Short Sale

A Possible Solution When You
Owe More Than Your Home Is Worth

What Is A Short Sale?

A short sale is a real estate sales transaction in which the lender allows the property securing a mortgage to be sold for less than the existing loan balance, usually due to the borrower’s financial condition, the property’s condition, market conditions, or a combination of all three.

In short (no pun intended), the lender accepts a payoff that is less than the amount owed on the property.

For example, if you own a home that was purchased for $450,000, and it’s now only worth $400,000, the lender would allow you to sell the home for $400,000 (and accept the $400,000 as payment in full).

What’s The Lender’s Motivation For Accepting A Lower Payoff?

As set forth below, there are a number of factors considered, but the overriding question is will the lender net more money by approving a short sale than they will by foreclosing? In most instances this is what it boils down to. Values have dropped dramatically and most sellers are not willing to remain in a home where they owe more than the home is worth while continuing to make payments that are often adjusting upwards.

Stated below are the additional factors considered:

• Was the property purchased or refinanced at the top of a seller’s market and has now dropped in value?
  
• Was the property refinanced at one hundred and twenty-five percent of a value that was based on an over-inflated property appraisal report?
  
• Is the property located in an area where property values have dropped due to a dramatic change in local economic conditions?
  
• Has the property's value decreased to an amount that's below the loan balance due to local and national economic conditions that are beyond the borrower's control?
  
• Has your property’s condition deteriorated to the point where it's not financially feasible for the lender to put it in a marketable resale condition?
  
• Is the proposed purchase price more than the lender would be able to sell the property for after foreclosing on the loan?
  
• Is the sales commission less than the lender would have to pay after foreclosing on the loan?
  
• What is it going to cost to secure and maintain the property while it’s being marketed for resale?
  
• What’s the cost of marketing and selling the property?
  
• How many other properties does the lender have that are not performing?

In addition to the market place and property matters, the lender also considers financial hardship to the borrower, including, but not limited to:

• Catastrophic illness.
  
• Death of a spouse and loss of income.
  
• Employment transfer accompanied by an inability to sell or rent the property.
  
• A call to active military duty for an extended period causing a reduction in income.
  
• Permanent disability.
  
• Unemployment beyond the borrower’s control (throughout the foreseeable future).
  
• Incaceration
  
• Financial insolvency (with no expectation of improvement in the foreseeable future).
  
  Are These All Of The Factors That A Lender Considers?

No! This list is provided to give you a general idea of what the lender considers in making a short sale decision. These factors are not all inclusive.

Tell Me About The Short Sale Process

The first step is finding a listing company that has experience in getting short sales approved. First Residential has been in business for fourteen years and we’ve witnessed three cycles during which property values have depreciated to the point that many distressed homeowners qualify for short sale relief. We have a success ratio that’s over 90%. This is largely attributable to the fact that we are also mortgage brokers, and many of the skills necessary to obtain a loan approval are also required to obtain a short sale approval. It’s virtually the same process (just done in reverse).

Once you’ve listed your home with First Residential we will contact your lender and request a Short Sale Package (some lenders will provide the package before hand, and others will only forward a short sale package after you’ve received an offer on your home). A short sale package is essentially a comprehensive request for information. Again, before a lender’s loss mitigation department will approve a short sale there has to be a justifiable reason with supporting documentation. (As stated above, the justifiable reason in the current environment is that it’s cheaper for the bank to approve a short sale than it is to foreclose). There must be an understanding of what the lender is asking for and the package needs to be completed fully and competently the first time!

Once the short sale package is submitted and you’ve received an offer on your home, the approval process begins. During this time it’s not uncommon for the lender to ask for additional information. We’ve seen short sales approved in as little as 18 days, but it’s usually at least 45 days and sometimes 90 days or more.

What Are The Consequences Of A Short Sale To Me?

In the previous example, where we stated that you owe $450,000 and the lender accepts a $400,000 payoff, the lender forgives $50,000 of your debt. The IRS considers forgiveness of debt as income. As such, there are likely to be tax consequences on the sale of your home via the short sale route.

MAKE SURE YOU CONSULT WITH A TAX PROFESSIONAL BEFORE CONSUMATING A SHORT SALE. YOUR POTENTIAL TAX LIABILITY REQUIRES CALCULATIONS THAT ARE BEYOND THE EXPERTISE OF MOST SHORT SALE CONSULTANTS.

If you’d like to inquire about selling your home via Short Sale,
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