What is a short sale?                    

A short sale occurs when the net proceeds from the sale of a home are not enough to cover the sellers’ mortgage obligations and closing costs (property taxes, transfer taxes, and the real estate practitioner’s commission). The seller is unable to cover the difference.

Some, although by no means all, "short sellers" may also be in default on their mortgage loan(s) and, or be headed to foreclosure. Home owners who bought at the top of the market, or who took out large amounts of equity with a refinance and who now need to sell may also find themselves upside down, owing more than the home is currently worth, when closing costs are factored in. Some sellers simply do not understand that if they have assets, such as stocks or a high-salaried job, a lender is not going to let them just walk away from a short sale without signing a note to repay what they owe. Check out the example below:

How does the seller know if they are in a “short situation?”
A Comparative Market Analysis by a professional REALTOR, Don Khoury, may be your first indicator that you are in a short-sale situation. To give you an estimate of your net proceeds you must first know your outstanding mortgage balance and then add the costs associated with the sale of your home. Check with Don Khoury to get exact figures on closing costs and the lender to get the loan balance(s). Contact Don Khoury to find out what procedures the lender has in place to assist your family. You may consider getting a home inspection to determine what repairs are needed on a home and how this might affect its value.

The following questions and actions, along with several other actions, must now be answered:

            1. Whom do we need to talk to about the problem?

            2. What information will the bank need to decide whether to accept a short sale?

            3. What are the options besides a short sale?

            4. How to price a “short sale property.”

            5. What, where, when and how should disclosure of the short sale of a property be          disclosed to prospective buyers?

            6. How long does it take to complete a short sale?

            7. What can the seller and REALTOR do to make a short sale more attractive to a          lender?

            8. What are a seller’s options if a short sale is rejected by the lender? There are a variety of reasons a bank will reject a short sale — from too low a price to too many files on the loss-mitigator’s desk. You can look for another buyer or even try resubmitting the same contract. "Banks don’t want to take properties back in foreclosure, so they are going to do everything they can to make it work." You need to prepare in advance for the possibility of foreclosure if a short sale fails.

            9. What financial or credit liabilities will a seller have because of a short sale? Many lenders ask sellers to sign a promissory note for all or part of the difference between the proceeds of the short sale and the debt obligation as a condition to a short sale. In such cases, the note gives lenders the right to sue a seller and attach other assets if the note is not paid when due. Having a portion of a loan forgiven may have an adverse affect on your credit. You may try to sign a lease on an apartment before credit is damaged.

            10. What tax liabilities will a seller have because of a short sale?
One often-overlooked aspect of short sales is that a seller must count any amount forgiven by the lender as income and pay taxes on that income, even if no actual money was received. The IRS requires lenders to submit a Form 1099 stating the forgiven amount. Sellers who meet the Internal Revenue Service definition of insolvency (either in bankruptcy or with debts exceeding assets) will not have to pay taxes on the forgiven amount. Tip: The U.S. House of Representatives has introduced the Mortgage Cancellation Tax Relief Act (H.R. 1876), which would eliminate taxes on any debt forgiven on a principal residence through either short sale or foreclosure. The NATIONAL ASSOCIATION OF REALTORS® has been working to support this bill.

            Adapted By Donald J. Khoury from an article written by Mariwyn Evans