The Goad Team's Blog

The term "Short Sale" is often times thrown around by Real Estate Professionals with the belief that the general public knows exactly what they are referring to.  So for that reason I wanted to help describe "in a nutshell" what a Short Sale is.

So what exactly is a "Short Sale"?  A short sale is when a persons mortgage company agrees to forgive a certain portion of the debt that the person owes on their mortgage.  For example lets say that your current mortgage balance is $300,000 on your house, you need to sell that house but in today's market that house will sell for $250,000.  This means that you need to come up with $50,000 OUT OF YOUR POCKET to sell your house. (this does not include Real Estate Agent fee's and closing costs (escrow & title fees, transfer taxes, appraisals, demand and reconveyance fees, etc.) and in today's market in order to sell a house the seller is often having to pay the buyers costs as well.  All of these cost will generally run anywhere from 8-11% of the sales price.  For the purposes of our example lets use 8% in total closing costs, commission, etc. at a sales price of $250,000 which is $20,000.  So in order to sell your house you would need to come OUT OF POCKET $70,000.

In a situation such as this if you do no have the $70,000 to sell your house then you (or your real estate professional) can get in contact with your mortgage company to request authorization to perform a "Short Sale" where your mortgage company (or companies if you have more than one mortgage) agree to take less than what is owed on the mortgage in order to sell the house.

Why would a mortgage company agree to this?  Simply put to save money!!!  Most people looking to conduct a short sale can no longer afford their mortgage payments.  If the mortgage company has to foreclose on your property this will generally cost them between $50,000-$70,000 in fees to take your house from you.  But it does not stop there, remember you owed them $300,000, now they spent $50,000 taking back the house (for the purposes of our example we will use the low side of the foreclosure fees)  and now they need to sell it.  Lets say your house is still worth $250,000 by the time the bank takes it back, they still have to pay Real Estate Agent commissions and closing costs in order to sell it after the foreclosure.  However as an REO Property (REO - Real Estate Owned meaning "owned by the bank" now) generally buyer's expect a better deal on these types of properties so for the purposes of our example lets say the mortgage company was able to sell the house for $240,000.  Lets look at their losses...

•   $240,000 Sales Price
• - $ 50,000 Foreclosure Fees
• - $ 20,000 Real Estate Commissions and Closing Costs
•   $170,000 Amount Mortgage Company recouped from original $300,000

If a "Short Sale" had been conducted it would have looked more like this...

•   $250,000 Sale Price
• - $ 20,000 Real Estate Commissions and Closing Costs
•   $230,000 Amount Mortgage Company recouped from original $300,000

Please bear in mind this is a very simplified scenario, there could be and generally are more fees the mortgage company will incur taking back, and later selling the property. 

So this is how it benefits the mortgage company.  Now...how does a Short Sale benefits the person selling the house?  A foreclosure is generally looked at as being one of, if not the worst items a person can have on their credit report.  In fact when I see people trying to buy homes that have filed bankruptcy, many times they can buy a house months after the bankruptcy has been discharged (depending on what type of bankruptcy the person filed for).  However a foreclosure is a much different story...It may be several years before they can buy another house.

I have been conducting Short Sales for years and not once have I had a seller come back to me and say that the bank is trying to get them to pay back what they lost on the house.  Bear in mind the mortgage company agreed to forgive a certain portion of your debt, so it would be rather hard for a mortgage company to go before a court and ask for judgement on a debt that they agreed to forgive.   However I know of numerous times where the bank is attempting to collect the deficiency money from the seller after they have foreclosed and later sold the property.  Almost always it is better for both the seller and mortgage company (or companies) to conduct a short sale rather than foreclose.  When a short sale has been performed, in the past the mortgage company(s) would issue the seller a 1099 form, as the seller was responsible for paying taxes on the amount that the mortgage company agreed to forgive.  The IRS viewed this amount as "taxable income" and therefore would tax the seller on the forgiven amount.  BUT recently President Bush signed the H.R. 3648, The Mortgage Forgiveness Debt Relief Act of 2007 which now removed the tax on the amount the mortgage company forgave, which is a huge benefit to those who need to sell via a short sale.*

In a nut shell the Short Sale process can be compared to applying for a mortgage in reverse.  When you applied for a mortgage to purchase your house the bank generally wanted you to provide documentation that you WERE ABLE to make the payments on the house.  On a Short Sale the mortgage company will now want documentation that you can NO LONGER afford to make the payments on the house.

Another thing for a person facing a situation such as this to consider is to talk an attorney and go over other options that may help your particular situation, such as filing for bankruptcy protection, as the attorney may be able to provide other option for you to consider.  I would be happy to recommend an attorney if you would like. 

If you or someone you know is behind on their mortgage payments or realizing they may soon not be able to afford to make their mortgage payment, give The Goad Team of Century 21 Infinity a call at (702) 460-3782.  The sooner you start taking care of the situation the better, as the further the mortgage payments get behind the more damage will occur to your credit, and if you get far enough behind on your payments the bank may foreclose before the Short Sale can take place, thereby eliminating this option.

John Goad, Jr. with The Goad Team of Century 21 Infinity

* The Goad Team always recomends you consult with your accountant when it comes to possible tax ramifications, as no member of The Goad Team is a Certified Public Accountant.