Short Sale FAQs
THERE ARE MANY TAX AND LEGAL ISSUES (FOR INSTANCE, IRS TREATMENT OF DEBT FORGIVENESS) RELATING TO SHORT SALES. FIRST AND FOREMOST, PLEASE CONTACT YOUR ACCOUNTANT AND ATTORNEY BEFORE MOVING FORWARD.
What is a short sale?
A short sale is when the net proceeds from the sale of the property are not sufficient to pay off the outstanding loans on the property. A successful short sale would only occur if the lender or lenders who hold the lien on the property agree to release the lien despite being paid less than owed.
When do they occur?
Short sales frequently occur when there is a sharp drop in market values of properties. There are three types of people generally affected: people who bought the property before the decrease, and either never could afford the payments or can no longer afford the payments. Also, people who refinanced their property at the inflated value taking cash out of the property. Finally, people that have received a large lien on the property above and beyond the loan balance, for instance, IRS liens, mechanics liens, judgments, SBA cross collateralization agreements, etc.
Who needs to know the property might be facing a short sale?
If you have listed your property, you must disclose this fact to your listing broker so that they can place a disclaimer in the MLS that the property is in a short sale situation and any purchase contract is contingent on lender(s) approval of short sale. You will also want to make sure the information is disclosed again in the purchase contract and in communication with buyers and buyers’ agents.Do not assume that everyone knows it is a short sale. While you are aware of what you did with the property, there is no way for everyone else to know what is owed until the property is escrow and a title commitment has been pulled – and even then there could be unrecorded liens or other issues affecting the property.
Can’t I avoid a short sale by placing money into escrow?
Yes, you can. Realize that a short sale can be devastating to your credit. If you have adequate cash, you can deposit it into escrow and avoid a short sale altogether. For instance, if the net proceeds of a sale came up $10,000 short of the amount needed to pay off your mortgage(s), you could deposit $10,000 into escrow and the sale would go through without destroying your credit while fulfilling the contract that you signed when you took out the mortgage. Some lenders may even allow the deal to go through by you taking on an unsecured line of credit for the unpaid balance.
Can Congress Realty handle short sales?
Yes, we can. We will clearly disclose the property is a short sale situation. We can provide you with a CMA which you can show your lender as they consider the fair market value of the property. Because you are saving money on commissions, it is quite possible (but not guaranteed) that the bottom line sales price they will accept would be lower than if they had to pay a higher commission, meaning a better sales opportunity for you. Please remember, however, that lenders are under no obligation whatsoever to accept a short sale. They can decide they want the full amount paid back or they won’t accept. After all, it is their money.
What is a hardship letter?
A lender is going to want to know why you cannot make the payments you agreed to and why they should take a loss on the principal balance. Sellers typically put together a hardship letter explaining changes in employment, income, etc. with pay stubs and tax returns in order to explain their situation.