What is a short sale?
In 2002 when I first started in real estate I attended Tuesday morning sales meetings where the three broker/owners would teach agents the business. One Tuesday morning, one of the Brokers asked the following question; “What is a short sale?” An agent without hesitation answered “Any sales that Dave Short made.” Dave Short was and still is a LONG time agent with the company. There was laughter in the room.
Definition: A short sale occurs when a property is sold and the lender agrees to accept a discounted payoff, meaning the lender will release the lien that is secured to the property upon receipt of less money than is actually owed.
Example: If the unpaid balance of a loan is, say, $100,000 and a property sells for $90,000, under a short sale the lender might accept $90,000 as payment in full.
Is it difficult to get a lender to let the seller do a short sale?
Let’s say you bought a house for $110,000 and because of the economy it is now worth $90,000 fair market value. You still owe $100,000 so this makes you “upside down” or “under water”. You can’t sell the house without taking a loss and you don’t have the money to cover your loan even if it sells for $90,000. Depending on the lender, they may say, put it on the market at fair market value and then we will talk OR I have had a lender tell me to put it on the market at fair market value and they would have it appraised and it can be sold for 90 percent of the appraisal. Most likely the lender will send you a short sale packet. It will contain numerous documents to be filled out by the owner and Realtor. If you have the patience and time to fill out all the forms and get the house on the market and if your Realtor can present a case on the fair market value of the house then most likely the lender will listen and OK it. I have had homeowners that wanted to do a short sale, took one look at the forms that the lender sent them and said “forget it.”
Why would a lender not do a short sale?
It is a matter of math. Suppose you owed the lender $100,000. If the lender takes the house through foreclosure, their costs to do so equal about 33 percent of the loan. That means it would cost them about $33,000 to take it through foreclosure. If the property was sold for $90,000 through a short sale, the lender would only lose about $10,000. Now suppose the fair market value of the house was $60,000 and $100,000 was what was owed to the lender. In this case it would cost the lender less to foreclose on the property.
What can happen during a short sale?
Just about anything! How about the first lender in the middle of a negotiated buyer deal sells the property to another lender. It happened. We had to start all over again with the second lender. Because it took so long for the seller to redo the paperwork for the second lender, the buyer wanted out of the deal. How about when the lender said that all offers had to be 90 percent of appraised value or better and the buyer’s agent insisted that I send an offer to the lender which was about 86 percent of appraisal. I will never forget when the lender called me and gave me a verbal whipping. She almost pulled the plug on the whole short sale. Eventually the buyer made a better offer and the sale went through.
Lenders are not easy to deal with. It is their money and if you don’t do things their way, look out.
Why do short sales take so long?
Short answer, lenders are under staffed. How many times have you walked into your bank and found a teller that you could do business with right away? My bank? I am always waiting in line. Same goes for their back office staff. Remember the robo signing ordeal? Another factor I see is that when a bank gets an offer on a short sale property, they may hold it for a month or two before they make a decision. They may think they will get a better offer. They don’t realize that the buyer will walk if they think the lender is stalling. There is an agent in our office whose short sale took 17 months to close. This is extreme. Fortunately the buyer stuck it out.
Just like regular real estate sales, every transaction is different. There is no rhyme or reason to short sales.
Is there a downside to short selling?
If you owe a debt to someone else and they cancel or forgive that debt, the canceled amount may be taxable. From calendar year 2007 to 2014 the Mortgage Forgiveness Debt Relief Act forgave that debt and it was not taxable. Consult the person that does your taxes for an answer in your case. I am not a tax expert or accountant.
Asyou can see there were no short sales in Pike Township before 2009. Once the economy went south, lenders started allowing it. So far this year there are only 5.
Disclosure ; The raw dollar figures above in the article do not include closing costs which can vary. Some of the above information came from MIBOR’s Broker Listing Cooperative which is deemed reliable but not guaranteed. I am not an attorney, appraiser, tax expert or accountant. I am just an experienced and good Realtor. Selling houses is all I do.