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Understanding Short Sales
What is a Short Sale?
When a bank, Mortgage Company, or other lender accepts a reduction on a mortgage amount to avoid a foreclosure or bankruptcy.
The basic premise leading to a short sale is when a homeowner owes as much or more than what the home is worth, usually because the value of the home has dropped in that area since they purchased or refinanced the home. Or, a homeowner has stopped making payments on their home and at this point has defaulted on their mortgage and is looking at going into foreclosure.
How do you determine if the homes value has gone down?
The value of the property is determined not only by the market but also by the condition of the property: so, it could be a property in a good location, but it is in a state of neglect or disrepair which puts it’s value below it’s mortgage balance; or it could be a nice property, but all of the other nice properties, the comparables in the area are selling for less than the balance of the current mortgage against the property because of a downturn in the real estate market. So, when a property has no equity, it creates a perfect opportunity for a short sale.
But, why don’t people just sell the property and pay off their mortgage? Well, if they don’t have any equity, then they won’t even have the ability to pay a realtor his or her commission. They could try doing a for sale by owner (FSBO), but they won’t even have the ability to pay closing costs, real estate taxes and other costs, meaning that they would have to pay these through money from the new buyer. And what new buyer would want to buy a property at or above market value and then pay extra for closing costs and taxes? They wouldn’t, which is why the property can’t be sold on the open market.
Furthermore, if the property owner is already in foreclosure and behind on their mortgage payments, they might have additional taxes that are owed and they might have interest and penalties that have been tacked onto the mortgage because the mortgage could potentially be going up at this point.
Example – A property owner may owe $260,000 left on their current mortgage. In a short sale the lender may accept $220,000 or less paid to them at closing rather than the $260,000 that is owed to them. In a short sale the property owner may have to pay taxes on the difference between what is paid and what is owed. In this situation it would be $40,000. The lender could 1099 the property owner for the $40,000 difference and the seller may have to pay income taxes on that amount. Things get even more complicated when there is more than one mortgage on a property. The seller then needs to negotiate with not just one lender but multiple lenders. If there are more than two mortgages on a home you may want to move on and look at other properties that will not be so difficult to negotiate. Your odds of being able to negotiate a short sale go down whenever there is more than one mortgage on a property.
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