Short Sale-Good or Bad Idea

There are no easy remedies in liquidating real estate in today´s complex market, however, some real estate agent, and investors want you to predispose of your home without you fully understanding what you may be getting yourself into. They rely on the" ignorance of the public" in an attempt to take advantage of you. With the foreclosure market the highest it has just about ever been, homeowners are looking for alternative ways to either save their credit, their home, or both, but where do turn and what do you do? There are unscrupulous people working the system every day to take advantage of you. One such alternative is called a "short Sale" and it can be quite complicated and that is why it is always best to seek legal assistance or professional help when dealing with a short sale.

A short sale happens when a seller can no longer afford to make their payments and is nearing foreclosure or bankruptcy (not all short sales, however, are due to the pre-foreclosure situations. A homeowner does not have to be in pre-foreclosure to sell their home with a short sale). If you are living in the home that is the subject of a short sale, it makes life much more complicated… The bank's ability to threaten or frighten you is much greater in that case. In this case, a short sale is only slightly better than the alternatives. You will still lose your house, and your credit is still destroyed just because you've made 4-5 late payments on your mortgage.

This is not an alternative to foreclosure where the money you owe just magically disappears. The deficiency entered by the lender will be accounted for. The deficiency can be 100% loaned to the seller in the form of a promissory note, which they then must repay. If any portion of the deficiency is "written off", meaning that the bank does not collect it, you can rest assure that they will report it as 1099 income to the seller or even as a judgment which will show on your credit for 10 years (not 7 years, but 10 years!).

(In cases where the money is "written off" it's important to understand that the lenders will never actually "write something off." In most states, the lender has the ability to show any deficiency as 1099 income for the seller. All this really means is that the seller has to pay taxes on that income. Depending on one's situation, it could mean that people that are dependent on some form of aid because of "low income" will have some explaining to do come tax time. It is recommended that the seller consult with a tax attorney to determine what, if any, tax consequences there may be).

The representatives or employees of the lender that are negotiating the sale are not there for the benefit of the seller. Their only goal is to collect as much money as possible for the lender and they will use whatever means necessary. You can be sure they will misrepresent their own policies and sometime will outright "lie" to the seller in order to intimidate and scare them into paying more money.

A short sale, therefore, is a phrase, or concept, and is the latest trend that realtors and investors are throwing around as though it is the cure-all to the foreclosure crises. Those same realtors and investors simply throw the term around as if it meant "a sale under market value." There are some individuals who may tell you that by selling your home that it prevents foreclosure (A bank owned (foreclosed) house is not a short sale) proceeding to be facilitated, or that the short sale will not affect your credit. Short sales appear on your credit report as "pre-foreclosure in redemption", not as "debt discharged due to foreclosure"

The most important definition of a short sale is how it differs from foreclosure. In foreclosure, the homeowner falls behind on their mortgage payments and the bank repossesses the house through the foreclosure process and sells it. In almost all cases, the bank pursues the homeowner for the deficiency.

A short sale can come about for many different reasons not just because a homeowner is in foreclosure. Sometimes a short sale can arise when a seller owes more on their mortgage that they can sell their home for (sometimes referred to as up-side down, or the loan is underwater) Different banks have different policies and although there are general policies, every bank is different. The best-case scenario is to get a bank that actually "writes off" the deficiency. All that happens here is that the seller has some minor derogatory credit reporting, but doesn't actually owe the bank any more money. This credit reporting can consist of anything from "creditor settled for less than the amount due" all the way to "foreclosed."

One other important thing to remember is that if the lender gets the property back (should the short sale not go through); they have to put it up for auction. This creates the risk that additional money will be lost if the house doesn't sell for what it's worth

A short sale, therefore, is an "arrangement" between the current owner of a home and the bank that lent them the money to buy their home to accept an offer for less than the total amount owed to pay off the home. The "deficiency" is the difference between the amount owed and what the bank collects at the short sale. Although, the "arrangement" can take many different forms, there is no other definition of a short sale.

Most banks will not agree to a short sale in writing until you have a formal offer. You can simply call your bank and ask them if you could do a short sale at a certain price and they might say, "Sure, no problem, we'd be happy to facilitate that offer." Beware". That doesn't mean a thing. Before your short sale is approved, you'll have to submit an application, hardship letter, financial statements, tax returns, pay stubs, the purchase agreement from the buyer, a HUD statement from the pending transaction, payoff letters from all lenders involved, and several other things depending on the lender.

Once this information is submitted to the lender, you will most likely hear back in 1-4 weeks on the "Terms" of their "approval." Be warned their approval will most likely be thinly disguised attempt to collect their debt and will almost never be the "write off" you were hoping for.

In conclusion, (these writings are only a summation of the complete short sale process) a short sale is not a magic cure. If you're thinking about selling your house as a short sale, you should contact your lender and get information in writing. It is not easy, and hardly ever will truly "win." But in some cases, it can leave you much better off than the alternative of foreclosure and bankruptcy.

Remember that this is a complex process and you should always seek the help of a professional when considering a short sale.