Short sales were unknown to most homeowners and real estate professionals until 2008. Most homeowners in America were benefiting from a booming market in residential real estate. Years of steadily rising home values resulted in increased equity, the difference between the value of a home and the mortgage debt owed by the owner. Many of these homeowners took advantage of attractive refinancing packages that allowed them to pull equity out of their homes by increasing their mortgage debt. Refinancing generally seemed like a safe financial decision until the real estate bubble burst in 2008.
Today, millions of homeowners find themselves owing more in mortgage debt than their homes are worth. When someone owes more than his house is worth, that person is described as being “underwater.” These homeowners are locked into homes they cannot sell because the amount they owe in mortgage debt exceeds the fair market value, which is the amount that a buyer would likely be willing to pay.
Homeowners who are not financially able to wait until home values improve, or those who must move because of job relocation or personal reasons, must sell their homes as “short sales.” A short sale is a sale of real property in which the money received by the seller is insufficient to pay the mortgage liens filed by lenders against the property. The seller cannot give the property to the buyer until the debts are paid and the liens removed.
When the amount offered by a buyer is insufficient to pay the mortgage lender in full, the seller must obtain the bank’s approval for the sale. The seller likely will not be able to obtain approval for the sale without proving to the bank that the sale price is at fair market value. The seller may need to provide the lender with a letter from a licensed real estate broker comparing the seller’s home with comparable properties that have recently sold nearby. The bank will usually obtain a similar letter from a broker of its own choosing to verify the accuracy of the information provided by the seller.
In some situations, the bank generally will not agree to accept less than the full amount owed. These circumstances include:
- The buyer is a friend, acquaintance or relative of the seller.
- The borrower owns other real estate that the borrower could sell or refinance to pay this bank.
- The seller has bank accounts or other assets that the seller could use to pay the mortgage.
A seller whose bank agrees to accept less than the full amount owed on the mortgage may not be free of the bank, even at the closing. Many lenders will require repayment of the deficiency by the seller. The deficiency is the difference between the amount owed and the amount repaid on the mortgage. Sellers must make take care in reviewing the short sale approval letter to understand fully their obligations, if any, following the sale.
Short sales can be an effective means of selling a home in today’s turbulent real estate market, but homeowners should seek the advice of real estate brokers and attorneys who have experience handling these types of transactions and who understand the legal and tax implications involved.