What is a Short Sale? | Ask a Texas REALTOR®
A short sale describes the sale of a property in which the sale proceeds received by the Seller are not sufficient to payoff the balance of the lien(s) (money owed) against the property. After a short sale is completed, the remaining unpaid balance of the lien(s) may be forgiven by the lien holder(s), or the Seller may remain indebted after the sale for that balance.
The Short Sale Story
John Seller has lost his job and is struggling to make his home mortgage payment. The principal balance on his mortgage totals $170,000. Because the real estate market in his city has declined due to high unemployment, his home is now worth less than when he purchased it 4 years earlier for $187,000.
John consults with a REALTOR®, who provides him a comparative market analysis (CMA) supporting a market value of $175,000. With propety taxes, closing costs. and broker's fee totaling $12,500, deducting the costs of the sale from $175,000 would leave only $162,500 in proceeds - not enough to repay the $170,000 balance on John's loan. John decides to contact his mortgage lender to let them know he will be pursuing a short sale, and he lists his home with the REALTOR® for $175,000. The lender's loss mitigation department requires that John provide documented evidence of his financial hardship so that they can determine if his circumstances merit a short sale.
Two weeks after John's home is listed, another REALTOR® presents a full price offer from a prospective buyer. John and the Buyer agree on the terms, and the signed contract is then delivered to the title company and submitted to the lender. The lender then reviews the offer and John's financial information to determine whether they will accept a principal payoff that is $7,500 short.
If the lien holder approves the transaction and agrees to forgive the remaining debt, the Buyer and Seller can then complete the Short Sale. It's a great result for everyone!
Advantages of a Short Sale:
- Seller is empowered to make a strategic and informed choice for the benefit of all parties, rather than losing control of his home in foreclosure
- Seller can continue occupying and maintaining the home during the short sale process, which also affords the Buyer peace of mind.
- An occupied short sale property will generally have a lesser impact on surrounding property values than will a vacant foreclosure.
- A short sale may cause less harm to the Seller's credit score and may shorten the time until the Seller can be approved for a government-backed loan.
- Lien holders often prefer to pursue a short sale with a cooperative Seller than resort to a costly and drawn out foreclosure.
Disadvantages of a Short Sale:
- The List Price may not be enough to buy the property- even if there are no competing offers!
- A short sale cannot take place unless it is approved by the lien holder(s).
- Awaiting the voluntary approval of the lien holder(s) can be a lengthy and difficult process- for the buyer and the seller.
- If not required by the terms of the sale contract, the lien holder(s) may not forgive the debt remaining after the sale and can hold the Seller responsible for repayment.
- Depending upon the type of property sold (i.e., principal residence, second home, investment), the amount of debt forgiven by a lien holder may be counted as capital gains for the Seller and result in tax consequences.
If you are considering selling or buying property by way of Short Sale, please contact me to discuss the services that I can provide you!
Disclaimer: Questions regarding the exact financial, legal, and tax consequences of a short sale should be addressed to a real estate attorney or qualified accountant.
Source: http://davidcompanik.com/2011/what-is-a-short-sale-ask-a-texas-realtor/
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