What is a Short Sale?

This is a touchy question to answer because many of us fall into this category today. Chances are that you know someone in this situation or in a similar one.

A "Short Sale" is the technical term for when someone is trying to sell their home for less than they owe on the mortgage and they have no cash to cover the difference. In other words, (#1) you're upside down on your home loan and (#2) you don't have the deficient amount in your bank account; but in order to qualify for "Short Sale" status, both of these conditions must apply to you. *

Here are some examples of a sale that qualifies as a Short Sale and another that does not:

Ex. a) You owe the bank $400,000 on the home you've been trying to sell recently, but the comparable properties ("comps") are going for $300,000 in your neighborhood and you only have $15,000 in the bank. This is a standard Short Sale situation.

Ex. b) You owe the bank $400,000 on the same home mentioned above, but the "comps" in the neighborhood are selling for $350,000 and you have $100,000 in the bank. This would not qualify as a Short Sale.

Since the banks will not allow the Short Sale of a property if the owner has the cash to cover the deficient amount, this last example doesn't qualify.

Q: How do I convince the bank that I have no money/job?

In order for the bank to agree to take less money than you owe them, you must demonstrate that the current loan and sale pose a "hardship" to you and will require verification. Such types of verification vary from recent bank statements to confirmation that you've lost your job and even a profit & loss statement from your tax counselor to verify that you don't have the money if you're self employed.

NOTE: On a side note, a rough estimate of houses on the market currently (well over 50%) are Short Sales or non-standard sales (i.e. REOs, Foreclosures, Deed In Lieu of Sales, etc.). A standard sale is the simplest type of transaction where someone just wants to sell their home, places it on the market and negotiates the purchase (at or around market price) with the buyer.

Q: How does the bank's involvement affect the sale of my house?

Since the bank is now in the decision-making process along with you, the potential buyer and agent must working with the bank as well as you and your agent to negotiate the sale. Unfortunately, since the banks are inundated with these types of sales at present, the process to buy a Short Sale is very slow.

For potential buyers, months can go by before the offer they submitted to the homeowner is even considered by the homeowner's bank. Many buyers simply move on to other, less problematic homes because they grow tired of waiting to hear from the bank's approval staff.

Q: How does this affect my credit score?

As with anything else, there are negative effects to selling your home under these conditions. This process does have a negative effect on the homeowner's credit report, however, it is preferable to a foreclosure in most cases. Also, since most banks won't consider a Short Sale unless the homeowner is in default, or late on payments, the negative effects on the credit report begin well before the house is sold via the Short Sale.

Please consult your legal or tax professional to discuss the tax ramifications of selling your home via Short Sale. Selling the home via Short Sale is not as simple it may sound so make sure to discuss these issues with your tax or legal professional.

*This is only a brief summary of what a Short Sale is and what it takes to qualify for Short Sale status. This is not intended to be legal or tax advice and should not be regarded as such. Feel free to call me with any questions or comments and contact an attorney or accountant for legal or tax advice.