A short sale occurs when the net proceeds from a sale are less than the cost of actually selling the house. Sadly, more and more sellers are faced with this situation.
Many people purchased property when the market was peaking and now find themselves upside down on their loans. Creative financing programs such as interest-only loans and adjustable rate mortgages have also taken their toll on the market. In an effort to cut their losses, both lenders and sellers are turning to short sales to relieve their financial situations.
In most cases, short sales must be approved by the mortgage holder and stringent requirements must be met. Although every situation is unique, there are some general guidelines in determining who is a candidate for a short sale.
First and foremost, someone who is behind on their mortgage payments or already in foreclosure is a prime candidate. A lack of assets, job loss, or court ordered sale, are also strong reasons for lenders to approve the sale.
Why would banks agree to take a loss? One reason is to avoid the costs of foreclosure. Another factor is that the bank would know what they are making up front versus not knowing what they will make once the property is foreclosed and auctioned. If property values decline, the bank stands to lose even more.
As to the seller, a short sale is not always an easy way out. Lenders will issue IRS form 1099 for their losses, which in turn is taxable income for the seller. The seller might have to collaterize other assets. If you are contemplating a short sale, it is best to first consult a real estate attorney for a complete disclosure as to the advantages and disadvantages of doing so.
