What is a short sale?
Q: I’ve heard about the increasing number of foreclosures and I fear that we may be next. We have been trying to sell our house but can’t get an offer high enough to pay off the mortgage, let alone a real estate commission. Our real estate agent suggested we do a short sale. What is that?
A: You are in a situation known as being upside down. This means you owe more than the house is worth. This sometimes occurs when market values in a geographic area are dramatically reduced. It also occurs when a borrower obtained 100 percent financing and then values skipped and something else happened, such as a job loss that prevents the mortgage payments from being made.
A short sale is a method to dispose of property without having the lender foreclosure. The arrangement with your lender allows you sell the property for less than the amount of the current mortgage. Not all lenders will allow a short sale. Their decision depends on a number of factors such as how much they lose and where the house is located. Some banks will prefer a foreclosure sale if they believe that the location is right or loss too great.
Begin this process before you are already in default but consider contacting an attorney before deciding that a short sale is the right course for you. Contact your lender only after you fully understand the potential risks involved. For example, federal law may require you to treat the forgiven debt as ordinary income on which tax must be paid. Recent legislation, the Mortgage Forgiveness Debt Relief Act of 2007, may apply to your situation and eliminate the need to pay this tax.
You and your attorney should write a well thought out letter explaining why you are requesting the short sale. Include a market analysis to show what houses in your area are currently selling for and indicate the price you are asking the lender to approve. The letter should include other details of the proposed transaction such as real estate commissions, anticipated closing costs any other expenses. Be sure all expenses are include that you aren’t surprised at closing.
You will want your attorney to make absolutely sure that even though the lender has approved the sale, you will not be obligated to make up this difference in the future.
When you have a prospective purchaser, be sure the contract states that it is contingent on lender’s approval. Send the contract to the lender. You want to go into the settlement knowing all of the terms and conditions your lender will accept. A short sale may be the solution for your current financial dilemma but be careful.
Attorney Sylvia Heldreth is a Certified Specialist in Real Estate Law. Her office is located at 1215 Miramar Street in Cape Coral. This article is not intended as specific legal advice to anyone and is based upon facts that change from time to time. Individuals should seek legal counsel acting upon any matter involving the law.