A quick short-sale review

What is a short sale?

A short sale is when a bank agrees to accept less than the total amount owed on a mortgage, usually to avoid having to foreclose on the property.
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Am I eligible for a short sale?

• Your house must be worth less than you owe on it.
• Typically you should have a financial hardship, such as a decrease in wages, job loss, medical condition, job transfer, etc that has altered your ability to make the same income as when the loan was originated. Divorce, death situations should also qualify.

Below are some misconceptions when it comes to a short sale vs. a foreclosure.


1) If you just walk away and let your home go to foreclosure you are done with the situation and you can walk away with a clean slate. The reality is that this couldn’t be any further from the truth in most situations. You could end up with an IRS tax liability or still be on the hook for tens of thousands of dollars to the bank money. Let me explain. Please keep in mind that if your property does go into foreclosure you may be liable for the difference of what is owed on the property versus what is sells for at auction, in the form of a deficiency balance and subsequently a deficiency judgment!  (Check your state law as it varies widely from state to state)

Here is an example of how a deficiency works: If you owe $300,000 on the property and it sells at auction for $150,000, you could be liable to the bank for the $150,000+ difference! The bank may get a "deficiency judgment" and pursue you for the balance...or they may sell the judgment for pennies on the dollar to a debt collection company and they will pursue you relentlessly

Conversely,  in some situations you could also incur a tax liability to the IRS! Although there are exemptions (mostly for principle residences) under the Mortgage Debt Forgiveness Act (which expires at the end of this year). Hard to believe? Well, believe it or not, the IRS counts the difference between the sale and any charged off/forgiven debt as a “gain” on your taxes...you lost money and it’s counted as a gain!  Banks and the IRS can go as far as attaching your wages. Not to mention if you let your home go to foreclosure you will have that on your credit, as well.

Since the tax code on this is a little complicated I advise talking to a CPA when in this situation as you are weighing your options.

When negotiated properly, a short sale can alleviate any liability to the bank from the deficiency on a short sale.

2) Banks don't want to participate in short sales, or, it's too hard to qualify for a short sale. Banks would rather do a short sale than a foreclosure any day. A foreclosure takes a long time and creates a huge expense for the banks; a short sale saves both time and money. Banks have more foreclosure inventory than ever before, and certainly do not want any more. Not only do consumers now have government incentives to participate in short sales but the govt. also offers banks incentives to complete short sales.

3) Short sales are not that common. In some Palm Beach County communities short sales make up 50 % of all sales and experts predict that in 2012 we will have more short sales than any other year. Due to economic changes in the last few years, this is something that is affecting millions of Americans. Short sales are in every market, and are not just limited to any particular income class. This has affected everyone from all facets of life. A short sale should be looked at as a helpful tool, a viable option to leaving your home for the bank to take, and not a negative stigma. The govt. and the banks don't want any more homes in the foreclosure inventory of Fannie, Freddie or the banks...that is one of the reasons why the government is now offering programs that actually pay homeowners to participate in short sales.

4) The short sale process is too difficult and short sales often get denied. Though the short sale process can be time consuming and complicated it is not as difficult as you may have been led to believe. The problem is that if the short sale process is not followed correctly by the realtor and seller there is a good chance of getting denied. Agents experienced in shorts sales with a variety of lenders/investors/GSE's (us, for example) know how to avoid this. Short sales require a lot of experience, and a special skill set.

5) Short sales will cost me money . A short sale should normally not cost you any out of pocket money. In fact, you could get between $3000 and $30,000 to participate in a short sale. In many ways, a short sale may put you in a better financial position than you were in prior to the short sale. Many short sale programs now have some type of financial incentive for the home owner, and we are even seeing relocation money being paid on some investment/second homes. As a seller of a property you should never pay for any short sale costs or fees up front. Realtors commission, documentary stamps, title insurance and other reasonable and customary fees are paid for by the bank.

6) I should wait as long as possible before I do a  short sale. The closer a property gets to a foreclosure the harder it may be to perform a short sale...the sooner you start the process, the better. Waiting too long can make it that much more difficult to get the foreclosure sale postponed and the short sale completed.

Just because you received a foreclosure notice (or Lis Pendens) it does not mean that you can't perform a short sale. I have seen banks postpone a foreclosure to work a short sale option as close as 10 days prior to the scheduled foreclosure auction, but the longer you wait the less chance you have. If you have received a foreclosure notice, please call me or a foreclosure defence attorney immediately. The longer you wait, and the closer you get to foreclosure, the fewer options you have.

7) I was denied for a loan modification, so I know I will get denied for a short sale. Short sales and loan modifications are handled by two separate departments at the bank. These processes are totally different in approval and denial criteria. If you got denied for a modification you can still apply for a short sale; in some cases you can get a short sale approved faster than a loan modification, as some loan modifications are denied because they cannot reduce the loan low enough based on the consumers income.

98 If I go through a short sale I cannot buy another house for 7 years. The time to buy another house depends upon your entire credit picture and the specifics of the short sale and can vary from 12-60 months.

This is just a cursory review of the short sale process. With the options available today, no homeowner should ever have to let their home just go back to the bank.

Thanks for reading...Steve Jackson
561.602.1258
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