Short Sales in the Real Estate Market

Even during the good market, bargain seeking homebuyers were inquiring about foreclosure properties. Today the new bargain buzz word is "Short Sale", where the lender allows the property to be sold for less than the amount owed. Yet, some licensed real estate agents are not anxious to get involved in short sales, due to the possible consequences the seller may encounter.

When property values across the country began to backslide, and sellers found they owed more than what they could sell their property for, some homeowners began negotiating short sale options with their lenders. Yet, even if the lender discharged a portion of the loan, the IRS still wanted taxes paid on the discharged amount, leaving the sellers with new debt. The Mortgage Forgiveness Debt Relief Act of 2007 brought about some changes to this taxation, yet still sellers need to speak to their professional tax advisor and attorney before venturing down the short sale road.

Some lenders may agree to a short sales, yet still hold the seller liable for the difference between the sale price, and the original loan amount that was due at the time of the sale. While some states do not allow this, some states do. If the property is located in a state that affords the seller protection in a short sale, but the lender is from another state, the seller may have legal issues to resolve.

Short sales are a pre-foreclosure activity. Conditions that lead to short sales include an increase of local defaults and foreclosures, a large number of speculative homes, the secondary market players tightening their credit guidelines, hedge fund involvement in the mortgage market, declining property values and excessive inventory of properties.

The short sale is a contract with the lender and must be negotiated. Yet, the lender has no obligation to enter into a short sale, and they are in control of the terms and conditions of the short sale.

Requirements for short sale negotiations typically include the fact that the seller has stopped making their loan payment and the property in question is significantly upside down in the loan. A lender will usually request a broker-price opinion to evaluate the current market value of the property.

The lender takes into consideration several factors before approving a short sale. They want to determine if the motivation of the seller is not fraud based, and if there are additional liens on the property. The lender wants to determine if the seller has the ability to bring the loan current, and if the property is distressed. Another concern is the estimated cost to the lender.

Before considering a short sale, the seller should discuss the financial ramifications with a qualified accountant and attorney. A short sale will adversely affect the seller's credit rating, and there may also be unexpected expenses.