There’s Nothing Short About It

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Short Sales. I think the name is what fascinates people. In a society based more and more on immediate gratification, the term ’short sale’ is completely deceiving.    I continually get folks asking about short sales as an option for them, people whose homes are not even on the market or in distress! So here are the very basics of Short Sales:

The term ’short’ replies to… well, look at it like this:   You and your buddy go out for a few drinks. The check arrives and you open your wallet.  Inside, what you thought was a $20 bill has somehow morphed into $12 and a few odd bits of change… and you suddenly remember that you had stopped by the Quikie Mart on the way to meet your friend and bought a couple of candy bars and some lottery tickets.  You say to your friend, “Dude, I’m a little short. Can you spot me a five?” Of course, the Code of the Drinking Buddy would prevail and he would spot you the cash.

Now…in a Short Sale, that’s what the ’short’ means. You’re ’short’ on what you owe. And this time, there is no buddy with you who will spot you the difference.  It has nothing to do with the length of the transaction and everything to do with offering to short the bank what you actually owe them.

So now, if you would like to do a short sale, you must talk to your lender.  But be warned… most lenders will not even talk to you about a short sale unless your account is in default.  This means that unless you have missed a payment or two and possibly a notice of foreclosure has been sent to you, no dice.  So if you are making your payments but needing to sell your home and know that the values have dropped… this is really not the answer for you.

Let’s say you are in default.  You contact your lender and they agree to consider a short sale. This does not mean they are not going to proceed with the foreclosure. A short sale stops nothing.  It simply means that they will be hedging their bets.  You see, at this point, it sort of comes down to this:  If you owe $200K and all the homes in your area have been selling for $150… then the odds are, when the bank gets it from you in foreclosure and turns around to sell it themselves, they are looking at $150k as the potential re-coup on their loan to you.   If you can sell it ahead of the foreclosure, then it saves them the effort and expense of the foreclosure and taking possession and passing it onto their already overworked asset manager.

Keep in mind, however, if they say they will consider a short sale, it doesn’t mean they will do it. You don’t know until you get an offer… which means you have to market it like normal and hope you get an offer.  If you do get an offer, you must agree to the terms of that offer as usual and get it binding… and submit that contract to the bank for approval of the short sale.  They may or may not accept it.  It’s all up to them.  And remember, you are dealing with a bank, a bureaucratic entity with their own policies and procedures set up to benefit only the bank and their shareholders, if any.  You, as the defaulting borrower along with any time frames or obligations noted in any contract have very little, if any, power here.

They may receive your contract and review it and decide to accept it or reject it for any reason.  For them, it can be construed that it makes no difference whether they accept less now… or later after foreclosure. It probably depends on how much less they are to accept. If they feel this offer is good and probably more than what they could get if they tried to sell it on their own, they may accept. I should note here that the process involved here is where the term ’short’ sale becomes an absolute contradiction…  this process can take days… I’ve even heard weeks. They care nothing about the ‘time is of the essence’ clause in the contract.  Everything and everyone must abide by the bank’s time frames.

If they accept, you need to find out if they will forgive the balance of the loan. Some banks will, which will create a tax issue for you… if the bank forgives your debt of $25,000… the IRS may see that as earned income!  Some banks will not forgive the balance and will file a judgment against you.

So there’s a lot to consider. On the one hand, if you successfully short sale a property, it will impact your credit less and for a shorter length of time than in a traditional foreclosure. On the other hand, it forces you to jump through a lot of hoops to potentially get nothing.

If a short sale is something you are interested in, get sound advice. Talk to someone who is experienced, trained and able to work with you.  Speak with your accountant and perhaps consult an attorney familiar with short sales and real estate law.

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