03/11/2024
Understanding the Details of a Short Sale
Within the real estate market, the term ‘short sale’ is often brought into play when a property owner has financial difficulty and the property is in imminent danger of being lost to foreclosure and reclaimed by the lien holders or mortgage company. During a short sale, a property owner and their lending institution agree to sell the property at a loss to partially, but quickly, end the legal financial obligation between the two parties.
Why Choose A Short Sale Over Foreclosure
As an alternative to foreclosure, which scars the property owner’s credit report and renders the lien holders or mortgage company seeking relief for their loss through equity court, a short sale can serve to minimize the damage to the property owner’s credit while allowing lien holders to recoup at least a portion of the funds which they are owed.
Unless a cash sale has occurred, traditional property buyers secure a loan through a bank, mortgage company or other lien company to complete a property purchase. This loan, or mortgage, requires that the property buyer make payments at an agreed rate and on a specific time schedule. Some property owners that are bound by such an agreement may have personal financial problems at some time during the life of the loan, and may no longer be able to hold up their end of the contract. Job loss, divorce, financial market change and unexpected medical expenses are only some of the reasons that a property owner may find themselves in danger of default.
When this occurs, a property owner may choose to petition the bank or mortgage company to agree to a short sale. This proactive approach will be viewed favorably by the financial institution or lender, as it shows that the property owner is interested in achieving a resolution and not simply ignoring their obligation.
How A Short Sale Works
When a property owner realizes that they have exhausted their financial options and there is no other recourse but to surrender the property, the property owner should contact the financial institution, mortgage company, or lien holder named on the contract and verbally discuss the potential for agreeing to a short sale. There will usually be a written application process, and can take several weeks to months to be approved. However, a short sale is often a more rapid process than the legal steps the lender would need to execute in order to achieve foreclosure. A lender is usually amicable to a short sale as they stand to recoup more money than they would through a foreclosure on the same property.
Secondary or Junior Lien Holders
In some cases, a property owner may not only be burdened by a mortgage note that is unable to be satisfied, but also secondary liens for other creditors. Once a short sale is approved, the property owner should immediately begin negotiations with each junior lien holder in an effort to secure a waiver of responsibility for any debts not able to be paid fully with the funds collected from the sale.
Receiving Offers
When the property owner receives offers from potential buyers that are reasonable, the details of the offer should be brought to the lien holders to determine if they are willing to accept. Based on the current estimated value of the home, the outstanding lien amounts, and the amount of remaining deficiency, the lien holders will make a decision regarding approval of the sale. In the event of approval, the property owner must immediately request releases from the lien holders to prevent the property owner from being responsible for any financial deficiency remaining after the sale. Not securing these releases could cause the property owner to be responsible for the total shortfall amount between the purchase price and the original loan.
Other Considerations and Potential Consequences
Although there are benefits to a short sale, a property owner also must prepare for the negative potential consequences that may occur. The impact of a short sale will impede any attempts at securing additional credit, sometimes for several years. It will also take time to rebuild the property owner’s damaged credit score. There are also potential federal income tax ramifications for a property owner that chooses a short sale. Any forgiven amount or deficiency that is not required to be repaid may be reported to the Internal Revenue Service as a ‘Cancellation of Debt.’ In many instances, a Cancellation of Debt is fully taxable as income on your yearly federal income tax return.
General Rule of Thumb
When determining the best method of handling any financial matters that could have potentially severe negative results, a property owner should confer with real estate professionals skilled and trained in these complex matters and their personal legal counsel to choose the best course of action.
If you have any questions or are looking for an experienced team to handle your short sale, find you a home, or sell your home, call or text me at 503-757-5645 We have over 15 years of experience buying and selling homes in Portland and SW Washington and have helped hundreds of families move into their dream homes.
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