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What Does Short Sale Mean?
October 18th, 2006 categories: Real Estate Tips, Short Sale
A short Sale is when the homeowner owes more on their mortgage more than what the property is currently able to sell for in today’s Real Estate market place.
This can occur for many different reasons. Equity lines of Credit where the homeowner takes money out of the equity of their home to pay off bills to an amount greater than what the house can sell for including closing costs.
Another possible scenario would be the type of loan the homeowner took out originally that may be an Interest Only loan with negative amortization and penalty fees for pay offs, 100% loans and Option Arm Loans. The homeowner now may owe more than the home is worth and would have to actually come up with the difference in the money in order to sell their house.
Short Sales are many times one of the first steps in the Foreclosure process. A Short Sale is definitely, a better option for the homeowner than Foreclosure. As a Realtor ®, I have helped facilitate Short Sales and work with Lenders on behalf of homeowners.
The Short Sale process must be agreed to by the Lender, the mortgage holder. There is quite a bit of paperwork involved in this process where the Lender asks the homeowner to provide documentation proving their inability to keep up with the house payments. W-2’s, pay stubs, tax returns are just a few of the items needed by the Lender. Lenders work with Realtors ® quite often on Short Sales.
Some Lenders would prefer a Short Sale rather than a Foreclosure. One very important item that all homeowners contemplating a Short Sale need to be aware of, is the difference in the amount that the Lender forgives (and some Lender’s don’t forgive), the IRS does not.
The IRS considers this amount as income and you may be taxed on it. If the homeowner decides to walk away from the mortgage loan by returning the property to the Lender, it is important to know that this will affect your credit. Remember, your credit is important when attempting to later rent.
If considering Bankruptcy in the form of Chapter 7 or Chapter 13, it is vital to see an Attorney who specializes in this field so that you are informed properly as to the long-term drawbacks.
A very important side-note is that a homeowner going through this process is many times bombarded with questionable people who offer their services at a very hefty price to the homeowner. You need to be cognizant of this and protect yourself by making sure that you are dealing with someone who really has your best interests at heart. I would suggest that you contact an experienced Realtor ® that can guide you through this process.
Your Realtor is your spokesperson to the Lender and can help you through this difficult time. In the Central Valley, from 2005 -2006 there has been a jump in default notices up 85%.
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Gena: Congratulations on a great blog and topics! I’ll add you to my own blogroll when it debuts.
Short sales are becoming commonplace in San Diego. The biggest contributors are the more recent 100% loans, Option ARMs and equity draining on the part of the owner. Sometimes all three factors are present.
Be sure to give me your blog address when you have it, can’t wait to see your new San Diego blog! Thanks for the visit. Be sure to come back on Monday for the official debut.
[...] I have blogged, about Foreclosures, Short Sales , the process and the dangers as well as the Fraud, where you can read the in’s and out’s of Foreclosure. [...]
[...] What Does Short Sale Mean? [...]
I can see how hist could be beneficial to a seller (avoid forclosure) but am curious to know if a “short sale” is good for a potential buyer? If so, what benefits are there? thanks
Scott, great question. If the Banks were accepting Short Sales it would be beneficial but so far I’m 4 and 0 with getting the Banks to respond much less accept any Short Sales. Right now, the Buyers are wasting time with Short Sales when they can go after a home for sale that is negotiable with a Seller and make out far better.
Thanks Gena. I wondered how flexible the bank/seller would be given that they had already accepted a ‘loss’ due to the short sale.
Scott,
You are most welcome. Come anytime.
Yep, the answer is pretty much a big ZERO!
Hi…I’m trying to understand this as a hopeful buyer…If an ad says “subject to short sale” and bank approval, owner motivated” if they are asking say $150,000, can I just offer like say $130,000? Will the bank take lower offers, or are you stuck with the asking price? I’m new at this and on an extremely limited budget. Thanks
Brenda, I wish there was one simple answer for you. That is why you need to have good representation with a Realtor. All banks are different, all circumstances of the loan are different. There is no one answer fits all.
Many times if the list price as a “short sale” is $150,000, the actual homeowner may owe $230,000 or more. As you can see, the banks want to get as much as they can and there lies the problem. The banks do not typically reply quickly as they are waiting to see all the different offers and will take the highest or if the offers are not high enough, they will simply foreclose on the property.
Your best best is to be represented by a qualified Realtor who can steer you in the right direction.
Hope that helps answer your question. Feel free to call me if you like.
This looks like a good time to buy a short sale.
Great post full of information for people needing to sell short. Thanks
I am new to the term of short sale.
Why do you say “A Short Sale is definitely, a better option for the homeowner than Foreclosure”. Is it because Short sale mayn’t affect homerowner’s credit?
For buyer’s concern, does it make any difference to buy short sale property or to buy forclosure property.
Homer,
This article was written Oct. 2006 and back then the banks were not accepting any of the home buyers offers on Short Sales. It was very frustrating for the home buyers.
But now, in 2008 we are finding that a few of the Banks have gotten with the progam and are beginning to accept Short Sale offers from home buyers.
As far as why it is best for a homeowner to go through the process of Short Sale vs going straight to foreclosure is the first of all, theres is a chance that the Lender (sevicer)might redo the loan to make it so that the homeowner could remain in the house.
Also, your credit isn’t effected as badly as it is on a foreclosure. Pluse there may be tax implications to consider as well.
Thanks for coming on over to Sacramento Real Estate Voice and feel free to ask your questions, any time.
We are at the point of our life not knowing what is the best option for us at this time
we purchased a home almost 2 yrs ago with a subprime loan 2 yr fix that turns to adj in jan 2008. is our option best to do a short sale,if so how are our taxes and credit affected. there’s a attorney we found on line that wants us to pay 3000.00 to him to write the lender and negoiate a better loan payment
and interest rate,have you heard of this before? thank you
Linda,
I would never presume to know more than a “Real Estate” attorney and I assume that is the type of attorney that you are referring to but personally, I would do the leg work yourself and save the $3,000.
This seems to be a time when everyone and their dog is out there taking money from those that can least afford to be scalped.
Call the Lender yourself. Write a letter to your Lender. It’s what we call a hardship letter and let the Lender know WHY you can’t make the upcoming payment. They also want to see bank statements and tax returns.
Plead your case and see what you can do for yourself, first.
Ask the Lender to modify your loan. Many will since this saves them money and buys you some time.
If the Lender won’t modify the terms of your loan then seek a Real Estate professional who has experience in Short Sales and follow their advice.
Good luck to you. It’s not an easy task but one that a lot of folks are and have been going through and requires your due dilegence.
My understanding is that a short sale will effect your credit less than a foreclosure. I believe, the overall time before you would be able to buy again with good payment history would be 1 year and with a foreclosure it could take up to 5 years.
I wish you the very best and hope that helps answer your question.
We are in the process of buying a house. Is a short sale the way to go or not? I have been told no. Please help.
Desiree,
As long as you are working with a full time professional Realtor, I don’t see why not. There are some excellent buys here in CA.
we have been approved for a short sale will theirs come after me for the rest of the money?
sorry not very clear irs will they come after us for the rest of the money.and or do they always come after the money
Brian,
I can’t really speak for the IRS. Many of the homeowners who lost their homes may find that they will have to pay taxes on the difference between what they owed the bank and what the house eventually sold for.
It’s important to talk with a tax consultant or an attorney for your particular situation. There are non-recourse loans and recourse loans so gather those old loan documents and talk to a Real Estate attorney so that you are not one of those who might be in for a bad surprise.
It’s definitely a good idea to work with an agent and work with a tax professional. Short sales can be complicated and there are those who have done them many times. Short sales are much better than just letting the house go back. Short sales work in most all areas whether the house needs work or not and in each price range. Most people I know think it works best with a second mortgage. Being that the short sale process leaves a lot of unanswered questions for people, I have tried to help those in my state with this with this long informative article
http://www.minnesotainvestors.com/blog/what-short-sale-information-minnesota-short-sale-process/
Dear Madam/Sir:
I saw a couple of condo lists with “short sale” or “short sale almost complete” sign. I am looking for condo for investment. I am wondering what kinds if risk I will take for the short sale condo?
Thanks
Roseanne
Roseanne,
You need to have a lot of patience when dealing with a Short Sale. They take longer than a bank owned home to get the banks to respond to an offer.
However, there are some excellent deals out there to be had.
Some of the Short Sale owners may be trying to negotiate a modification which would obviously not be in your best interest as a buyer.
Two of my short sales have sellers who have made a commitment to leave their home so that would not be an issue but it could be on others out there.
Hope that helps. When in doubt ask your Realtor about a specific property and get the specifics on that property.
is the house belong to the buyer even they doing short sales
Sherell,
The house still belongs to the owner but the bank is the one who will decide if they will accept a short sale or not.
if you short sale your home, will they close your credit cards and take your cars?
No, they will not take your car. You need to have transportation to your job. However, I am not an attorney so you may want to talk to someone in the legal field if you are concerned. I really can’t give legal advice, I am a Real Estate Broker.
Gena,
What is meant when a listing states short sale approved at such and such amount? I seen a listing for a property and it stated short sale approved at $250,000. I also recently heard from a friend that short sales are moving must faster now is that true?
Thank you for your time Jerry
Jerry,
Thanks for popping in…
When you see “Short Sale approved at $250,000″ this is the listing agent’s way of letting you know that the bank will not accept anything less than $250.000. This usually comes after an offer has come in and the bank has had an appraisal done on the property and knows it’s worth.
I too have heard that Short Sales are possibly moving faster. This really has to do with the bank and the investor along with the ability of the listing agent doing their job correctly. There are a lot of factors involved here…some homeowners do not qualify for a short sale and if the listing agent hasn’t done their job correctly, it makes the process that much longer.
Thanks for your question. I hope this has helped both you and others who have the same question.