Short Sale - How is it Accomplished?

The real estate market transitions from "overheated" to normal, some people are in a position of no equity or negative equity regarding their home's value. In this situation, a seller who wants to sell his or her home will have to come to closing with a significant amount of cash to make the deal work.

What happens to a seller who is in a negative equity position and either does not have the liquid assets to sell or is facing foreclosure but wants to avoid foreclosure or bankruptcy? This is when a "short sale" must be contemplated. In a short sale, the seller's lender is contacted and the financial situation is outlined, along with proof of the home's value and the seller's financial condition.

SHORT PAYOFF

Under these circumstances, lenders often will cooperate with the seller and allow the property to be sold under normal market conditions to maximize the gross sales price and subsequent net to the lender. Upon sale and settlement, the lender will receive all net proceeds, following the payment of customary closing costs including the normal real estate commission, which will generate the lender less money than they are owed, also called a "short payoff." The lender has agreed to take this short payoff and release the lien against the property, thereby allowing the new purchaser to receive clear title to the property.

AVOIDING FORECLOSURE

The short sale also benefits the lender because the alternative - which could be foreclosure - would cost the lender more money by selling the house below market, carrying a vacant house for months and paying to maintain that property. Also, FHA, VA and conventional loan holders, Fannie Mae and Freddie Mac, require lenders to work with borrowers in a reasonable manner in such circumstances.

The short sale is not a miracle cure for all sellers because some lenders will not cooperate in the program. Also, where lenders do cooperate, there is no guarantee that the lender will forgive the remaining indebtedness; each case will be determined on many factors, including a borrower's future ability to pay. Additionally, a short sale could have adverse credit complications for future loan originations plus debt forgiveness may be subject to income tax.

EQUITY STATUS

Therefore, it is suggested that when a seller is about to list a property the seller and real estate agent should discuss the equity situations. If negative equity appears and the seller does not have financial ability to pay the money due at closing, a short sale should be explored immediately. The determination by a cooperating lender will take several weeks, so if the property is listed and a contract is accepted, it would be advisable to make the contract contingent on lender approval of a short sale.