Real Estate Short Sales

A short sale occurs when a distressed homeowner offers to sell their home for less than they owe on their mortgage. This usually occurs when owners are unable to make mortgage payments to their lenders.

If you’re in the market for a short sale home or your house is in pre-foreclosure and you’re thinking about selling it as a short-sale property, consult with a real estate lawyer to make sure you get a fair deal.

Types of Home Sales

In a tough real estate market, both homebuyers and sellers might benefit from short selling. To understand the benefits of a short sale, you must first consider the different ways you can sell a property:

• Traditional sales
• Short sales
• Foreclosures and deeds in lieu of foreclosure

In a traditional sale, a real estate agent will try to get the most home value for their client. On the buyer side, that means getting the most bang for their buck.

A traditional sale can take months, and neither side has to be in a rush as they negotiate for the best available deal.

Short sales and foreclosure sales are done under pressure and when financial trouble is afoot. When a homeowner can’t make their mortgage payments or doesn’t see value in paying for a mortgage when the house is no longer even worth the amount of money they borrowed on it, they might stop paying.

If the homeowner can’t resume payments and is also unable to modify or refinance their loan, the lender can force a sale.

How Short Sales Work Differently

In foreclosure, the bank itself sells the home right from under the homeowner’s feet. As a last resort to avoid the foreclosure process, a borrower might be able to convince their lender that a short sale is the better option for both parties involved. They will need to explain this to the bank through a hardship letter, which will detail why they are unable to make payments and the struggles they’re going through.

The ultimate reason a bank will agree to a short sale is that it will be faster and cheaper. They won’t have to fight the borrower in court, pay a realtor to list the home, or waste time looking after the sale. Remember: Banks are in the business of lending money and turning a profit on the interest. They don’t want to own and sell real estate. So if your hardship letter can prove that you have enough responsibility to handle the transaction for them, they’ll let you do a short sale in lieu of foreclosure.

In a short sale transaction, you might not have the luxury of splitting closing costs with the buyer. The buyer will also not enjoy the benefits of a traditional sale because the property will most likely be sold “as is” (with all its faults).

But ultimately, in these circumstances, everyone will be glad to do the short sale because:

• You will suffer less harm to your credit score than you would incur in foreclosure, and you’ll have extra time to sell your home.
• The buyer will (hopefully) get a sweet deal by scooping up a distressed property for cheap.
• The bank will save time and money by not having to babysit the sale of the home.

Keep in mind that no one really comes out as a “clear winner” in a short sale. You will still lose your home and suffer some harm to your credit, the bank will lose all the profits it stood to make on its mortgage, and the new buyer bears the risk of stepping into a home with all kinds of problems.

What Happens to Your Mortgage After a Short Sale?

Even though the property will be free and clear of your mortgage liens after the short sale, the debt you incurred to obtain the mortgage can come back to haunt you.

Other consequences will depend on the jurisdiction in which you reside:

• In recourse states, you’ll be personally responsible for the difference between what your home sold for and the remaining balance of your mortgage.
• In other states, known as non-recourse jurisdictions, the lender will be legally prohibited from pursuing you personally for that difference.

For example, if you owed $150,000 on your mortgage but the short sale netted only $100,000, the lender can come after you for the $50,000 difference in recourse states. That $50,000 difference is known as a deficiency judgment.

Keep in mind that a short sale can trigger taxes with the Internal Revenue Service (IRS) if the debt that is forgiven by the lender would have otherwise made you personally liable for payment.

How a Lawyer Can Help

Short sale transactions can be complicated for both potential buyers and existing homeowners. Getting the right sale price, clearing liens, and closing on the real estate transaction involves negotiating between your bank and other parties.

An attorney isn’t just there to address FAQs — they can help you negotiate with a lender to potentially allow you to keep your home. But if you’re purchasing a distressed property or you’re in an urgent need to do a short sale, then a real estate attorney can make sure you get all the benefits of a short sale no matter which side of the transaction you’re on.