subject: Short Sale Faqs [print this page] Everyone in the real estate community and most of the general public know that distressed property sales, such as short sales, are ultra hot commodities in todays real estate market yet often prospective buyers or sellers frequently have question about the short sale process. Here is a list of the most frequently asked questions and answers.
What is a short sale?
A short sale is the sale of a home that occurs when the proceeds from the sale do not fully satisfy the existing loan or loans and the lender accepts a discounted payoff to fully satisfy the loan. These types of sales must be approved the lien holder (lender) and almost always the seller will need to demonstrate hardship and inability to pay off the debt.
How is a short sale different from a foreclosure?
The main difference between a short sale and a foreclosure is that the former is still owned by a distressed owner who is asking the lender to accept a reduced payoff for the existing loan and a foreclosure is typically owned by a bank who has already foreclosed on the property.
Do short sales always sell at greatly discounted prices?
No. Each bank has a formula that governs what price they will accept for a specific property. Nearly all of them are based off of a recent appraisal performed at the banks request. On most occasions banks will not accept offers greater than 10% below the appraised value.
Why do short sales take so long?
A typical real estate transaction has commenced once the buyer and seller have agreed to all terms and executed a purchase contract. Many times this negotiation process will happen in a few days. Short sales however are subject to lien holder (usually lender) approval since the current owner is requesting a discounted payoff from the lien holder. The lien holder will undergo a lengthy process that determines the fair market value of the property and whether or not the seller qualifies for a short sale. Remember that a short sale is a right not a privilege and many are sellers are not approved.
Who pays for the real estate commission and seller closing costs?
The existing lender who approves the short sale will typically pays all of the seller side closing costs, including real estate commissions and all existing liens or back taxes.
Will the Seller have to repay or pay tax on the forgiven debt?
When the lender declares waiver of the deficiency, they usually declare a loss to the IRS for the deficiency as bad debt. Typically the lender will then send the borrower a 1099 representing the waiver of indebtedness income gain. The seller will have to account for this income. Primary residences are protected by the Mortgage Debt Relief Act of 2007 which provides relief for those borrowers modifying or short selling their primary residence by excluding much of the reported income. If the property is an investment property the borrower may have the ability to declare insolvency which will allow the owner to exclude some or all of the income as well. In either scenario a discussion with an accountant is necessary.
