The Real Estate Encyclopedia
What is a Short Sale?
Category - Home Selling Questions - Listing & Agreements FAQ's

Short Sale is a legal, lender-approved solution assisting financially strapped homeowners to get out from under their mortgage commitment quickly. A Short Sale can be accomplished by negotiating with your bank or lending institution to accept a purchase price for your property to a third party buyer for less than what you currently owe on your mortgage balance.1

 

The real property short sale is not a questionable practice in a softening market, in fact it may have become a necessity. The short sale transaction is a legal and much more beneficial alternative to foreclosure or even bankruptcy. Lenders are very motivated to accept short sale offers for many reasons, including avoiding the process of foreclosure. The short sale can result in a winning situation for all parties involved.

 

The homeowner wins by getting out of a difficult financial situation through a clean transaction and a salvaged credit score. The property does not go into foreclosure, thus helping home owners minimize impact to their credit rating. The lender wins by avoiding costly foreclosure proceedings or re-taking ownership of the property until it sells; referred to as REO or Real Estate Owned.  The buyer wins by getting a nice property at a good market value.

 

If you are considering a Short Sale, your first call should be to your financial and/or legal adviser, not the lender. You only want to contact the lender once you understand all the ramifications of this move.  Under federal law, a “forgiven” debt can be treated as ordinary income on which tax must be paid. Therefore, if your lender allows you to sell a $400,000 property for $375,000, less a 2 percent real estate commission, you will have a deficit of $32,500. According to most tax professionals, you will have to pay income tax on this amount of forgiven debt, even though you did not receive the money.  The State of Arizona does not require that the forgiven amount be treated as income.

 

In addition, you must make sure that, even though the lender approved the short sale, you will not be obligated to make up the difference called a deficiency. Unfortunately, most lenders will not put their agreement in writing, so your legal advisers will have to be satisfied on this matter.

 

After you are satisfied that you understand the concept and are prepared to move forward, then you should contact your lender. Ask to talk to the manager of the “short sale” or the “loss remediation” department; the individual in charge of these matters.

 

Your lender will need a letter of authorization for a lawyer or real estate agent to work on your behalf. Privacy laws prohibit lenders from discussing personal and financial information with a third party without such written permission. This letter will include your name, property address and loan number.  You, or your agent, should then prepare a comprehensive letter explaining why you are requesting the short sale. Emphasize your hardship and provide a market analysis showing what houses are selling for in your area.  Explain your request in detail: The price you are asking the lender to approve; the commission the real estate agent can accept; and the closing costs associated with the settlement. Do not forget that there may be a recordation and transfer tax, which is typically split between buyer and seller.  Your request should be as specific as possible to avoid any surprises at closing.

 

Before preparing your proposal, request your outstanding mortgage balance from your lender. The lender has a legal obligation to provide this upon request; the burden is on the lender to provide an accurate accounting. Review this carefully to make sure that no charges have been added, which you are unaware of. If you have missed some payments, you will be assessed late fees. When you present your proposal to the lender, try to get these charges deleted from the outstanding mortgage balance.



Also Search for Terms such as

Forecloure, REO and Financing

 



References
 
Category(s)
Home Selling Questions - Listing & Agreements FAQ's
Mortgage Questions - Foreclosure & REO FAQ's
Home Selling Questions - General Home Selling FAQ's
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