Short Sale. (
Ok so that's two words...but who's counting?)
If you've read the real estate headlines lately, then you've heard the term. Everyone is talking about it. It comes on the heels of the last Real Estate Buzz Word, "Foreclosures." But what is it, and why all the attention?
In short (excuse the pun), a short sale occurs when the following conditions apply:
- A homeowner has a lien (aka mortgage or loan) against their house.
- The homeowner cannot make the minimum monthly payment on the loan.
- The home's market value is currently LESS than the balance of the loan, thereby putting the homeowner in a situation of not being able to afford to sell their home.
- The homeowner wishes to avoid foreclosure.
- The homeowner contacts the lien holder (aka bank or lending institution) and arranges for the lien holder to accept LESS than what is owed to payoff the loan in full.
Well, this certainly makes sense if you're the homeowner, right? Who wants to face foreclosure? Ruin their credit? Have the stress of a large payment they can't afford?
Not so fast, Mr. or Mrs. Homeowner. A short sale is not a "get out of jail free" card. There are repercussions, but they are not nearly as severe as those of a foreclosure. You get to avoid having the enormous hit on your credit score that a foreclosure would deliver. However, you will still see a large drop in that credit score. With a foreclosure, you could be looking at an approximate loss of 250 points to your FICO. With a short sale, you might only see a loss of approximately 100 points.
Another negative for the homeowner is the fact that the lender will now deliver a lovely little note to the homeowner, and they will be so kind as to send a copy of that note to the IRS. These little love notes are often referred to as a "1099". But wait, you're thinking, a 1099 is only delivered for income. And you are correct. The IRS often views the forgiven portion of the debt as income. That's right...the homeowner will most likely need to pay taxes on that amount.****2008 Update Note: thanks to the government's involvement, this may not apply. Contact your attorney or CPA for more information on why not!******
Still...this is better than losing your home outright. So for someone facing a foreclosure, this is a very viable option. But why would the lien holder be willing to accept less than the amount owed? What's in it for them?
For one, the lender is in the business of loaning money. They are NOT in the business of owning real estate. So the fact is, the lender does not WANT the house. Second, there are alot of costs for the lender to take a home through the foreclosure process. All in all, most lenders would like to avoid the costs, headaches, and extra work involved with the foreclosure process. And who can blame them? So for the lender, it is often a wise business decision.
So there's a bit of the basics, delivered a bit tongue-in-cheek. But in all seriousness, if you are a real estate agent, you need to be well educated on short sales. Because this "Buzz Word" is not going to go away anytime soon. And you will need to be able to properly advise your clients who may be in a tough financial situation. And it's more common than you may think. What with ARMs adjusting to their higher rates, property values declining in the past couple of years, and homeowners that chose to use their home as an ATM when property values were at their height, you never know when a past client of yours will call you looking for help.
But don't think that just because you've read a blog on short sales means you are fully educated! If you'll be advising your clients, you need to know more. Email me at jacki@jackisemerau.com and I'll get you more information, articles, and resources.
Until next time,
Jacki
