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Pam, Other/Just Looking in West Phoenix Estates,...

What is a short sale, good or bad?

Asked by Pam, West Phoenix Estates, Buckeye, AZ Fri Apr 13, 2012

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Hi Pam, that is a great question!

By definition, a short sale occurs when your lender agrees to accept less than what is owed on your home. It can be a relatively straightforward process, or it can entail complicated negotiations involving an attorney. The way your bank negotiates a short sale has everything to do with the type of loan you have, whether you have ever refinanced your loan, and which investor owns your loan. For instance, if you have a Chase portfolio loan there may be some crazy cash incentives available to sellers. If you have a recourse vs. a non-recourse loan, your lender may require a cash settlement or promissory note.

In order for a lender to accept a short payoff, there must be a hardship of some sort. In many cases that takes the form of a financial hardship - reduced hours, unemployment, medical expenses, etc. There can also be other non-financial hardships - change in neighborhood condition, forced relocation, divorce, etc. When the hardship is not financial, the lender may ask for a cash settlement or promissory note.

As others have said, the impact to your credit is less than a foreclosure and your ability to obtain a new mortgage is accelerated depending on your circumstance. It is not necessary for you to miss payments in order to be eligible for a short sale as long as you can show your lender "risk of imminent default", however most servicers will tell you that they require at least one missed payment. This and all other requirements are investor dependent.

Don't forget about tax implications. After a foreclosure or short sale, your lender will issue you a 1099-C. The amount of debt that has been forgiven will be reported to you as income. The IRS has specific guidelines under which the tax on that phantom income can be forgiven. It's called "The Mortgage Forgiveness Debt Relief Act" and you can read more about it here: http://www.irs.gov/individuals/article/0,,id=179414,00.html. You should contact an accountant or research this issue to determine whether you will owe taxes on forgiven debt. Most of my clients are able to have this tax burden forgiven.


An attorney will be invaluable if we run into an obstacle with the lender. Make sure that whoever you hire has partner attorneys and accountants who can provide you with the proper legal and financial consultations. Remember that by "approving" your short sale, the lender isn't necessarily giving up its claim to the remaining mortgage balance. A lot of sellers fell into this trap early on. Sometimes, especially with recourse loans, the lender approves the sale but retains the right to pursue the borrower for the remaining mortgage balance. In such cases, the lender may come back to sue you you up to 6 years after the sale. Nobody wants that unpleasant surprise! There is specific language you must look for in the lender's written short sale approval to ensure you receive full and complete release from your mortgage. We get that release on all of our short sales, and in cases where the lender is stubborn, we can involve our partner attorney to achieve the desired results.

Speaking of attorneys, you don't need to spend $1,500 or $2,000+ that some attorneys charge. Our partner attorney, if she is needed, typically charges $350-$800 depending on the complexity of the negotiation. Her involvement is needed in a minority of cases now that lenders have streamlined and standardized their short sale processes. DO NOT pay an agent an up front retainer fee - only an attorney can legally charge such a fee. Please interview at least three agents and list your home with the most experienced agent. Ask agents how many short sales they close annually, what is their success rate (number of listings taken vs number that actually close escrow - ask it just like that or agents may take liberties with their numbers), do they have partner attorneys and accountants, do they have any inside connections with lenders, etc.

Daniella and I close an average of 100 short sales and foreclosures annually, have partner attorneys and accountants to provide you with critical consultations, enjoy a high 90% success rate on our short sales, and never charge buyers or sellers of short sales for our services. We are top 3% in the valley according to the Phoenix Business Journal and work at the #1 brokerage in the valley where we are top 1% producers. We would be happy to discuss your individual situation and give you a realistic assessment of your chances for success. We will assist you with all aspects of the short sale process, including completing your paperwork and following up with your lender.

While short sales can be complicated, having an expert team on your side means the difference between success and failure. Please give me a call if you would like to discuss your needs in more detail at (480) 302-9659. Have a great weekend!
1 vote Thank Flag Link Fri Apr 13, 2012
Hi Pam,

If you are buying, short sales represent excellent values. The most important aspect of buying a short sale, believe it or not, is the competency of the listing agent (seller's representative). Once you decide on an experienced buyer's agent who knows and understands short sales - preferably from a team that also works with REO/foreclosures - that agent need to qualify the listing agent by asking some key questions. The seller's loan type, hardship, number of loans, and willingness to settle with their lender will all play a major role in whether the sale will be successful. The last thing you want is to spend 3-6 months waiting, only for the deal to fall through because the seller is not willing to pay a settlement, sign a promissory note, or have the file cancelled because the listing agent did not submit the proper documents and forms in a timely manner.

Expect multiple offers within 1-2 days of listing. Also be aware that unless it is a "pre-approved" short sale, the list price has no relationship to whether the seller's lender will actually accept that price. Don't worry about all those cash offers, as very often the seller doesn't care whether or not the buyer is utilizing financing. The seller wants to go with the buyer most likely to follow-thru on the deal, not necessarily the one with cash or even the highest price.

There are many angles here. Daniella and I would be happy to help you through the short sale jungle, as they represent the majority of listings in our current market. Give us a call at (480) 302-9650. Have a great weekend!
0 votes Thank Flag Link Fri Apr 13, 2012
I believe the question was asked by a buyer. Lots of good but long answers here. If you are indeed a buyer in this market, but obtaining financing, I will tell you a short sale may very well be your only chance of buying a home at this point. The market is saturated with cash buyers who are actually paying above what many believe is market value. There is more cash than deals, so find a home you like, have your Realtor fact find the sellers situation to ensure you get into contract with a seller who will stay the course and close.

Andrew Texidor
Team Texidor
Solution Real Estate
http://www.AndrewKnowsTheValley.com search the Mls
http://www.TeamTexidor.com blog
0 votes Thank Flag Link Fri Apr 13, 2012
Short sales are great if you are not in a hurry. The name itself is somewhat misleading. Most people think short means not very long! But the reason it says "short" is because the bank may be willing to take less than what is owed because the homeowner has claimed a hardship and most likely is "underwater." This is what the "TARP" funds you hear people talk about. It's tax payer money to bail out those American homeowners adversely affected by the mortgage meltdown and resulting poor economy. I highly recommend putting in back up offers on homes that may already have a contract on them. The process takes so long that the buyers in first position may ditch and buy something else because they lose patience or see something else they like better. Until the bank has accepted their offer the buyers can walk. We do a lot of short sales here in Virginia Beach and as the listing agent on many of these we feel like sell these homes several times each because buyers walk away and the back up offers roll up. It's a way to get an exceptional buy. This is one way to hedge your bets that you won't overpay this time around.
0 votes Thank Flag Link Fri Apr 13, 2012
They aren’t good for the lender that is taking the hit, that is why most of them never reach the closing table. There is a point where it makes more sense to foreclose.

Jim Simms
NMLS # 6395
Financing Kentucky One Home at a Time
Web Reference: http://jamessimms.com/
0 votes Thank Flag Link Fri Apr 13, 2012
Jim, In my area, we close the majority of short sales. My team is at 96% in the last two years. While that's good, there are several other agents/teams that have similar success. AZ is a "non-recourse" state so the lenders have more incentive to play ball.
Flag Fri Apr 13, 2012
A short sale can be good if your a seller under water. You can actually buy another home the day after a short sale if you did not have any mortgage lates 12 months prior to your short sale and a good explaination. A short sale will drop your credit score about 100 points vs a foreclosure about 200 points. If your a buyer looking at short sales try to find a short sale that has been pre approved by the sellers bank. It will speed up the close of escrow process.
0 votes Thank Flag Link Fri Apr 13, 2012
If you're a homeowner, a short sale is better than a foreclosure. If you're a buyer, you might get a better deal on a short sale as compared to a traditional sale, but be prepared to wait three months or (sometimes much) longer.

Either way, do your homework. There are lots of great online articles on the subject. If you are looking for an agent to help you, you probably want to make sure they have at least 20 successful SS transactions under their belt. Designations (CDPE, CSSN, etc) are fine, but nothing beats real-world experience!
0 votes Thank Flag Link Fri Apr 13, 2012
Esssentially a short sale is when the bank agrees to take less money from a sale than is owed against the property as payment in full. We are short sale specialists and are Certified Distressed Property Experts. This is a very viable way for home owners to get out from under homes that are "under water."
0 votes Thank Flag Link Fri Apr 13, 2012
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