A short sale is the sale of a home with the sales price lower than the balance of the mortgage. These usually take a very long time to close because the lender has to agree with the amount of loss. A short sale occurs when the outstanding loans against a property are greater than what the property can be sold for in the market.  In other words the owner in this case owes more on the mortgage of the home than what the home is currently worth on the real estate market.  Instead of letting the bank foreclose on the property the homeowner tries to settle with the lender.

If the lenders agree to do a short sale , the lender is accepting less than the total amount due. The lender has to determine whether or not a short sale will make more financial sense than foreclosing on the home.  If a short sale is an option for the lender the next matter would involve finding out if the homeowner actually qualifies for a short-sale.

Buying a Short-Sale property

Buying a short sale property has its benefits and its drawbacks, however most buyers I have help purchase a short-sale property will agree the benefits surpass the drawbacks.  The biggest benefit of buying a short sale property is getting a home that otherwise may have been unattainable at a great price.  Depending on the property, some short sales will list at prices similar to foreclosure sales mainly because if other foreclosure properties have sold in the area those comparables will determine the prices similar properties will sell for as well.

The drawbacks will be the long process and the possibility of competing with other buyers for the same property.  The process of a short sale can take months and nobody can truly give you an exact time frame.  Each bank has a different way to handle the short sale process and this will determine how much time they take to give the approval or give a counter offer to the buyer.  Just because you offer the full price the property is listed at does not mean the bank will accept the offer, many times sellers or Real Estate Agents representing the sellers will price the property very low at a number that will most probably not be acceptable to the bank.  The reason behind this practice is to entice buyers to submit offers and get the short sale process started, it is important you don’t find yourself in this situation because if you do it will be a waste of time for you as a buyer.  Remember banks will due their due diligence and so should you.  If the average sales price for the property in the last 3 months has been between $200k -$250k, the odds the bank will accept a price of $150k are slim to none.  If you are buying a short sale make sure the price makes sense, take a look at similar properties that have sold in the past couple of months.  Make sure the seller is not submitting multiple offers to the bank, make sure he is using your offer as the principal offer and using the remaining offers as back-ups.  Lastly be patient.

How does a Short Sale affect the Seller?

In order to start the short sale a homeowners must demonstrate a hardship and be financially unable to pay for the home loan. Although all lenders have varying requirements and may demand that a borrower submit numerous documentation some of the standard ones are Letter of Authorization,  Hardship Letter, Bank statements,  Proof of Income and Assets,  a Comparative Market Analysis (CMA) and a Listing Agreement if you have the house listed for sale with a Realtor.  Only after the seller submits all the required documentation will the lender determine whether or not the seller qualifies for a short sale.  If lender agrees to the short sale the next step is to find a buyer for the property.

Whether the seller is working with a Real Estate Agent or selling the property on their own it is crucial to price the property competitively enough to get buyers interested but within a reasonable price based on previous sales in the area.  Be prepared to go through the process with the lender and understand that just because the lender accepts the short sale and you sell the home you may not necessarily be free and clear.  If the lender does not grant a total release you may have to pay taxes to the IRS on this sale.

Over and over again I have seen sellers surprised when they receive a 1099 from the Lender on the amount of the loan that was forgiven.  Short sale property they sold previously.  The IRS can consider debt forgiveness as income, and there is no guarantee that a lender who accepts a short sale will not legally pursue a borrower for the deficiency (difference between the amount owed and the amount paid).  It is very important to consult with a Real Estate Attorney and if possible also an accountant to discuss the ramifications of a short-sale, they can advise the seller as to what the consequences would be if a full release is not granted on the short-sale.