By Ron Biegler
www.RonBiegler.com

Short Sale Defined:  A “Short Sale”  or “short pay” occurs when a Lender agrees to accept less than the amount that a home owner owes to payoff a loan as an alternative to foreclosure.  If the property is worth less than the amount owed on the loan, then even if the Lender forecloses and takes back the property, they know they are going to take a loss.  We can often demonstrate to the Lender that they may net more money (the only thing they care about) if they take less than what is owed, NOW, rather than taking the property back by foreclosure and trying to sell it later.

Time Frame:  The Short Sale negotiation process is a lengthy one.  It may take several weeks or more likely several months to get an approval.  Many Lenders have several layers of bureaucracy, insurers, and investors that we will have to maneuver through in order to get the Short Sale approved.  Plus, many agents and their buyers will not consider offering on a short-sale property simply because the banks take so long to consider an offer.  Therefore we must find that willing and patient buyer.  So, as a seller, it is important to be patient during this process.

What if my house is entering foreclosure already?  Starting a request for Short-Sale approval does not automatically stop a foreclosure.  However, many times we can successfully negotiate with the Lender to postpone the foreclosure in order to allow time to negotiate the Short Sale.  So, while there are no guarantees, it may be in your best interest to try for the Short Sale.  A home-owner with their home in the foreclosure process has usually been behind on their payments for many months.  It is important to begin the Short-Sale attempt as soon as possible, preferably withinthe first month or two that they realize their payments are too much to handle.

Can I stay in the house?  The key word in “Short Sale” is sale.  The purpose of a Short Sale is to get the property SOLD.  A Short-Sale attempt is not a program designed to stop foreclosure and allow you to keep the house for longer.  Unless your house is SUPERBLY immaculate, it will most likely be easier to sell the house if it is vacant, so you should make plans to move as soon as possible.

How do I know this will work?  You don’t.  No Real Estate broker can make a promise to you that the Lender will accept a Short Sale.  Once you have missed a payment, the Lender is in charge!  And, consequently, the lender can proceed to foreclosure if they want to.  But, they do not want to foreclose.  And, we are good at presenting alternatives to the Lender that they often prefer to accept rather than foreclose.  We are very good at what we do, but NO PROMISES or GUARANTEES are being made as to whether or not the Lender will accept a Short Sale – they may or may not.  Their organizations are very bureaucratic and sometimes their decisions (or lack of decisions) simply make no sense.

How much money will I receive?  NONE!  When the Lender grants a Short Sale, it is the Lender who is making the decision to lose money.  The Lender will always insist on receiving as much of any proceeds as possible.  Most of the time the Lender will even refuse to allow the sale unless the Real Estate Agent agrees to take a SEVERELY reduced fee (usually $thousands below normal success fees).  And, a Short-Sale usually requires more marketing money, time, ad effort by the agent.  On top of that, Short-Sales are typically 4 to 5 times more work than a traditional sale for a Real Estate broker.  These three reasons are why very few agents will list a property requiring a Short-Sale approval.  In summary, the borrower will be required to agree to receive no proceeds from the sale of the property.  If any "deal" is worked out, without the lender's awareness, to where the seller receives money as a result of the sale (before, during, or after closng) it is considered FRAUD.

Why do it then?  Your loan obligation and the mortgage encumbering the property will be satisfied, or released, for less than what you owe.  When your property is sold, the debt is paid off completely.

What happens if this doesn’t work?  Your house will likely go to foreclosure.  A Short Sale is something we try after you have exhausted your other options.  And, if you are in the advanced stages of foreclosure there may not be enough time to start the process anyway.  The Lender will feel they have waited too long already.  It is important to start early (as soon as you know that you can not maintain the payment schedule).

 Will my Loan be completely forgiven?   Maybe, maybe not, maybe both.  A "Satisfaction" or a "Settlement" is where the Lender agrees to accept less than the amount owed on the balance of the mortgage as complete and final “satisfaction” or "settlement" of the debt and the mortgage lien on the property.  This is what a "FIRST" Mortgage Company will typically do.  A "Release" is where the Lender may offer to “release” its security interest against the property in exchange for less than the amount of the note.  They may do this to "allow" the sale to proceed, however, the remaining debt on the property is still not satisfied.  "SECOND" position lenders or "HELOC" lenders sometimes do this.  The Lender will decide which, if any, of these they will accept. 

Short-Sale and the TAX MAN:  It is important to remember that the IRS considers any "Forgiven" debt to be ordinary taxable income (even though you received no money at the sale).  However, effective January 1, 2008, President Bush issued an order to NOT tax the "Forgiven" debt from short-sales performed during a two year period.  This order may, or may not, continue.  Therefore, you should seek competant tax and legal advice when considering a short-sale. 

A Short-Sale is a Win-Win-Win:  If the Short Sale is successful, it is a win-win-win situation for seller, lender, and buyer.  The seller wins because his/her credit is saved from a tremendous hit.  A foreclosure could remain on the credit report for seven to ten years, or longer, which could make buying another house almost impossible for a long time.  Yes, the seller will have late payments showing on their credit reportafter a Short-Sale, but as long as foreclosure does not occur, after only twelve months of good rental and credit history, the seller should be able to get a new mortgage and buy a house once again.  The Buyer wins becuase he/she obtains a home at a price which is usually well below comparable sales.  The Lender wins because they can dispose of the property quickly instead of holding on to a non-performing asset which in the long run hurts them financially.  The Lender is in the business of lending money not selling real estate. Bottom line is, if you don’t win, neither does anyone else! 

Short-Sale vs. Foreclosure:   So, which is better?  Well, BY FAR, a Short-Sale will usually have far fewer negative repercusions.  Foreclosure can have a severe and long-lasting negative effect on the affected credit report making it very difficult to purchase a home again for a long time.  Foreclosure can also leave the affected family with a feeling of failure, or it can create a stigma which friends or family have difficulty overcoming.  The Short-Sale, on the other hand, while not without its drawbacks, demonstrates to all concerned that the seller was proactive in seeking a remedy to their circumstances.

The Secret:  The secret, which is no secret at all, is to consult a True Real Estate Professional who is BOTH knowledgeable AND experienced with "Short-Sales" and "Foreclosures."   Very few agents possess Short-Sale skills and experience.  And, most agents simply refuse to deal with them.  A true professional will have YOUR best interests in mind.  A true professional will advise you to consider all other alternatives prior to considering a "Short-Sale" attempt.  Such alternaties include: negotiating with your lender to restructure the loan, renting a portion of your home to help make the payments until your financial situation improves, seeking alternative loan programs, are a few options.  The point is that after exhausting other avenues, when other options no longer exist, a Short-Sale is better than a Foreclosure.  But, the process is lengthy, so it must be started as early as possible.

You may contact Ron Biegler at www.RonBiegler.com