November 14, 2023
While you may not have heard the term recently, there's a possibility that this type of real estate sale may be slightly more popular over the next couple years. This information is related to short sales in the Sacramento area, as the legal process may be different in other states/areas. I don’t expect there will be nearly as many as the 2007-2011 real estate meltdown, but some home sellers in the Sacramento area may have no other option. As usual, this is general information and not intended to be legal or tax advice. If you’re considering a short sale, you may also want to talk with your CPA and/or attorney once you have more detail from your real estate professional. Let’s dive into it!
1. What is a short sale?
When a homeowner has a financial hardship of some kind and needs to sell a home, but owes more than the value of the home, it is referred to as a Short Sale. The reason behind this is because the lending institution that holds the loan on the house agrees to take less than they’re owed when the sale closes. In effect, the lender is being “shorted” on the amount they’re owed. For example, a home owner loses their job and can’t afford to keep the home, so they decide to sell. They owe $700,000, but the home will only sell for $650,000. In this case the bank may agree to receive only $611,000 instead of the $700,000 they are owed ($50,000 loss + $39,000 in sales costs/fees)
2. Who qualifies for a short sale?
While there is no “standard” answer to this, there are some general guidelines. Lenders will want to review a full financial package from the homeowners. They will want to verify that the financial situation has changed, and that there is truly a permanent hardship situation. This can be job loss, death, divorce, or any other life change that has a detrimental impact on the home owner’s financial situation. In some situations the lender/bank may offer to re-negotiate the terms of the loan to help the home owner get back to financial stability. In some cases the lender may decline the short sale, if they don’t feel home owner hasn’t shown a valid hardship.
3. How long does a short sale take?
This can also vary greatly. I’ve personally seen short sale approval in as early as 30 days, or as long as 18 months. This depends on the size of the bank/lending institution, their familiarity with Short Sales, owner response times, or their work load. Sometimes the short sale package gets reset, or expires, and the process has to start over from the beginning. Other blogs on the site outline how to get a short sale approved faster!
4. What are the benefits of a short sale?
Depending on the situation, a Short Sale may be a better option than a foreclosure or deed in lieu. The waiting period before someone can apply for a new loan is often shorter than with a foreclosure. Additionally, a deed in lieu or a foreclosure can cause a larger drop to credit scores. In many cases, a short sale can be completed in a shorter time frame than foreclosure proceedings. This can mean that there will be fewer non-payments showing up on a credit report. A deed in lieu can fall somewhere in the middle and also has it’s pros/cons. (Those are covered in other posts)
5. What is the liability of a short sale?
Liability can vary based on each situation. In some cases the lender can require repayment of a small loan amount in order to approve the short sale. Sometimes this is a small percentage of the total amount. Additionally, the home Seller may have tax liability for the amount of the loan that was forgiven and the IRS can consider it “income” in certain situations. This can vary based on a few details. Is the home a primary residence or an investment property? Has the original loan be refinanced and cash taken out of the property?
If you’d like a confidential review of your home for a potential short sale, contact me directly. I understand discretion in these situations is a primary concern. Having completed many short sales over the years, I understand how challenging and emotional they can be. My goal is to make sure you have the best chance to sell your home and walk away with as little financial damage as possible!
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