Short Sales

In a short sale, the mortgage lender agrees to a payoff of less than the balance due on the loan. Short sales become more common during periods of economic slowdown and when appreciation on homes and other real estate is low or is actually in the process of falling.

Properties that qualify for short sale status are usually saddled with either high mortgage amounts, subprime loans with high interest rates, negative amortization, and/or large prepayment penalties.

Whether a bank or other lender agrees to a short sale depends on the amount the seller asks the lender to forgive. The greater the amount, the least likely a lender will approve the short sale. In many cases, the agreement depends on the particular bank or mortgage company simply because some lenders are more amenable than others.

Short sales require a great deal of paperwork, time, and patience. Many people don't complete the whole short sale process because they get frustrated and don't follow through with their part of the negotiations.

Although it's totally up to the lender to accept or reject a short sale request, there are several issues that give a property owner reason for hope.

• The bank is not in the business of taking property back through foreclosure.
• The lender doesn't want to have to resell the property, especially if they can avoid foreclosing on it.
• The bank does not want a bad loan in their portfolio.
• It takes time and money to go through the foreclosure process, evict the borrower, and then resell the property.
• Once the bank has foreclosed on the property, it becomes the legal owner, becoming responsible for maintenance, repairs, taxes, and insurance.
• Vandalism to the property if it is left vacant is a major concern for the lender.

If you are going to make a request for a short sale on your property, you should make sure that the bank or mortgage company is willing to negotiate such a request.

You should also know who to talk to at the bank, what paperwork you will need, and whether the bank will agree to release you from further obligations to the debt. And most important of all, you should present a sales contract for a well qualified buyer whose loan has been pre-approved and is ready to be funded.

Note: A short sale may present tax and credit consequenses for the property owner and should be discussed with an attorney, an accountant, or other informed professionals. The tax implications may be substantial and proceeding with a short sale may not be in the best interest of the property owner. The forgiven debt is generally taxable as "debt discharge income" in addition to any income from capital gains that are owed by the seller.

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