The “Real Deals of Real Estate” … Let’s Dish!
What you may not know about Short Sales
Contrary to the name, a short sale is certainly not a “short” process. A short sale is a sale in which the property owner is selling their property “short” of what is owed on it. For example they may owe $300,000 on a property currently worth only $100,000. This process can take from 3 months to over a year.
So how can they do this? The bank or their lender must approve of the sale amount and thus the loss they are going to incur. By the way they may be receiving subsidies from the government to decrease their loss or maybe even not really incur a loss at all, they are however still going to tax you on the difference of the sales price and what is due on the loan. This amount is known as “forgiven debt”.
Myth 1 – The seller has to pay back the difference or tax on the difference. – NOT ALWAYS, if the home was a primary home the Mortgage Debt Relief Act (go to irs.gov for more information) can treat the “forgiven debt” as a “gain on the sale”.
Myth 2 –This is a great way to get a home well below market value. – NOT TRUE. The lenders on these homes that are approving the sale do their due diligence to ascertain market value of the home. They do send agents out to do a “Broker Price Opinion” and appraisers to do an actual appraisal on the home.
Myth 3 – The listing price is the price the bank wants. – NO. The listing price is the price the listing agent puts on the listing. A good agent will price the property at market value to avoid hiccups down the road. However, some agents will list a very low price on the listing to quickly get it under contract. However, remember, the bank will ultimately set the sales price. I have seen, on a number of occasions, the bank countering the offer up to 50K higher than the list price. The ol’ adage that if it is too good to be true it probably isn’t true can apply here.
Myth 4 – If we offer market value and seller accepts the offer and the lender likes the offer, it will close. – MAYBE NOT. I have seen short sales crash for many reasons and see new ones every day. In my experience about 25% of short sales come to fruition.
*There may be a second mortgage/lender on the property who will not agree to the terms of the short sale, usually because of the amount being offered to them.
* There may be another lien holder on the property that will not agree to the terms such as a purchased water softener or construction lien. Crazy but they are OK taking nothing over something and sending the property into foreclosure.
*OR I have seen at the last minute, after waiting almost a year for a decision, the seller is offered a loan modification and takes it, thus taking the property off the market.
*AND of course there is the time clock of beating the foreclosure sale. If there is already a summary judgment for a foreclosure, you most likely do not have enough time to process a short sale and they lenders won’t necessarily stop the foreclosure proceedings to allow a short sale.
So as you can begin to understand, a short sale can be very complicated. Is it the right avenue for you? Evaluate the seller’s position, the state of foreclosure proceedings and how much risk are you comfortable taking. While you are waiting for your short sale dream home, there may be an even better dream home passing you by.