Short sale (real estate)

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For short selling in the financial markets, see Short (finance).

A short sale is a sale of real estate in which the net proceeds from selling the property will fall short of the debts secured by liens against the property. In this case, if all lien holders agree to accept less than the amount owed on the debt, a sale of the property can be accomplished. A Short Sale is not to be confused with a Short Settlement.

A short sale has two intrinsic and inseverable components. A Short Sale is successful when (1) The Lien holder(s) (aka Mortgage Company) is agreeable to net less than the amount owed on the note (debt) as the result of (2) an arms length sale at or below the Appraised Value for that property. The agreeable selling price is intrinsically defined to be at or less than the appraised value allowing the process to be attainable. A prudent buyer will not pay greater than the appraised value, and a Bank or Finance company will not provide a mortgage for greater than the appraised value, thus limiting the Short Sale proceeds to a maximum gross yield of the property's Appraised Value.

It's important to understand that a Lien holder is not bound to accept the Appraised value and can demand a greater selling price. In this case, a "Sale" with a prudent arms length buyer is no longer a reasonable or attainable expectation. Instead the demand for greater than the Appraised Value (but less than the amount owed on the debt) is called a "Short Settlement". Some Lien holders will agree to a Short Sale but not a Short Settlement while demanding greater than the Appraised Value. This is a paradox as neither is achievable and both predestined for failure.

Therefore a "Short Sale" can only be accomplished when a Lien Holder is willing to accept less than what is owed on the debt while also agreeing to accept a sales price that is at or below the appraised value for the property.

Creditors holding liens against real estate can include primary mortgages, second mortgages, home equity lines of credit (HELOC), homeowner association liens, mechanics liens, IRS and State Tax Liens, all of which will need to approve the sale in return for being paid less than the amount they are owed. The lien holders do not have to agree to accept less, but they often do since the alternative is to let the property go to foreclosure.

A short sale is a more beneficial alternative to foreclosure and has become commonplace in the United States since the 2007 real estate recession. Other countries have similar procedures. For instance, in the UK the process is called Assisted Voluntary Sale. [1] While both short sale and foreclosure result in negative credit reporting against the property owner, because the owner acted more responsibly and proactively by selling short, credit impact is less.

Home Affordable Foreclosure Alternative Program (HAFA)[edit]

In 2009 the government implemented the Making Home Affordable Program (MHA) [2] to address the real estate recession and the need to help homeowners deal with their real estate loans. Its primary components are loan modification (Home Affordable Modification Program known as HAMP) [3] and foreclosure alternatives (Home Affordable Foreclosure Alternatives known as HAFA).[4] HAFA® provides homeowners the opportunity to exit their homes and be relieved of the remaining mortgage debt through a short sale. It also provides homeowners or their tenants with up to $10,000 in relocation assistance. Through HAFA, you can short sell your primary residence or rental property. Once you complete a HAFA short sale, there is a waiver of deficiency, meaning you are released from any remaining mortgage debt.

You may be eligible for HAFA if you meet the following basic criteria:

· You are struggling to make your mortgage payments due to financial hardship.

· You are delinquent or in danger of falling behind on your mortgage.

· You obtained your mortgage on or before January 1, 2009.

· Your property has not been condemned.

· You owe up to $729,750 on your primary residence or one-to-four unit rental property (loan limits are higher for two- to four-unit properties).

The HAFA program expires December 31, 2016.

The Short Sale Process[edit]

The Short Sale Facilitation Process consists of the following.

1. Contact the Primary Lien holder and make application to be accepted into their Short sale Program. Lenders will not entertain any short sale contract with a buyer unless the home owner has first been approved for their program.

2. The Lender should verify that any government programs, such as Home Affordable Foreclosure Alternatives (HAFA) eligibility, are explored, including relocation assistance to the borrower.

3. Once approved the Lender should provide the terms of the short sale. Terms can include forgiveness of any deficiency, Money incentive for a successful closing, property must be listed by a certain date, and many other incentives.

4. Interviewing real estate agents and selecting the most qualified person to handle your short sale (if you have not already selected a listing agent).

5. It can be helpful to obtain Broker Price Opinion letter to establish an estimate (not an appraisal) of the property's current market value. This BPO's must use comps in your immediate market. The property should be listed at a greater price to show the Lender you are trying to get the highest possible price.

6. Monitoring the listing to ensure that it is proactively handled.

7. Negotiate with Junior Lien holders for a reduced payoff. Junior Lien holders will get nothing in the event of a foreclosure (that qualifies for a short sale) therefore they have every incentive to settle for something rather than nothing. Junior Lien holders are permitted to pursue a personal money judgment due to any deficiency this creates. Negotiating to eliminate this is paramount for the borrower.

8. Submitting the short sale offer to all lien holders and negotiating with them to obtain approval of the sale.

9. Working with the lien holders to obtain release of any deficiency liability.

Parties to a Short Sale[edit]

Some junior lien holders and others with an interest in the property may object to the amounts other lien holders are receiving. It is possible for any one lien holder to prevent a short sale by refusing to agree to negotiate a reduction in their payoff to release their lien. If a creditor has mortgage insurance on their loan, the insurer will likely also become a third party to these negotiations, since the insurance policy may be asked to pay out a claim to offset the creditor's loss. The wide array of parties, parameters and processes involved in a short sale can make it a complex and highly specialized form of debt renegotiation. Short sales have a high risk of failure for the many reasons stated, but have the best chance of success if the right professional is hired to facilitate.

Deficiency Judgments[edit]

Any unpaid balance owed to creditors above the pay off they receive at short sale is known as a deficiency.[5] Short sale agreements do not necessarily release borrowers from their obligations to repay any shortfalls on the loans, unless specifically agreed to between the parties or provided by law. Most states allow lenders to obtain a deficiency judgment following a short sale, but a few states including Arizona, California, Nevada and Oregon, prohibit this.[6] In those states allowing deficiency judgments after short sale, it is imperative that the Short Sale Agreement between the borrower and the lien holders include a clear deficiency release agreement.

Credit and Tax Implications[edit]

A short sale will result in negative credit reporting to the borrower. However, the borrower who has short sold a property has a much shorter waiting period for a loan than the borrower who let the property go to foreclosure. [7] [8] With the FHA Back to Work Program [9] some borrowers can qualify for a new loan a year after a short sale. It has become the norm that the borrower who acted responsibly by short selling is rewarded.

The short sale borrower will receive a 1099-C (C meaning Cancellation of Debt) following a short sale. [10] The Mortgage Forgiveness Debt Relief Act [11] may give you an exemption from tax liability if the property sold short was your principal residence. Otherwise the property can be itemized on a Schedule D as a total loss and deducted accordingly (see your tax professional).

See also[edit]

References[edit]

  1. ^ "Voluntary or Assisted Voluntary Sale (AVS) NHAS factsheet" (PDF). Retrieved 2 September 2014. 
  2. ^ "Making Home Affordable Program". The government. April 2, 2016. Retrieved April 2, 2016. 
  3. ^ "Making Home Affordable". Home Affordable Modification Program (HAMP). Making Home Affordable. Retrieved March 31, 2016. 
  4. ^ "Making Home Affordable". Home Affordable Foreclosure Alternatives. Making Home Affordable. Retrieved March 31, 2016. 
  5. ^ Blacks Law Dictionary (March 31, 2016). "Blacks Law Dictionary Online, definition of DEFICIENCY". TheLawDictionary.org. Retrieved March 31, 2016. 
  6. ^ "Nolo Press". States That Prohibit Deficiency Judgments Following Short Sales. Nolo Press. March 31, 2016. Retrieved March 31, 2016. 
  7. ^ "When Can I Get a Mortgage After Short Sale?". Nolo Press. Nolo Press. April 1, 2016. Retrieved April 1, 2016. 
  8. ^ "National Association of Realtors". How to Repair Your Credit Score After a Short Sale. National Association of Realtors. Retrieved March 31, 2016. 
  9. ^ "FHA Back to Work Program". Back to Work Program. Fannie Mae. April 1, 2016. Retrieved April 1, 2016. 
  10. ^ "Short Sale Tax Implications". Short Sale Tax Implications. Nolo Press. April 1, 2016. Retrieved April 1, 2016. 
  11. ^ "Home Foreclosure and Debt Cancellation". Home Foreclosure and Debt Cancellation. Internal Revenue Service. April 1, 2016. Retrieved April 1, 2016. 

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