When housing prices in many parts of the country were booming a
couple of years ago, there wasn’t much national attention given to short sales.
But with the current subprime debacle and increasing mortgage delinquencies,
many people are wondering if the short sale process is a way to avoid
foreclosure.
Basically, the definition of the short sale process is when the
lender of a property allows the property to be sold for less than the amount
due on the mortgage loan.
The obvious benefit to the short sale process is that it allows
the seller to avoid the credit report damage associated with a foreclosure. A
foreclosure can stay on your credit report for up to 10 years and can take an
emotional and financial toll on you and your family.
But the pitfalls of the short sale process should be considered
as well. The I.R.S. may consider any debt forgiveness as taxable income, thus
resulting in a tax liability. In addition, lenders can often pursue a borrower
for the deficiency balance (the difference between the amount owed and the
amount paid).
In some cases you may be able to avoid taxation if you can prove
you are insolvent. But if insolvency is unsuccessful, and you are faced with a
tax liability resulting from the deficiency amount, it may make more financial
sense for you to let the lender foreclose.
The Short Sale Process
The short sale process can vary, but it will generally work as
follows:
1) The lender is contacted to discuss the possibility of a short
sale and to determine the lender’s process for completing the sale.
2) The seller issues a letter authorizing the release of
personal information about the loan and the property to the buyer or escrow
agency.
3) The lender will review a settlement statement, which will
indicate the proposed selling price, remaining loan balances and itemize all
expenses, including real estate commissions and other fees and expenses
associated with the closing.
4) The seller will complete a "hardship letter," which
will detail and explain all financial difficulties. Lenders will usually want
to validate the seller’s financial situation by looking at bank statements,
investment accounts, along with examining paystubs and other financial records.
5) The lender will then look to the broker to provide a price
opinion by examining the condition of the house and the market value of
comparable properties.
6) The lender will then want to scrutinize the purchase
agreement to determine if all amounts are reasonable and the real estate
commission is acceptable.
Because of the documentation required, the short sale process
can be lengthy. But if done correctly, it can work well for all parties
involved. The lender avoids the uncertainty of the foreclosure process, the
seller avoids a foreclosure on his or her credit report (along with potential
bankruptcy), and the buyer hopefully got a good deal on a property.
Considering the complexity of the short sale process, you must
be educated. If you are considering a short sale, make sure that you discuss
your situation with a competent lawyer and accountant. The more educated you
are on the process, the easier the transaction will be, and the better the
impression you will make on the lender.
