Basically the seller is working to sell the property for less than the amount they owe the bank or banks to avoid foreclosure. They are "short" the payoff amount and need to convince their lender to take a loss. Banks do not like to lose money, the approval process can take time (a couple of months or more) and the bank does not always approve them. The advantage of a short sale to the seller is that they can walk away with less of a hit to their credit. Short sales can be a good opportunity for a buyer but they can be challenging and each situation will be different. A short sale is not automatically a great deal from a buyerâ€™s view point.
A short sale is not the same thing as a foreclosure. In fact, the two processes operate separate and apart from each other. If a seller is facing foreclosure, it is almost always in their best interest to attempt a short sale with the bank.
While working to complete your short sale with your Realtor, your attorney, and the bank, the foreclosure process will continue on its own, but generally speaking, a short sale takes much less time than a foreclosure. A short sale will typically have less of an impact on your credit score than a foreclosure, as well. A foreclosure is considered a judgment against you and will stay on your credit report for 10 years. A short sale is considered â€œsettling a debt for less than is owedâ€ and, as with most other negative trade lines, will come off of your credit report in seven years.
Both short sales and foreclosures result in forgiveness of debt. Both can cause the homeowner who has lost their home to be subjected to a large tax obligation since forgiven debt is traditionally considered to be taxable income. In the cases of short sales and foreclosures â€“ and loan modifications â€“ that meet specific criteria defined in a law passed by Congress, the tax obligation is waived. The law expires 12-21-12. It is likely to be extended in some form but perhaps not as soon as the end of the month. Expiration of this law could subject those who close short sales or have their houses foreclosed after 12-31-12 to very substantial tax obligations.
Check with your tax expert for details.
They are the wild wild west of real estate these days - Yeee Haaa