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What is a short sale?

Will this type of sell benefit the buyer or seller?
  • July 29 2009 - Hollywood
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Answers (4)

Best Answer

Short Sale - Long Answer

      Millions of Americans today owe more than their house is worth.   The Seller does not have enough equity in the house to pay off the mortgage.   In order to get the house sold, the Lender may agree to take a lesser amount than is owed - that is, the Lender is going to "come up short".

      For a Short Sale to occur,   a  Buyer offers a price that is not sufficient to cover the amount owed to the Lender.  The Seller asks the Lender to "allow the contract" and take the loss.  The Seller will have to provide financial statements and other documentation to prove that they are not able to come up with the shortage.

     Not all Lenders will agree to this.  It may be more advantageous for a Lender to go ahead and foreclose on the property.  The problem gets further complicated when there are second or third mortgages, or other lenders involved.

     Buyers and Sellers should be aware that a Short Sale may have serious legal and tax ramifications:      

     A Buyer that is purchasing a short sale should get Legal Counsel (an Attorney), to ensure  that no liens or judgments will "stick" to the property after the sale.

     A Seller should meet with a CPA or Tax Professional to discuss the tax consequences.   According to the United States Internal Revenue Service, "if you owe a debt to someone else and they cancel or forgive that debt, the canceled amount may be taxable".   Sellers may wish to familiarize themselves with The Mortgage Forgiveness and Debt Relief Act of 2007.  Sellers may also want to have the Lender sign an IRS Form 1099C, Cancellation of Debt.

      A Seller should  also have an Attorney review the documents.  It is not uncommon for a Lender to "agree" to a Short Sale, but later come after the Seller for the deficiency.  (You do not want Bill Collectors harassing you later, for a debt that you thought was cleared.)

     Sellers and Buyers must realize that a Short Sale can be a long and tedious process.  The Lender does not become a party to the contract, but they must approve the contract before the sale can go through.  The amount of paperwork involved in a Short Sale can be staggering.  Lenders may take weeks or even months before responding to submitted documentation.  

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Best wishes,
  Fred
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  • July 29 2009
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Profile picture for Bretzke
Fred has a great answer.  I would add that sometimes a short sale listing is a method for the homeowner to prove to the bank that the house is worth less than the mortage, and that the bank should do a loan modification. 

I have been in two offers, where the listing did not close, but was cancelled due to the ability of the existing home owner to stay.

Watch out for houses that have half done or poorly done remodeling, as the money borrowed on the house probably went to buy the granite counter tops and the Ikea cabinets, in a 1920 house with bad plumbing.  These are the ones that will need to be foreclosed, and resold by the banks.  

  • July 29 2009
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Profile picture for SeattleHome.com
John owes $300k to the bank for his home.

John's home is worth $200k.

John need to sell today for $200k.

The bank has to take a loss, so the bank has to approve the "short sale".
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A short sale is when there is more owed on the property than the property is worth.  The bank may be willing to take a lesser value than what is owed because it could cost less than a foreclosure.

It will affect the sellers credit in a negative way but they are able to avoid foreclosure.

Most likely the buyer will be getting a good value on the property.

Good luck
  • July 29 2009
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