Demystifying Short Sales

There has been an increased interest in “short sales” over the past several years. In 2010, about 2% of all single family homes sold in Montgomery County was identified as short sales. But the number has been growing each year. A short sale is essentially a pre-foreclosure arrangement where a lender agrees to accept a sale’s net proceeds as full payment of the homeowner’s outstanding debt. It is a viable option when a homeowner can no longer make their mortgage payments, their home is worth less than the amount owed, and efforts in acquiring a loan modification have been exhausted.

So how is a short sale different from a foreclosure? To a lender, a short sale prevents the legal costs associated with a foreclosure, eliminates the holding costs associated with owning the foreclosed home, and minimizes the risk associated with an unoccupied dwelling. To a home seller, a short sale has the potential to be less damaging to their credit score and could indicate to future creditors that they were proactive in mitigating their lender’s losses. It is also a less traumatic process for the home seller as it allows a more orderly transfer of the home and enables the seller to make a more graceful exit. Under certain circumstances, the home seller can even qualify for relocation assistance under the Home Affordable Foreclosure Alternatives (HAFA) program administered by the U.S. government. Details of this program can be found at www.makinghomeaffordable.gov.

For someone interested in a short sale, an experienced Realtor can be helpful in navigating through the process. One of the first steps for the homeowner is to contact their lender’s loss mitigation department to discuss their situation and give permission for their Realtor to communicate with them. The bank will expect evidence from the homeowner that a hardship has been incurred, there is an inability to make ongoing mortgage payments, they are unable to qualify for a loan modification, and there are no other assets to pay all or part of the debt. After the bank is on board, a short sale is handled much the same as a traditional sale, but with the bank negotiating offers, not the homeowner. And although there are a few more steps involved, most experienced agents can easily handle a short sale.

There are some things that homeowners should be aware of when considering a short sale. A second mortgage, for example, can make a short sale more challenging. The difference between the lender’s proceeds from the sale and the amount of the outstanding mortgage may or may not be forgiven by the bank, although the merits of pursuing the remainder through a judicial action would appear fruitless considering the documented hardship of the seller. If the debt is forgiven by the lender, the amount forgiven is taxable, unless the home is a principal residence. In that case, the amount is not currently taxable under the Mortgage Forgiveness Debt Relief Act of 2007.

In recent years, short sale negotiation companies have attempted to insert themselves into the process. Their claimed expertise is to handle the negotiation with the bank on behalf of the listing agent. To compensate them for their involvement, the homeowner is typically required to sign a contract requiring any future buyer of their home to pay the negotiation firm a fee. This fee can be significant and along with its unusual nature can sometimes be offensive to potential buyers. Because of this, home buyers looking at short sales should always inquire upfront about any fees that they would have to pay to a short sale negotiation firm, so that it can be factored into their offer.

Fear of losing one’s home is something none of us ever want to experience. But unexpected hardships can happen to any of us. If you are a distressed homeowner in fear of losing your home, be sure to discuss your options with trusted advisors who have your best interest at heart. And if you conclude that you can no longer afford your home and are upside down on your mortgage, be sure to consult with an experienced Realtor who understands and has direct experience with short sales.