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Short Sale


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A short sale is a sale of real estate in which the net proceeds from selling the property will fall short of the debts secured by liens against the property. In this case, if all lien holders agree to accept less than the amount owed on the debt, a sale of the property can be accomplished. A short sale is not to be confused with a Short Settlement.

A short sale has two intrinsic and inseverable components. A short sale is successful when (1) The Lien holder(s) (a.k.a. mortgage company) is agreeable to net less than the amount owed on the note (debt) as the result of (2) an arm's length sale at or below the appraised value for that property. The agreeable selling price is intrinsically defined to be at or less than the appraised value allowing the process to be attainable. A prudent buyer will not pay greater than the appraised value, and a bank or finance company will not provide a mortgage for greater than the appraised value, thus limiting the short sale proceeds to a maximum gross yield of the property's appraised value.

It's important to understand that a Lien holder is not bound to accept the appraised value and can demand a greater selling price. In this case, a "sale" with a prudent arms length buyer is no longer a reasonable or attainable expectation. Instead the demand for greater than the appraised value (but less than the amount owed on the debt) is called a "short settlement". Some Lien holders will agree to a short sale but not a short settlement while demanding greater than the appraised value. This is a paradox as neither is achievable and both predestined for failure.

Therefore, a "short sale" can only be accomplished when a Lien Holder is willing to accept less than what is owed on the debt while also agreeing to accept a sales price that is at or below the appraised value for the property.

Creditors holding liens against real estate can include primary mortgages, second mortgages, home equity lines of credit (HELOC), homeowner association liens, mechanics liens, IRS and state Tax Liens, all of which will need to approve the sale in return for being paid less than the amount they are owed. The lien holders do not have to agree to accept less, but they often do since the alternative is to let the property go to foreclosure.

A short sale is a more beneficial alternative to foreclosure and has become commonplace in the United States since the 2007 real estate recession. Other countries have similar procedures. For instance, in the UK the process is called assisted voluntary sale.[1] While both short sale and foreclosure result in negative credit reporting against the property owner, because the owner acted more responsibly and proactively by selling short, credit impact is less.

Deficiency Judgments[edit]

Any unpaid balance owed to creditors above the pay off they receive at short sale is known as a deficiency.[5] Short sale agreements do not necessarily release borrowers from their obligations to repay any shortfalls on the loans, unless specifically agreed to between the parties or provided by law. Most states allow lenders to obtain a deficiency judgment following a short sale, but a few states including Arizona, California, Nevada and Oregon, prohibit this.[6] In those states allowing deficiency judgments after short sale, it is imperative that the Short Sale Agreement between the borrower and the lien holders include a clear deficiency release agreement.

Credit and Tax Implications[edit]

A short sale will result in negative credit reporting to the borrower. However, the borrower who has short sold a property has a much shorter waiting period for a loan than the borrower who let the property go to foreclosure.[7][8] With the FHA Back to Work Program [9] some borrowers can qualify for a new loan a year after a short sale. It has become the norm that the borrower who acted responsibly by short selling is rewarded.

The short sale borrower will receive a 1099-C (C meaning Cancellation of Debt) following a short sale.[10] The Mortgage Forgiveness Debt Relief Act [11] may give you an exemption from tax liability if the property sold short was your principal residence. Otherwise the property can be itemized on a Schedule D as a total loss and deducted accordingly (see your tax professional).

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