SHORT SALES

The following was written by Michelle Lind-counsel for the Arizona Association of Realtors-July 2007

Unfortunately, some homeowners today owe more on their home than what the property is worth. Some programs that were intended to make it easier to obtain financing and increase homeownership resulted in loans that required small or no down payment, interest-only loans that do not build equity, and other loan programs that require such small payments that the loan amount actually increases rather than decreases. As a result, some homeowners have negative equity in their homes. Stagnant or decreasing property values add to the problem. Homeowners who financed their homes with loan programs with low initial rates of one percent to two percent will experience dramatic increases in their monthly payments when the loan resets to the market rate. These and other factors have contributed to a striking increase in home loan defaults and foreclosures.

Short Sales A homeowner in default who owes for example, $300,000 on a property that is worth $250,000, may be able to convince the lender to allow the home to be sold for less than the loan amount, or even accept less than the amount owed as payment in full. This is known as a short sale. A lender may agree to a short sale to save the costs associated with a trustee’s sale, such as attorney’s and trustee’s fees, eviction, and resale costs. Additionally, a lender may agree to a short sale because if the property is foreclosed upon, the loan becomes a "non-performing" loan on the accounting books, which may affect the funds that the lender can obtain from the Federal Reserve for other loans.

Seller Considerations When considering a short sale, the seller must first determine how much is owed on the property. For example, in addition to the delinquent loan, there may be a home equity loan, past due homeowner’s association fees or unpaid property taxes. Then, the seller must add the costs of a sale, such as closing costs, escrow fees and brokerage commissions. All of the seller’s debt and costs must be factored in before determining whether a short sale is feasible.The seller should also be aware of some of the downsides to a short sale. A short sale could affect the seller’s credit score. Further, even if a lender agrees to a short sale, the lender, the VA, or the FHA may require the seller to pay the difference as a personal obligation. The outstanding debt could result in a subsequent collection action. Therefore, the seller should be certain of the terms of any short sale before making a decision and obtain any debt forgiveness agreement in writing. Also, a short sale is a relief of and may be treated as income for tax purposes. A lender who forgives a debt must submit a 1099 form to the IRS indicating the amount the borrower has been forgiven. (Note: The NATIONAL ASSOCIATION OF REALTORS® supports proposed legislation that would change this tax law.) Different lenders have different short sale department names, so contacting the person who has the authority to authorize a short sale on behalf of the lender may require some tenacity. The appropriate department may be called the loss mitigation, work-out, foreclosure, loan modification or loan reinstatement department. To accomplish a short sale, the seller must convince the lender that it will fare better by agreeing to a sale for less than the outstanding loan amount. A short sale may involve more documentation than the original loan application since the seller must “reverse qualify” and prove that the seller is financially incapable of paying the loan.

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