IRS Publication p4681 - Canceled Debts, Foreclosures, Repossessions, and Abandonments
Arizona Department of Real Estate Seller's Short Sale Advisory
What’s a Short Sale?
A short sale occurs when a property is sold for less than the amount owed on the mortgage and the lender agrees to accept that amount as satisfaction of the total amount owed to pay off the home loan (including other transaction-related expenses such as closing costs, property taxes, transfer tax, and/or commission fees).
The lender determines if the seller is eligible to sell the home at less than the outstanding debt due to a hardship. The lender then accepts that shortfall as their loss. Simply owing more than the home is worth is not necessarily a hardship. Hardships include divorce, unexpected hospitalization and medical expenses, job loss, death of a family member or a similar catastrophic situation. Additionally, a budget must show that the seller’s expenses exceed their income/assets, they are behind on their payments and there is no way to repay the lender.
The risk with short sales is that a home may be listed as a short sale, however when you get to closing, the lender may decide not to accept the home as a short sale. There are no guarantees in short sales.
The Short Sale Process from a Buyer’s Perspective
If you are considering the purchase of a Short Sale you need to know what a short sale is and the process of purchasing a short sale. As a Buyer you may have incorrect assumptions about short sales, such as getting a great home at a huge discounted price very quickly.
You’ll also need to be familiar with the process from submission to short sale approval. Note the time-line which can cause many buyers to decide a short sale is not for them.
1. Submit the offer to seller’s agent.
2. The lender orders a Broker Price Opinion (BPO) or appraisal in 30 to 60 days.
3. The lender reviews the offer and short sale submission package in 30 to 60 days.
4. A negotiator may be assigned in 30 to 60 days.
5. A level II negotiator may be assigned in 30 to 90 days.
6. The offer is approved or rejected hopefully within 60 to 120 days.
Reasons it can take so long to close a short sale:
1. The listing agent is not experienced with the process.
2. The negotiator is not keeping the process moving.
3. The bank does not have enough staff.
4. The lender lost the file.
5. The listing agent did not submit the proper paperwork for a short sale.
6. The appraisal is higher than the buyer’s offer.
7. A thousand other reasons!
Why purchase a short sale?
Often a short sale seems like a good deal to many buyers. The media has created a perception that cheap homes and bargains exist on the market for anybody to take advantage of and that a “Short Sale” = “Great Deal”.
When your buyer asks to see a home on the market simply because the price seems like a bargain, check to see if the property is a short sale.
On the surface, a short-sale may appear like a good deal. However, they are not for every buyer. A buyer with kids, dogs and living in a temporary housing situation, may not be right for a short sale because of the extended time needed for most short sales. However, if you have time, there are great prices available.
Many true bargains in the real estate market go to cash investors, however if you have time and are remain patient through the process there can be a good deal out there.
Why shouldn’t someone buy a short sale?
If you are interested in a short sale, make sure you review all possible risks to making an offer and purchasing this type of home. It’s likely you are not prepared for all these risks.
Time. Few short sales close in 30 days or less. Inform your buyer of the potential time-frame involved with a short sale and determine if they have the time, patience and ability to wait for the lender to make the decision to accept or reject the discounted payoff. Remind your buyer he or she could be under contract for a long period of time and that the buyer will be bound by that contract so they may need to keep the loan updated. Depending on when the Notice of Default was filed, and the lender's back-log of foreclosures, it could take anywhere from two weeks to two months to get a response on a purchase offer from a lender. In addition, if two lenders are involved because there are two loans secured to the property, it could take even longer to satisfy the demands of the second lender.
No guarantee the lender will accept the home as a short sale. The contract is usually contingent upon the agreement of the seller’s mortgage lender to accept the net proceeds of the sale as full payment for the underlying debt. This can be a long process, which can delay an anticipated settlement date, and buyers and agents should be prepared for this possibility. Ideally, the lender pre-approved the short sale prior to advertising on the Multiple Listing Service, but the fact that the property is a short sale should be disclosed in the comments section of the listing. The sales contract should also include a third party addendum, outlining that the contract is contingent upon the agreement of the seller’s mortgagee to accept the net proceeds of the sale as full payment of the underlying outstanding debt.
The seller does not even qualify for a short sale. Inexperienced or unethical real estate agents might push a seller into considering a short sale when the seller does not qualify for a short sale. Some agents list homes as short sales without ever talking to the lenders or pre-qualifying the sellers.
Probably no repairs or repair credits. Buyers will likely be asked to take the property "as is." Lenders are already taking a loss on the property and may not agree to requests for repair credits. Lenders typically will refuse to pay for repairs disclosed on a home inspection.
Sort Sales aren’t always a bargain. Lenders aren't unaware of the value of a home. Lenders will insist on a comparative market analysis, or broker price opinion (BPO). If a lender believes a better price can be obtained by taking the property back in foreclosure over a short-sale offer, the lender may hold out for a higher price. That price will be close to market value. Lenders accept short sales when the home is worth the short-sale price, which means market value.
Lenders will likely reject low offers. Lenders want to minimize their losses as much as possible. If a buyer makes a low offer, chances are that it will be rejected. Or the lender could make a counteroffer, which will lengthen the process.
Lenders can change conditions. Some lenders reserve the right to renegotiate the terms of the short sale at the last minute. If the market changes, new laws pass or new information crosses the lender's desk, the lender can attempt to change the terms of the contract.
Lenders discount commissions. Generally, only lenders who have sold loans to Fannie Mae or Freddie Mac are paying traditional real estate commissions to real estate agents. The rest may want a discount. In some cases it is the buyer who ends up paying for part of the Realtor's commission increasing the out of pocket cost by 1-2% to get the deal to close.
Higher buyer closing costs. Because lenders rarely pay for any extras, like a seller would be willing to do, the buyer may have to pay those extras. Sometimes lenders will refuse to pay for standard seller closing costs such as transfer taxes.
Loss of control of the transaction. If the buyer needs to close escrow by a specific date, don't count on it. A short sale closing takes an indefinite amount of time. The seller's lender calls the shots, not the buyer nor the buyer's lender.
Low seller motivation. Some sellers may not be motivated to cooperate with a short sale. Although sellers may qualify to buy another home in 2 years after a short sale versus 5 (with restrictions) on a foreclosure, some have no intention of ever buying another home again.
All of these disadvantages can seem daunting in addition to the fact that buying a home is already a stressful process. Be sure you are ready to work through and know all the risks.
Short Sale Check List for Buyers
You may be good candidate for a short-sale purchase
if:
You are very patient. When there is only one mortgage, lender approval typically takes about two months. If there is more than one mortgage with different lenders, it can take four months or longer for the lenders to approve the sale.
Your Financing is in order. Lenders like cash offers. But even if you can't pay all cash for a short-sale property, it's important to show you are well qualified and the financing is set. We can Refer you to someone great.
You have NO contingencies. Lenders like no-contingency offers and flexible closing terms. If you have to sell a home or some other event must happen before you can close, you will have a tough time getting a lender to accept your offer. We can talk to you about this.
You have a qualified real estate professional. We can suggest one :)
You have a title officer do a search on the short sale property to see all the liens attached to the property. If there are lien holders it's harder to close. We can assist you with this.
Additional Advice for Short Sale Buyers
If you are aware of the risks of short sales and qualify as a good candidate, here is some additional advice:
Be prepared for out of pocket expenses that may be necessary to bring the home up to livable standards.
Talk to your lender about the different loans available and try to avoid any high risk loan programs.
If you are paying cash, you will need to show proof of funds.
You need to think about resale before they make a purchase.
You should have an exit strategy to avoid economic hardship.
Get an inspection. It is extremely important that as a Buyer you obtain a home inspection and pay for other types of inspections such as pest, roof, sewers, septic tanks, chimney or fireplace inspections.
Be aware that lenders also can change any of the terms of the contract that has already been negotiated, which may not be agreeable to the you.
We recommend you seek legal and financial advice.
(The Article and information contained below was Copied word for word from the Keylaw Website. )
Short sales of real property are not for the faint of heart or the uniformed. A short sale is the term given to the situation where a homeowner has a prospective buyer who wants to purchase the home for less than the amount owed to the lender(s) who have liens on the home to secure one or more loans. For example, A owns Blackacre, which he purchased for $300,000 at the height of the real estate boom with a $280,000 loan from Unfriendly Bank. The home is now worth $150,000 and B wants to buy the home at that price, but cannot unless Unfriendly Bank releases its lien on the home for $280,000. A negotiates with Unfriendly Bank until A is blue in the face and has pulled out all of his hair and finally after what seems like an eternity, Unfriendly Bank agrees to accept $150,000 at the closing in exchange for releasing the $28,000 lien. The fact pattern describes a typical scenario that is called a “short sale.”
There are a lot pieces to the short sales puzzle. If you are considering a short sale, you should first do your homework and understand the process from a to z. Here are some issues to understand, consider and resolve before you do a short sale:
What special provisions should a seller or buyer put into a real estate purchase agreement when the transaction involves a short sale?
If the short sale is completed, can the lender sue the home owner for a deficiency? In the example above, the lender was owed $280,000, but was only paid $150,000 at the short sale closing. The short fall amount of $130,000 is called the deficiency amount. Borrower promised to pay $280,000 when borrower signed the promissory note and borrower only paid the lender $150,000. Can and will the lender take legal action against the borrower/owner to collect the deficiency amount? For more on this topic, see KEYTLaw real estate attorney Jeana Morrissey’s post on this topic called “Confusion about Short Sales and Arizona’s Anti-Deficiency Law.”
What are the federal income tax consequences of a short sale? Will the owner/borrower have to report taxable income to the IRS for the amount of debt the owner/borrower is released from paying? The general rule of federal income tax law is when a borrower is discharged from paying all or a portion of a debt, the borrower has taxable income in the amount of the debt that was forgiven. When real estate is involved, the answer to the question can become more difficult to determine. See “Federal Income Tax Consequences of Home Foreclosures & Cancellation of Indebtedness” and the “Mortgage Forgiveness Debt Relief Act of 2007,” which ameliorates the normal forgiveness of indebtedness rules discussed in the former article.
How will a short sale affect the seller’s credit score?
Will a short sale create a waiting period before a seller can buy another home?
The good news for people contemplating a short sale of Arizona real property is that the Arizona Department of Real Estate and the Arizona Association of Realtors have worked together to publish an excellent Arizona short sale help booklet called the “Short Sale Seller Advisory.” The introduction to the booklet states
A short sale involves numerous issues as well as legal and financial risks. This Short Sale Seller Advisory is designed to address some of these issues and risks .
Here are the topics covered in the “Short Sale Seller Advisory:
Understand a Lender’s Options upon Loan Default
Be Aware of Predatory “Rescue” Scams & Short Sale Fraud
Contact a free HUD-approved housing counselor or contact your lender directly
Utilize free services available to Arizona residents
Obtain Legal Advice
Obtain Tax Advice
Be aware of the Consequences of Committing “Waste”
Consider All Options such as: loan workout, loan modification, refinance, deed in lieu of foreclosure, work out sale, bankruptcy and foreclosure
Contact a qualified real estate professional
Investigate documentation and eligibility
Determine the amount owed on the property
Determine the estimated fair market value of the property
Consult legal counsel
Understand that a short sale may not discharge the debt
Be aware of the impact on your credit score
Understand that there may be a waiting period before you can buy another home
Review the Arizona Association of REALTORS® (AAR) short sale forms
I note that the booklet recommends consulting an experienced attorney twice, which I obviously agree with. KEYTLaw attorney Jeana Morrissey has considerable experience advising Arizona home owners with respect to Arizona’s foreclosure laws, anti-deficiency laws and legal issues arising from short sales. See Jeana’s articles on these topics:
“Confusion about Short Sales and Arizona’s Anti-Deficiency Law“
“Arizona Foreclosure Law aka Arizona Anti-Deficiency Law”
“Arizona Loan Modifications“
Schedule an Arizona Foreclosure Law or Short Sale Consultation with Arizona Real Estate Attorney Jeana Morrissey
If you have questions about Arizona foreclosure law and the legal consequences of defaulting on a loan secured by a lien on an Arizona home or questions about short sales or short sale contracts, hire Arizona real estate attorney Jeana Morrissey to review your situation and answer your questions. Jeana offers a one hour in office or over the phone consultation for $299. Contact Jeana at 602-906-4953, ext. 4 or email her at jrm@keytlaw.com. To hire Jeana, complete our online consultation agreement. To schedule a consultation, call Jeana or Jeana’s legal assistant Milena at 602-424-4159.