What is a short sale?

A short sale typically is executed to prevent a home foreclosure, but the decision to proceed with a short sale is predicated on the most economic way for the bank to recover the amount owed on the property. Often a bank will allow a short sale if they believe that it will result in a smaller financial loss than foreclosing as there are carrying costs that are associated with a foreclosure. A bank will typically determine the amount of equity (or lack of), by determining the probable selling price from a Broker Price Opinion BPO or through a valuation of an appraisal. For the home owner, advantages include avoidance of a foreclosure on their credit history and partial control of the monetary deficiency. A short sale is typically faster and less expensive than a foreclosure. In short, a short sale is nothing more than negotiating with lien holders a payoff for less than what they are owed, or rather a sale of a debt, generally on a piece of real estate, short of the full debt amount. It does not extinguish the remaining balance unless settlement is clearly indicated on the acceptance of offer.

 Are you Upside Down On Your Property? 

Common Short Sale Questions:

Question: If I am down on my mortgage (missed payments) and my home is worth less then I owe, do I have to short sale?

Answer: No. You have other options as well. Here are a the most common: Option 1 do nothing and allow the bank to foreclose (not recommened). Option 2 Apply for a Loan Modifation to ruduce payment to a lower payment (condition apply and vary by lender). Option 3 Deed in leu of foreclosure (give the property back to the bank). Option 4 short sales the property. Sell for less then full amount owed to bank (Help from Jim Silva Real Estate Broker is recommend).

Question:Loan Modification or Short Sale?

Answer: Before taking any Short Sale listing I pre-qualify the homeowner/seller to see that their best options are. Sometimes this is staying in the home and possibly doing a loan modificaiton, sometimes it's a Short Sale and others times it's both. If you are over 30 days late on your payments, don't risk it, you should prepare and get ready for one of the above option or both. In some cases having the property listed as a Short Sale may help convey to the bank you are serious and they may put more of an effort into the Loan Modification. In some cases a loan modification is only a temporary fix & you still may need to do a Short Sale.

Question: How do I qualify for a Short Sale?

Answer: First you need to be able to convey to your lender that you have a valid hardship. The hardship will have to clearly show that you can no longer make payments now or in the near future. Your property plus costs will need to be valued less than what is currently owned on the property

Question: Do I have to be late on my payments to QUALIFY FOR A Short Sale?

Answer: Absolutely NOT! There are many professionals out there giving bad advice and letting thier clients know this is the only way to get a Short Sale done. I have heard other Realtors, attorneys and even the lender tell them this. Just understand when the Sheriff shows up on your door, not one of those professionals giving you that advice will be there to help you.  If you can countinue to pay your mortgage please due so.

Question: What is considered a valid hardship?

Answer:This is a tough question because everytime I think I have them all listed I get a call from someone that has a scenario that is a valid harship that I never thought of. Below is a list of some common hardships. Pretty much a hardship is anything that has a caused a financial burden in your life. Some types: divorce, bankruptcy, loss of a job or business, reductioin in pay, increased cost in lifestyle, lawsuit, adjustable mortgage rate increasing, illness or injury, death in family or unexpected medical expenses. If you have a question about a potential hardship contact Jim Silva  of Five Star Reatly a Short Sale Expert with year of experince,  he will respond back to you with 24 to 48 hours with his thoughts on your possible hardship.

Question: If I pay mortgage insurance and default on my loan, why wouldn't that cover the deficiency amount?

Answer: The mortgage insurance is not there for your protection, just the mortgage lenders.  You pay to cover the lender loss if you were to defult on the mortgage.

Question: Will I still have to pay property taxes if I do a short sale?

Answer: Property taxes will always have to be paid as part of any accepted short sale. Whether it?s you or the lender depends on their policies and the specific agreement you reach while negotiating the short sale.

Question: Who can represent me in a Short Sale?

Answer: A licensed Reatlor in your state is the only person that can represent you in the real estate transaction. Attorneys will play a role in this transaction as well to some extent depending on the knowledge base of your Realtor. While any real estate agent can represent you this doesn't necessarily mean every Realtor is qualified or holds the necessary expertise to successfully close a Short Sale transaction. This is very much a specialty and should be performed by a Certified Short Sale consultant.  Jim Silva of Five Star Realty is a SFR (Short Sale And Forclosures Resource) agent. This is a new designation by the NAR (Nation Assiocation of Realtor). SFR's have the skills need to complete Short Sales correct and quickly.

Question: Who truly Wins in a Short Sale, Seller, Buyer, or Lender?

Answer: They All Do! People who are in the market for a new home can get a great deal on a short sale house. At the same time, the person selling the home benefits because a short sale does far less damage to one’s credit than a foreclosure. The third party in the matter, the bank or lender, also benefits from this contract because they will incur substantially less fees and costs with a short sale than foreclosing upon the house.


Question: What are the Tax implications when a lender forgives debt in a foreclosure or short sale?

Answer: The short answer – Ask an accountant! The long answer is that the forgiven debt may or may not be taxable. Normally, debt that is forgiven or cancelled by a lender must be included as income on a tax return. But the Mortgage Forgiveness Debt Relief Act allows owners to exclude certain cancelled debt on their principal residence from income. It only applies to “qualified principal residences,” and the law expires at the end of 2012. So, if the bank forecloses or agrees to a short sale and forgives debt, and the owner lives in the home as his principle residence, the IRS suggests that the debt will likely not be taxable. For more information, go to the IRS website or IRS Publication 4681.

Question: Why are some banks taking so long to approve Short Sales?

Answer: Lenders are completely overwhelmed and understaffed. The foreclosure crisis struck quickly and grew at a staggering pace – too fast for lenders to keep up. There were nearly 2 MILLION foreclosure filings in the first half of 2009 alone. A large lender may have a few hundred loss mitigators. Dane County saw over 1,400 foreclosures in 2009. That is one relatively small county out of thousands nationwide. Lenders simply can’t keep up. At the same time, they can’t keep up with defaults and late payments. It is taking lenders longer than ever to deal with customers in default, start the foreclosure process, and push the foreclosures to completion.