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Foreclosure Short Sales

What is a short sale?

A short sale is what is sometimes worked out when a homeowner is in default and can’t get caught back up on payments.  Through an agreement with the lender’s loss mitigation department, the borrower sells the property at an amount that may be less than the full balance of the loan.  It will be up to the lender’s discretion to “write down” the principal on the loan, and whether to accept the real estate short sale.  

What is a short sale from the buyer’s perspective?

A short sale, on the face of it, sounds like a real boon for the buyer.  Through a real estate short sale, the buyer can land a property for less than current market value.  A buyer should be ready, though, for what might be a drawn-out and arduous process. The lender may dither and vacillate until the last minute as to whether to approve the short sale.  The buyer should come armed with comparable values from the neighborhood in case there’s a need to negotiate the process.  This isn’t something that can be done with a conversation or a handshake; you’ll need hard documentation to back up your offer.  It’s best to locate an agent who specializes in short sales in real estate.  

What is a short sale from the seller’s perspective?

A short sale should be considered as a last gasp before foreclosure.  As much as a lender doesn’t like having a foreclosed property on their rolls, they don’t like short sales much better.  They generally will not consider a homeowner who has a chance of making payments; they’re mainly looking at the seller’s financial situation.  Something like a layoff, short-term disability or maternity leave will leave the door open for the borrower to get back up on payments again, and a bank will be less likely to green-light the short sale.  Second mortgages are likely to complicate the picture even more.  Make sure you have all your ducks in a row (including pay stubs and bank statements), get any agreements in writing and look into tax and credit consequences.

What are the consequences of a short sale in real estate?

The short sale is a sort of last resort before foreclosure. Since the short sale is still up to the bank’s discretion, a seller may have already found a buyer, paid for inspection and even be packed up and ready to move out, but the bank may try one last time to renegotiate the loan.  Real estate short sales are reported to credit agencies; although the repercussions aren’t as dire as those of a foreclosure or bankruptcy, they do stay on one’s credit report for seven years.  There are also tax liabilities in a real estate short sale; it’d be best to discuss those with a tax professional.  To the IRS, the forgiven debt and interest may well count as “income,” for which you’d be accountable at tax time.


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