What is a Short Sale?
Posted by Dana Farmer in Real Estate Business, Real Estate Education, Real Estate Industry News
We hear a lot about short sales and foreclosures in our current real estate economy, but what exactly is a short sale and what is involved?
A short sale occurs when the outstanding loans and liens against a property are greater than the proceeds of the sale of a home. A homeowner may consider this option if they are facing foreclosure or they need to sell in a down market. A homeowner must meet certain qualifications and the lenders must agree to allow a short sale.
The short sale process actually begins when an offer is made that is less than the value owed on the home. If the homeowner qualifies and lender agrees to accept a short sale offer, the first mortgage holder will release the homeowner from any deficiency. Short sales become complex when there are second or third lenders. These additional lenders must also agree to the terms of the short sale and take less than what is owed to them. These additional lenders may choose not to release the owner from the deficiencies. If this happens, the seller needs to make arrangements to repay the deficiency amount or they may decide not to go through with the short sale and end the deal.
If the additional lenders decide to accept the short sale offer and release the home owner from deficiencies, the lender will write off the deficiency amount and send a 1099C to the homeowner for tax purposes. The released deficiency amount will then be included as additional income for that year and the homeowner will have to pay taxes on the amount the deficiency amount was released.
The homeowner should consult an experienced tax advisor. They may be able to avoid paying taxes on the 1099C under the following circumstances:
•File bankruptcy, in which case they will be able to exclude their retirement funds from the computations if they have any.
OR
•Prove insolvency, in which case they must include any retirement funds in the computations if they have any.
NOTE from ProSchools: Only a tax advisor should advise homeowners regarding taxes!
Short sale negotiations are very complex, time consuming and requires expert knowledge and negotiating skills. A short sale specialist is skilled in knowing short sale procedures and negotiating with lenders. Short sale specialists usually know which lenders are best to work with and which are most difficult.
Lenders usually take several months to decide if they will accept an offer and may come back with a counter offer to the buyer raising the price or terms of the offer. Many inexperienced buyers become impatient and walk away from the deal before a decision is made.
Because the short sale process is very complicated, it is advisable to take specialized training and consult with your managing broker if you have a client who will be in a short sale transaction. You may consider splitting your commission fees with a short sale specialist and let him or her manage the short sale negotiations. Whatever you decide, always make sure to ask the advice of your managing broker.
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