Short Sales:

“How To Sell Your Home When You Owe Too Much On It”

What is a short sale?
In the world of real estate, a short sale refers to the sale of real property for an amount less than the amount owed on the property. In the short sale scenario, the bank agrees to accept less than the full balance due on the debt, and usually “forgives” all or a large portion of the difference.

Who benefits from the short sale?
Short sales are a win-win situation. Lenders, mortgagees, and real estate agents all benefit from the successful short sale. Lenders get the majority of their money back, Borrowers get the relief they need and are able to sell their property and avoid foreclosure, and real estate agents can facilitate the transaction and receive compensation (commission) from the sale of the property.

Why would banks forgive the difference?
To reduce their losses, banks often accept a settlement of less than what is owed on the property. When faced with the option of getting the property “back” through foreclosure, a short sale often makes a much wiser business decision for the bank.

This sounds too good to be true!?
Not really. Things that are “too good to be true” usually don’t make good economic sense. The short sale makes good common and financial sense for the banks who grant them. The fact of the matter is mortgage companies and banks are NOT in the real estate business. They are in the LENDING business. The last thing they want is that property back.

Can FHA, Conventional or VA loans receive a short sale?
Yes!

What is “negative equity”?
Also known as being "upside down", negative equity is the difference between the value of an asset and the outstanding portion of the loan taken out to pay for the asset, when the latter exceeds the former. For example, if your car is worth $10,000 and you owe $15,000 on it, you would have a negative equity of $5,000.  Negative equity can result from a decline in the value of an asset after it is purchased.
Some areas decline in value. In other areas, prices may remain flat so that the properties in that area do not appreciate. If a seller wants to sell within 2-3 years of purchasing their property, they may be in a situation where they have negative equity.

Why does my property have “negative equity”?
Here are a few common reasons:

1. Home Owner bought at the height of the market and the market has now declined.
2. The area has become less desirable for any number of reasons, so property values have declined.
3. Home Owner purchased the home with little or no money down and wants to sell within a few years of purchase… and the property value has not increased during that time. Therefore, costs associated with selling the property may create a balance due at closing,
4. Home Owner refinanced the home (with a high appraisal value) and now has little or no equity.
5. Home Owner bought in a brand new subdivision or recently developed area that has not been fully developed or has not appreciated (or has depreciated) in value
6. The market is soft because there is too much builder (new home) inventory or too many existing homes on the market (buyer’s market)

What if I owe exactly what my home is worth?
Even if you owe exactly what your home is worth, you may still need to do a short sale in order to pay for the costs of the sale (agent fees, title policy, and other seller closing costs).

Why not just let my lender foreclose on my home?
NO! What is the first thing banks do when they foreclose on a property? Hand it over to a real estate agent to get rid of it quick! The foreclosure process is a legal process. It involves attorneys and it costs MONEY. Once they get the property back via foreclosure they must often sell it for MUCH LESS than market value and pay agent commissions and all customary closing costs. Doesn’t it make more sense for them to take at or a little below fair market value before foreclosing?

And, even when they do sell it through foreclosure... this does NOT remove your obligation to repay the remaining balance! It is not wiped away!!!

What if I'm not behind on my payments?
Short sales work—even if you’ve never missed a payment! Yes, I know… short sales have gotten a stigma of being only available for folks who are in foreclosure. But I have successfully negotiated dozens of short sales for folks who have never missed a mortgage payment! They just happen to be in a negative equity position and need the short sale in order to sell their home.

How long does it take?
Short sale approval can take 30-45 days.

What if my home is already in foreclosure?
Your foreclosure sale will usually be suspended during the short sale process. That's why it's imperative that you contact me right away!!!

Will I owe taxes on the on the debt the lender forgives?
In 2007 the U.S. Congress passed the Mortgage Debt Forgiveness Relief Act and it is in effect until 2012. As a result of that act, borrowers no longer pay taxes on the debt forgiven on their primary residence. So if the property is your primary residence, then no, you should not have to pay any taxes on the forgiven debt.
For investment property, the lender does have the right to report to the IRS the amount they have “forgiven” in a short sale transaction, the amount of the resulting tax will be far less than the debt forgiven. For example, there was a client who did get a 1099 for $30,000 forgiven. This resulted in additional taxes of $1,300 for that year. The resulting tax is far superior to paying the difference of the debt. Also, if the property is in foreclosure, the foreclosure would have a much more devastating affect on you than the amount of the 1099. For full tax information please consult a professional tax advisor

How much will the short sale cost me?
We strive to complete the entire short sale process without asking the seller bring any money to closing. In late 2007, some lenders changed their policies and there are certain expenses that the lender might not pay, such as unpaid Home Owners Association dues, certain escrow fees, and some minor closing costs. In most cases, these items total no more than $300 to $800. We will not know exactly how much they will be, if any, until we are closer to closing. It is a good idea to set aside $500 to $1000 for these incidental expenses.
Although this may sound high, it is usually less than one month’s mortgage payment. I will work with the lender to forgive your unpaid property taxes, unpaid mortgage payments, pay all of the real estate agent’s fees associated with the sale and customary seller closing costs. The savings to you is typically in excess of $20,000, so the amount you might have to bring is a small price to pay for the large debt forgiveness.