Simply put, a Short Sale is when a bank is willing to take less money for a property than what is currently owed on the property's loan or note. When a seller can no longer make their mortgage payments and wants to avoid foreclosure, another option is a Short Sale. The seller (normally with a realtor) puts the home for sale to solicit an offer. Once the sellers accept an offer from the buyer, then the offer is submitted to the bank for approval. This approval process can take several weeks if not months, and go through many counter offer and negotiation phases until the bank and buyer are happy with all the terms of the contract. It is during this process that we as your listing agent earn our money! We (the Realtor) take over as your liaison with the bank(s). We handle all the stressful phone calls with the banks negotiator. We are in constant communication with the bank(s) facilitating massive amounts of paperwork sending in contracts, forms, seller financial information, tax returns, financial summaries, market analysis, closing statements and a whole host of other documents (often several times), depending on the bank and competency of the bank assigned negotiator. This process can take hundreds of man hours negotiating with each lender and trying to get each lender to give its approval on the Short Sale. If and when the bank(s), seller and buyer all come to terms, the bank(s) then issues its approval and acceptance. Then and only then does the real escrow process begin. At this point the escrow takes on many aspects of a traditional sale and both agents and parties work to get the escrow closed.
From the sellers perspective, there is nothing "SHORT" about a Short Sale. Doing a short sale can be very frustrating, testing, maddening, and wearisome if not done by a professional. The process can take upwards of 6-9 months only to fall apart at the last minute leaving you (the seller) at square one and with several gray hairs. If you don't have a professional "Short Sale" Realtor representing you and also representing the Buyers, you can have a horrific experience that will forever turn you off the Short Sale market! Okay, now with that said, why even bother doing a Short Sales? There can be several reasons why a seller would decide to do a Short Sale. SB 931 went into law the beginning of 2011 and aims to prevent banks from pursuing sellers on all FIRST mortgages of residential dwellings (1-4 units), even if the seller has refinanced the loan, primary residence or not! SB 458 went into law July of 2011 and basically extends this law to junior lien holders (Seconds). Now California residents have protection from banks pursuing sellers for deficiencies on all first mortgages AND junior liens including SECONDS! This can be a huge advantage to Short Sellers and can potentially save them hundreds of thousands of dollars!. There is the Federal Mortgage Debt Relief Act that expires at the end of 2013 that generally may allow federal exclusion on income realized as a result of a short sale or foreclosure in the event the bank issues the seller a 1099. Then there is the credit issue. Both a Short Sale and Foreclosure will more than likely affect the sellers credit. With that said, if a seller is proactive with a Short Sale, they may be able to successfully close a sale with fewer 30/60/90 day late penalties, thus lessening the impact on their credit and recovery time. Also in the typical Short Sale that has delinquencies, we are hearing about a 2-year recovery time to purchase a home again. The foreclosure situation can be 5-7 years to recover. For the seller in a Short Sale it can be a lot less stressful, as the Realtor takes on most the stress and frustration negotiating with the bank on behalf of the seller. The seller nor the buyer pays for any commissions to the Realtors. The Realtor fees are paid by the Bank. For these reasons, both sellers and banks are increasingly more motivated to try and do Short Sales. The result of these Short Sales, if approached correctly, can be some amazing deals not likely to be had until the next real estate cycle!
In the past few years banks have been realizing that the Foreclosure process is very expensive. The bank(s) lose several months of mortgage payments and incur huge legal expenses Foreclosing and evicting the owners. The homes are normally left in some sort of disrepair and take several thousands of dollars to fix and prepare for sale. All these expenses start to add up quickly. Banks are starting to discover that by playing an active role in a short sale, they can save a lot of money , time, and limit their losses. With that said, some national banks are very hard to deal with, and take a very experienced short sale agent to navigate through the approval process. However, most banks are becoming more and more motivated to make this process easier for the Seller and the Buyer.
As Realtors, we cannot give legal or tax advice. The above opinions and statements are general rules of thumb and are subject to change. We, here at Merrill & Associates Real Estate, try and educate you with all the facts available and keep you informed to the best of our ability. Foreclosures and Short Sales can be very complicated. We ALWAYS recommend consulting an Attorney and Accountant to get legal and tax advice for your specific situation. We would be happy to recommend a local Attorney and CPA for you to speak with.