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 loans and, or be headed for 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 because of divorce or job
transfer, may also find themselves upside down, owing more than the home
is currently worth when closing costs are factored in. Other sellers
simply don’t 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 th
ey
owe.
How does the seller know if they are in a “short situation?”
A Comparative Market Analysis by a professional REALTOR may be your first
indicator that you are in a short-sale situation. Knowing what your
outstanding debt and then adding the cost associated with a sale is
critical. This will give you an estimate of the net proceeds. Check with
your REALTOR to get exact figures on closing costs and the lender to get the
loan balances and to find out what procedures they have in place. 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