What Exactly is a Short Sale?

Buying a Short Sale

What is a Short Sale?

Many people are suffering through the short sale blues.  Many people are fearing the life that follows.  When you end up without any other option what can you do?  Chances are most of these people will go on and barely feel the bump.  My prayers are with all of you.  Some judge and talk about how these people should have taken better care of their finances.  In our economy many of these people had no other choice but to turn toward credit cards.  Everyone is feeling the strain.  For those of you that are being forced to sell your homes and go back to renting; time will change everything.

Short sales are fairly simple to understand.  A short sale is an option to the seller from the lender.  A bank will only go along with this option when all else fails.  Banks are so overwhelmed with short sales at the moment that they have no other option, but to accept a lesser price for a mortgaged property.  This is how a short sale is created.  Most times a seller is either distressed or in some cases the seller is being forced to relocate and the bank has no other option but to short sale.  In the case of a distressed seller, the seller has usually been trying for several months to sell and time passes without even a bite.  This is a sign of an overpriced listing.  The seller then contacts the bank, because funds run out to keep up their mortgage.  The bank sends out financial documents asking for the sellers income and expenses.  When the documents are accepted as eligible for short sale the bank will send out an appraiser to get an estimated current value of the home.  Sometimes the value can be drastically lower than the original loan amount.

There is some confusion between buyers and agents when explaining a short sale.  Buyers need to understand that these short sales are, in no way, deals for the buyer.  Once the appraiser comes up with an estimated selling price this price is what the home is worth at current market value.  It is titled Short Sale because the price a buyer pays, sells the bank short of how much the seller still owes on the mortgage.

When making an offer on a short sale property be prepared with a pre-approval letter in hand.  Having a third party involved means the bank isn't going to fool around with someone that isn't financially able.  Banks are not flexible like people are.  You may have your offer accepted by the seller and be denied by the bank.  After all, the seller just wants to sell.  They don't care for how little.  If and when the bank does approve an offer the chances of repairs are slim also.  They will more than likely only agree to repairs that are demanded from the buyers lender.  Make sure when you are shopping for short sales you are good with fixer uppers.  Another good tip is banks are more likely to accept an offer from a normal conventional loan over an FHA or VA loan.  This usually will only come into consideration if multiple offers are available.

Sellers there are also things you should know about selling your short sale home.  You probably already know, by now, that your credit is in the dumps if you are behind on payments.  If you've managed to keep up your payments then you will be slightly better off.  A short sale will most likely be looked upon lighter than a foreclosure in the future because you didn't give up.  When your home closes in escrow make sure you read every last line on every page you sign.  There may be a line on one of these pages that asks you to accept responsibility to repay the amount that wasn't paid off by the short sale.  If you sign this you are accepting this.  You have a right to not sign.  Here is how I look at it.  You had two options, one you short sale and help the bank by marketing the home yourself with your Realtor and sell it for less than what you owe at market value.  Or option two, you foreclose on the home and leave the bank with the responsibility to find a buyer and sell it themselves for the same price you sold it for with the short sale option.  The reality is, the bank won't be able to sell the property for anything more than what you sold it for.  The current market value won't change fast enough for them to gain a profit.  Another reality is, a foreclosure is almost the same on your credit as a short sale.  They are both going to stay on your credit report for seven years, and they are both going to drop your score enough to make lenders question loaning you anything.  If you are going through this situation please contact a foreclosure/short sale attorney.  You may also owe taxes on the amount of money you end up being released from.  If you end up selling your home for $230,000 and you had a mortgage for $260,000 then you may have to pay taxes on $30,000.  You should contact a tax consultant to guide you through dealing with the IRS.  President Bush helped out a whole bunch before leaving the Oval Office.  He gave distressed owners relief from short sales and foreclosures by making some short sales non-taxable.

I hope this article has cleared up confusion for buyers and sellers.  Please remember if you are in a short sale or foreclosure situation, contact an attorney and tax consultant for better details on your situation.

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