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April 04, 2007

Defining the "Short Sale"...

In the past couple of months, I've had alot of inquiries from buyers curious about this term "short sale" and from home owners curious about participating IN a short sale. Many folks don't really know what they are, so I thought I'd throw down a definition.

In real estate, a short sale refers to the sale of a property in which the sale price is insufficient to pay off all encumbrances (loans, mortgages, liens, etc) and pay the expenses of sale. If the lender is convinced that the owner, for various reasons, is unable to continue making the payments the lender will often agree to take less than the full amount owed to allow the sale to close.

Why on earth would they do that, you ask? The incentive for the bank to approve a short sale is to have the property sell before the loan becomes a problem account on their books. Bottom line: banks do not want to own property. When someone is foreclosed upon, the bank "takes back" the property as collateral. Then they have to sell it, usually for an additional loss, plus the time and expense in holding and managing the property until it does sell.

Before a lender approves a short sale they will make two key decisions:
First, can the owner afford to continue making the payments on the property? If they can there is no reason for the bank to eat the loss. **NOTE: Banks will not look favorably upon a borrower that they determine lied to get the loan.**

Second, will approving the short sale leave the bank in relatively the same position as they are likely to be in by going though the foreclosure process and then selling the property? If the bank can do significantly better by foreclosing they are likely to do so.

The seller must not receive any sale proceeds for themselves.

Short sale sellers need to be careful, however, because there is no such thing as a free lunch! This process may sound like "the easy way out" but it really isn't. The seller may end up with taxable income in the amount of the debt that is forgiven. The seller may also end up with adverse entries in their credit history. Any property owner considering a short sale needs to seek the advice of competent legal and tax advisors before entering into the transaction.