

Oct 12, 2007 01:10 AM
Kathy Fisher
Parker Properties - Decatur, TX
Realtor Wise County Texas
I don't know about your state, but the ONLY way a client can do a short sale in Texas is to have approval from their lender AND have a Realtor. Sellers can NOT negoitate the short sale in Texas ONLY a licensed Realtor. Also, in a recent class I took on short sales, there is also something in the works (legislatively) to "forgive" the amount that is now being put on the 1099. Probably won't be pushed through until next however. Great article. Thanks...kathy
Oct 31, 2007 08:44 AM
Robin Willis
eXp Realty - Tucson, AZ
CDPE, SRES, Associate Broker
Kathy, I'm pretty sure it is the same here. I haven't run into a lender that will allow the seller to sell on their own. However, since I'm not 100% certain they all have that as a policy, I didn't want to state that as a fact. The bank will also sometimes help with other options, such as forbearance and deferral, etc.
Nov 01, 2007 04:57 AM
Vicente A. Martinez
Prudential Douglas Elliman Licensed Real Estate Salesperson - Woodhaven, NY
Realtor, Brooklyn - Long Island - Queens Homes
Robin great post. Your AZ clients are lucky to have you. Best of luck.
Nov 01, 2007 02:28 PM