What is a short sale on a house (in real estate)?

What is a short sale and how to do a short sale on a house (in real estate)?

In the recent and current economy we have become all too familiar with terms like foreclosure and the term "short" sale in the housing market. The increasing frequency of this term has many people asking "what exactly is a short sale?" and how "can I do a short sale on a house?”

A “short sale” is a real estate term that means an acceptance of a discounted payoff by the lender and releasing of the lien secured to the property that occurs when the property is sold and the lender agrees to accept less money than the actual owned amount. Recently short selling has become one of the most prominent alternatives to foreclosure and/or bankruptcy for home owners who are not able to keep their mortgage payments current. For example when the unpaid balance of the property loan is $110,000 USD, the house sells for $100,000 USD under a short sale the lender accepts this amount as payment in full. In other words, instead of buying from the seller, you are buying from the lender with a discount. There are several reasons why the banks would agree to such a deal. They dislike excess inventory and bad loans on their books, so if there is an opportunity to sell the property without huge losses, they will probably agree to a short sale. Another reason might be the long time a foreclosure procedure takes. The foreclosing process can be extremely time consuming taking up to two years in some states . That is why many lenders choose the short sale option and finalize the deal right away. The bottom line is that the lender will probably do whatever they can to make the most or lose the least amount of money, so having a property in foreclosure for two years while it loses value from deterioration and the interest payments that could be made on it are both incentives that encourage a lender to accept a reasonable short sale. The extra costs, which are involved in a short sale on a house vary and may lead up to a 40 % loss in the value of the mortgage. However, as we explained earlier, short sale is often conducted because of the long-lasting foreclosure procedures. Here is the place to note that not all lenders would agree to a short sale especially if the foreclosure makes more sense and not all sellers and properties qualify for a short sale. A seller could qualify for a short sale if he/she covers these points:

• <!--[if !supportLists]--> <!--[endif]-->The value of the house has dropped below the amount due to the lender, including some penalty amounts
• <!--[if !supportLists]--> <!--[endif]-->The seller has difficulties including hospitalization or serious illness, unemployment, bankruptcy, divorce etc. But does not include lifestyle decisions, bad purchase decisions, pregnancy, bad neighbors complications
• <!--[if !supportLists]--> <!--[endif]-->Absence of assets
• <!--[if !supportLists]--> <!--[endif]-->The mortgage is in potential default, near default or in default status

The short sale has some drawbacks for the borrower, so it is a good idea to get legal advice from a real estate lawyer and discuss with an accountant short sale tax ramifications. There is also no guarantee that the lender will not pursue a borrower for the deficiency (difference between amount paid and amount owed). A lawyer should be able to inform you if your loan qualifies for a deficiency judgment or claim. When a borrower begins to have difficulties or feels any financial discomfort paying the requested fees and he/she can no longer afford doing that, he/she should immediately contact the lender. Foreclosure on the property is the last thing a lender would want to do. Before considering a short sale in real estate or other property, the lender will usually require detailed information about the property to be submitted by the borrower in order to make the deal. Different lenders have different requirements and may demand that the borrower submit various documents, but in general the requested information may include the following details:
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• <!--[if !supportLists]--> <!--[endif]-->Proof of income and assets – Lenders would like to make sure that you indeed cannot pay your debt. You will have to disclose information about the various bank accounts you have, bonds, shares, real estate or any other kind of property.
• <!--[if !supportLists]--> <!--[endif]-->Copies of bank statements – this is designed to check your current financial situation and your financial history. If you had large cash withdrawals in the past you better have a ready answer about this.
• <!--[if !supportLists]--> <!--[endif]-->Hardship letter - hardship letter, in which the borrower should sincerely describe their financial problems and list the reasons why they are in the financial postition they are currently. The lender would show understanding if you lost your job or you were hospitalized. Lenders are not empathetic to situations involving dishonesty.
• <!--[if !supportLists]--> <!--[endif]-->Purchase agreement and listing agreement – the lender will require a copy of the offer and the listing agreement once you have reached an agreement with the prospective buyer
• <!--[if !supportLists]--> <!--[endif]-->Appraisal of the home from your real estate agent – this appraisal will show what the estimated market value of your house is at the moment. It may include comparisons to similar houses and their active market prices, pending sales and report of prices of similar houses sold in the area.
• <!--[if !supportLists]--> <!--[endif]-->Estimated closing statement – a document containing important data such as the price at which you expect to sell, loan balances that are not paid, due fees, late fees and commissions. If the estimations in this sheet show that the price of the house covers all the expenditures this means that you probably do not need to short sale
  - an ofiicial sheet in which proceeds during previous transactions are listed in detail
• <!--[if !supportLists]--> <!--[endif]-->Submit an authorization letter - is you are going to use any intermediaries such as closing agent, layer etc , you better send the lender an authorization letter including property address, loan reference number, name, address etc. Lenders typically do not share any information if they are not authorized to do so

Another good idea in this situation is to ask the lender not to report the short sell to the credit reporting agencies because a short sell will affect your credit score and even though it is not like a foreclosure there are some creditors who will consider it to be. Your lender may not do this for you but it does not hurt to ask and at the very least you will be aware of how it will appear on your credit report and it will help you make a more educated decision. Also remember the possible tax consequences and benefits of a short sale before you make a decision, for example the I.R.S might consider debt forgiveness as income. For more information you take a look at Mortgage Forgiveness Debt Relief Act of 2007.