Short Sales�-What You Should Know

Posted on: June 04, 2007

A ‘short sale’ with regards to real estate occurs when the owners of home sell the home for less (after their closing costs) than what they owe on the property.

When buyers and sellers agree in a contract to a price that would cause the sellers to be short in their payoff to their lender (lien holder), the contract should state that the “sale is subject to lien holder approval”. Many lenders are willing to accept a short sale if they believe they will net more money by allowing the sale to go through than if they complete the costly foreclosure process. A lender will not consider a short sale if the owner is still currently making the mortgage payments. Typically, short sales take place after a NOD (Notice of Default) has been filed and an auction date gets set for the property. The auction dates in our Portland Oregon and Vancouver Washington area are usually about 4 months from the time the NOD gets filed.

What it means to the Sellers:
A ramification for the sellers is if the sale doesn’t get approved by their lien holder they will have a “Foreclosure” on their record once it gets auctioned off and their credit will be significantly damaged for many years to come. They will also still owe their lien holder the difference from what they owe (with all fees, interest, penalties, etc) and what the lien holder nets on the property when they sell it.

If the sale gets approved by the lien holder and the transaction closes escrow they can end up with only mortgage “lates” on their credit and avoid the “foreclosure” on their record. If the sellers have a Realtor that is experienced in short sales, they can in many cases avoid owing their lien holder any money by obtaining a “full release”. I’ve always been able to negotiate a full release with my sellers’ lien holder on the short sales I’ve done. These shorts have ranged from $18k to about $98k. The sellers don’t get off completely though… the IRS considers the debt forgiveness as “income”, and the sellers will receive a 1099-C for the amount of the short and they will have to pay taxes on it.

What it means for the Buyers:
When a buyer gets into a contract with a seller on a property that is “subject to lien holder approval” they should be prepared for a potentially long and possibly disappointing escrow. On one of the short transactions I did, the lien holder refused to look at the contract until 2 days prior to auction. We were in escrow almost 4 months (kept getting close-date extensions) when the lender finally decided to look at the accepted offer. They did postpone the auction date and allow the sale to complete but they could have rejected the contract in 5 minutes and the buyer would have no recourse. The buyer would have been out 4 months of valuable home searching time tied up in this transaction. Thankfully, not all lenders are this difficult to work with on short sales!

If you are a seller and believe you might owe more than what you can net when you sell the home I recommend finding a Realtor that has successfully done short sales, it can save you a lot of money and your credit!