What is a Short Sale?
A Short sale is a phrase used to describe a sale in which the cost of the product or service being sold is actually more than the sales price of the product or service in question. Another common term used to describe a short sale is being "upside down". The term short sale has become synonymous with any real estate transaction where the lender is agreeing to accept an amount less than is owed. In real estate, a short sale is a rather lengthy process in which an agreement is made between the bank and seller for the bank to accept a lessor amount than owed.
The typical steps in the Short Sale process are as follows:
· The seller needs to be in a distressed state, most of the time the property is in foreclosure. If a homeowner is current on mortgage payments the bank will not always approve a short sale. The loan is said to be "performing." This is rapidly changing and nowadays banks are willing to negotiate with even "performing" loans.
· A lengthy package of documents need to be assembled to prove to the bank that the seller can no longer make payments. Most of these documents are the same ones used to qualify for the loan. You are basically disqualifying the property owner. In addition to those financial documents a hardship letter needs to be drafted explaining what caused the financial hardship. Also market trend reports, recent sales, market analysis, news clippings and other information that can help make the bank make a better determination as to why they should accept a short sale.
· The property has to be put on the market for sale and one must show a concerted effort to sell the property at market value. There is misinformation out there where people believe the bank will accept any amount. This is not true. The bank will only accept market value whatever it may be. A detailed record of activity needs to be kept and submitted to the bank along with all other documents.
Once a buyer is found the purchase contract along with all the documents already submitted to the bank for approval. Once approved the sales process is continued as any normal real estate transaction would.
Most homeowners don't know that the bank will pay almost all required fees and commissions to all parties on behalf of the seller. Essentially the homeowner walks away paying nothing. The exception of being that the bank may require an appraisal which case the homeowner might be asked to pay for it. Sometimes when back dues or assessments are owed to a homeowners association, the homeowner is asked to pay for some of those fees. Also important to note, in no case may the homeowner walk away with any proceeds from a short sale. In some extreme cases you may negotiate with the bank for the homeowner to receive a small amount (usually no more than $1,500) for moving expenses and help with rent. Again this is rare and not the norm.
Along with the steps above, diligent communication and follow-up is a must in order to successfully negotiate, process and close a short sale. The entire process can take anywhere from 3-12 months to complete. You can see why it is important to hire a competent Realtor with a knowledgeable team to expedite the process.
Short Sale Consequences
A short sale has been successfully negotiated, the shortfall can be dealt with in various ways by the bank.
These are the most common methods used by the bank to recoup losses.
· Deficiency Judgment: A deficiency judgment is sought by the bank in order to recoup losses. A judge usually grant these fairly easily. However the judgment itself only gives the bank the right to recoup the monies, the process itself has to be undertaken by the bank. This gets expensive and most times they seek the judgment just so they have the flexibility to go after the homeowner in the future. Statute of limitations is typically 2 years to exercise this option. What has been happening as of late is that the banks are so overwhelmed that they file for the judgment and little else.
· 1099: Another option the bank has is to issue a 1099. A 1099 is an IRS form alerting the IRS that the homeowner has profited from a short sale. That's right the amount the bank was shorted was treated as a profit to the homeowner. The bank may issue a 1099 or a deficiency judgment, they cannot do both( Important note: This provision in the tax code has been suspended for short sales involving primary residences through tax year 2010.)