To do a Short Sale or Not to do a Short Sale...

By
Real Estate Agent with Cuff & Company Realtors

...That's the question that seems to be on everyone's mind these days.   But before we answer that question, let's look at what is a short sale. 

A short sale is when a homeowner owes more on a home than the home is worth and they want the lender to accept a reduced payoff on the loan upon the home selling.  They must list their property at ‘market value', subject to third party approval ... The lender.  Once there is an offer, it must be sent to the lender's loss mitigation department for approval.  This approval process can take weeks or even months.  If the lender approves the transaction, they will either accept the proceeds of the sale and forgive the amount of the shortage, or they will seek a judgment against the homeowner/seller for the amount of the shortage.  Let's assume they forgive the balance (which is the desire of a homeowner when they do a short sale), they will send the homeowner a 1099 for the amount of the debt that was forgiven.  This creates a tax liability for the seller.  Let's assume the amount of the debt being forgiven is $40,000 and also assume the seller is at a 25% tax rate.  That would create an additional $40,000 in reported income and additional taxes of approximately $10,000 for the seller ... Something to think about (please consult a tax professional before determining the extent of your tax liability).  Of course this is better than the alternative of the lender seeking a $40,000 judgment for the amount of the shortage. 

Before approving a short sale, the lender will want to see evidence of financial hardship making continuing paying the loan not an option.  They will look at the sellers' income and assets to determine eligibility.  If the lender determines that the seller can afford to continue paying their loan and has no reason to sell, they are unlikely to approve a short sale. 

A short sale is generally a good option for those who cannot afford to keep up on their loan payments, are in default, and for whom foreclosure is inevitable.  A short sale will have negative impact on the seller's credit, but not nearly as negative as a foreclosure or bankruptcy.

A short sale is generally not a good idea for someone who can afford their payments and has no reason to move other than they just don't like being upside-down in their property and they want out.  Someone in that situation probably wouldn't be approved by their lender do a short sale and are better offer keeping their loan current and riding out the down market before selling the home. 

If you are considering a short sale and have questions, please don't hesitate to contact me...  It is a complicated transaction with serious consequences...

Make it a great day!

Comments (10)

Joe Virnig
RE/MAX Gold Coast REALTORS, Ventura County, California - Ventura, CA
No Ordinary Joe

Shortsales are not for the faint of heart.  The financial hardship part seems to be overlooked by an awful lot of listing agents.l

Jul 06, 2008 04:42 PM
Jon Zolsky, Daytona Beach, FL
Daytona Condo Realty, 386-405-4408 - Daytona Beach, FL
Buy Daytona condos for heavenly good prices

Yes, there is a lot involved in short sales. The deficiency may not necessarily hurt the Seller, as sellers, who used it as primary residence for 2 years, or tose who are insolvent at time of short sale, will be exempt from the tax on the difference, but it is all tricky.

Gary, there is also no benefit to the Seller to attempt to do it themselves. They stand to get no money form short sales, so it is in their best interest to seek a professional help with this.

Good description of the issues, thank you,

Jul 06, 2008 04:47 PM
Gary Cuff
Cuff & Company Realtors - McLean, VA

You are absolutely right Joe ... Some seem to treat it as almost a trendy thing to do ... Nothing could be further from the truth.   Thanks for the comment!

Jul 06, 2008 04:49 PM
Brandon Weber
Weber Property Group - Sacramento, CA

Short-sales are still very difficult in our market.  They drive me nuts because they clog up the MLS listings and they are usually so ridiculously low priced that buyers ignore the real values.  Nothing a little educating can't fix, though.  Thanks for the post!

Jul 06, 2008 05:23 PM
Bob & Carolin Benjamin
Benjamin Realty LLC - Gold Canyon, AZ
East Phoenix Arizona Homes

Short sales are anything but short. One of ours has had an offer for 8+ months while the bank does its due diligence.

Jul 06, 2008 06:52 PM
Crystal Corr
Keller Williams Greenville Central - Simpsonville, SC

Welcome to Active Rain. I hope you will enjoy it and learn from it as much as I do. Happy Blogging.

Jul 07, 2008 01:41 PM
Dawn Uselding
A New Dawn Real Estate Services, LLC - Manitowoc, WI
Short Sale Assistant

The homeowner is not always given a 1099 for the deficit.  In Wisconsin, legislation was passed on December 29th, 2007 that did away with 1099's for homeowners that participate in short sales.  It is my understanding that legislation is being written in many other states as well. 

I would also suggest that if you are new to short sales or handle large volumes of foreclosure properties,  you avail yourself of the services of a short sale negotiator.  With so many different lenders and servicers out there, and each one requesting slightly different packages, you may need some help.  Having the correct documentation and getting it to the right people is imperative in getting short sales done in a timely manner.  Short sale negotiators have the contacts and the pleasant persistence needed to keep your deal from stalling for months on end.  Notice I said pleasant persistence, don't badger your loss mitigation negotiator.  They are dealing with 50 to 150 short sales at one time.  You want to be the one who is pleasant and competent, that's how you get the negotiator to work with you.  Remember, they also want to close the deal, they get bonuses for clearing (rejecting or going to closing) X amount of files a month(amount needed for bonus varies by lender/servicer).

Jul 07, 2008 04:30 PM
Ted Mackel
Keller Williams Realty Simi Valley - Simi Valley, CA
Simi Valley Real Estate Agent

Welcome to ActiveRain. Congratulations on your first post. Get around and check out the community, you'll quickly figure out how to supercharge your blogging skills.

 Read this blog post: http://www.activerain.com/blogsview/535552/Three-Mistakes-Newbies-to

Jul 08, 2008 09:31 AM
SoldBuy Divas
RE/MAX Infinity - Chandler, AZ
ABR, CNE, e-PRO, CDPE

Definitely educating homeowners on Short Sales is key. Gary your definition is great, easy to understand and concise. I have found many homeowners still unaware of Short Sales and what they can do for them. Many homeowners in the Arizona market are so tired of dealing with their lenders they just let the bank foreclose feeling as though they have exhausted all their options. It's really sad. That is where we Realtors come in, however you cannot really do a client justice if you are "practicing on their home." Get the information, knowledge and know how or a competent negotiator and you can be successful in this market doing short sales.  

Jul 08, 2008 05:23 PM
Neal Barnes
Starstate Realty - Killeen, TX
Broker, REALTOR, ABR, CRS, GRI, SRES, SRS.

Hi Gary  -  Welcome to Active Rain.  I look forward to networking with you and reading your future post.   Have a great day!!!

Nov 22, 2008 12:24 PM