November 10, 2011

Real Estate Q&A: I keep hearing about short sales, what are they?


A: In our current real estate market, the price of real estate is not what it used to be. All too often property owners find themselves unable to afford to make their mortgage payments and unable to sell the property because it is worth less than what they owe to the mortgage company. This is commonly referred to as being “under water.” A short sale is another option when property owners find themselves facing foreclosure.

Generally speaking, a short sale is a sale in which the lender agrees to accept less than the full payoff balance due on the mortgage. In order for a short sale to be completed, the lender must agree to release its lien against the property.  However, the lender may or may not release the seller from being personally liable for the remaining debt. The difference between the loan balance due the lender and what the lender actually receives from the sale is known as the deficiency. A lender can obtain a judgment against the seller for the deficiency amount, have the seller sign a note agreeing to pay the deficiency, or waive the deficiency entirely and not require any additional monies to be paid by the seller.

You may be wondering why a lender would agree to a short sale when it could just foreclose. Lenders benefit from a short sale because the fees and costs the lender will have to pay are less than with foreclosure. At the foreclosure sales, many lenders have to take the properties back. As the new owner, the lender has to hold the property, maintain and care for it, and possibly pay taxes and HOA dues after the foreclosure sale until a new purchaser can be found. In a short sale, the lender has to do none of those things.

A short sale is often more advantageous than a foreclosure for the seller because a short sale is generally less harmful to a seller’s credit score than a foreclosure and the seller has the opportunity to negotiate with the lender to minimize or waive any deficiency. However, if a lender chooses to waive the deficiency amount, in part or in whole, the lender is required by law to report the deficiency amount to the IRS under a 1099 filing against the seller.  Therefore, there may be significant tax consequences associated with a short sale and anyone considering a short sale on their property should consult not only their real estate attorney, but their certified public accountant as well to make sure they are making the right decision. 

Please give us a call if you would like more information on the process, consequences and benefits of short selling real property.