What is a "Short Sale"?
A "short sale" is a term that is commonly used when a property is sold for an amount which is insufficient to pay the existing liens, encumbrances and costs associated with the sale of the property. The seller is often said to be "upside down" in the property.
The current market value for the property is $400,000.00. Closing costs are estimated to be $40,000.00 and the current balance on the loan secured by the property is $390,000.00. The sale proceeds will be insufficient to meet the seller's obligations at closing by $30,000.00.
Seller can deposit the additional $30,000.00 required into escrow at closing or the seller can contact the existing lender to determine if the lender is willing to reduce the amount required to release their lien from the property.
Contacting the Lender:
Seller should contact the existing lender to determine the documentation required to start the "short sale" approval process and the amount of time necessary for the lender to provide a preliminary determination, once the seller has provided the required documents.
The Purchase Agreement:
The lender may not provide final approval for the short sale until the seller has entered into a purchase agreement with a prospective buyer and seller's acceptance of this agreement should be contingent upon the successful negotiations with seller's existing lender to reduce the amount required to release the lien of record.
If the short sale is approved, the lender will provide the escrow holder, upon request, with a written statement reflecting the amounts required to release the lien of record and any final conditions which must be met before the lender will authorize the escrow to close.
Possible Lender Conditions:
The lender may require the seller to sign an unsecured note for any additional amounts required to pay the loan in full with payments to be made by seller after the close of escrow. The lender may require the seller to assign to lender, any refund due on any existing hazard insurance policy being cancelled or any remaining balance in seller's impound account.
The seller should contact a tax attorney or certified public accountant to determine the tax consequences of participating in a short sale.
Short sales often present challenges which go far beyond the possible tax consequences. It is strongly recommended that all parties seek the additional legal advice from a qualified real estate attorney before participating in such a transaction.