Own Sweet Home Blog

Short Sale simply defined means you are selling a home below what is owned on it.  Say you have a loan of $500,000 on a home that is now worth $400,000, then if you sell it at $350,000 (someone wanted a deal, right?) with lender approval, lender was SHORT of the amount owed and it is a short sale.

How does a seller typically arrive at a short sale decision?  First of all in most cases, seller is unable to pay the mortgage due to life changing situations like, job loss, divorce, backruptsy etc.  The lender issues a Notice of Default (NOD) to the property owner.  At this point seller has few options: Negotiate with lender on payment delays or reduced payments (like loan modification we discussed last month), become current on the payments and remove the NOD, or sell the property to cure NOD.  However, if sell of property involves reduced market price then a short sale situation arises.  This sale MUST be approved by all creditors to have a clean break from the property.  Any creditor not apprving a short sale, may recover their money by other means.

By all creditors I mean, all lien holders on the property.  They usually are, the county assessors office, first lender, second lender, HOA liens, and any other recorded liens on the property. County Assessors office always has priority and it usually never gets negotiated.  First lender is next in line and they can negotiate so the sencod lender, HOA dues and other lien holders.  To find out list of all liens on the property, one can research the county recorder's office or get a preliminary title report from a title company for a fee.  If your home is already with a Realtor for sale, this typically is obtained in the process.

Depending on the market value of the property these liens may or may not get paid.

Let's continue with our previous example...Assume all loans are obtained at the time of purchase.

Total Loan on Property $500,000

Amount of first loan: $350,000

Amount of Second Loan: $150,000

Sale price of property $400,000

Costs and Commissions:

HOA dues deliquency $1200

Property tax deliquency $3000

Misc Closing costs $6000

Real Estae Commissions: $25000

Total Costs and Commissions: $35,200

Net after all costs and commissions: $364,800.

At this point the first lender gets $350,000, second lender if agrees to settle for $14,800 gets that amount and the short sale gets consumed.  If there was loan deliquency on the first worth $14000, then the second lender may get just $800.  It is also possible that first lender may take a loss to have the second lender approve the sale and recover majority of the first loan.

This process may take any where from 3 to 6 months.  Note that the Mortgae Relief act of 2007 (see FAQ in IRS website) allows for all purchase money loan forgiveness to be NON Taxable until end of 2009.

It is important to price the property right, lender will do their own appraisals and broker price opinions and they all have to fall in place.  Afterall the lender has to answer to their investors in accepting a particular price.  If you offer too low, your offer may get rejected.  Also, by the time the lender accepts your offer and market prices have fallen, you may choose to back out.  Make sure your contracts are written properly to accomodate various possibilities and to make your deposit secure.

If you have refinanced your original loan, or taken a second loan or equity line, it may not be forgiven under the Mortgage Rellief act of 2007.  Please contact your tax professional for your specific situation.  Any loan or debt not forgiven the debter may come for collection later in time as allowed by the law.  If you or someone you know is in a situation where short sale can be an option feel free to contact me. (Amit 510-364-6686).