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The Real Estate Master
Dave Lewis on the current
real estate market.

What Is A Short Sale?

In real estate, a short sale is when a bank or mortgage lender agrees to discount a loan
owner/debtor sells the mortgaged property for less than the outstanding balance of the
loan, and turns over the proceeds of the sale to the lender in full satisfaction of the
proposed sale.

Extenuating circumstances influence whether or not banks will discount a loan balance.
These circumstances are usually related to the current real estate market climate and
the individual borrower's financial situation.

A short sale typically is executed to prevent a home foreclosure. Often a bank will
choose to allow a short sale if they believe that it will result in a smaller financial loss
than foreclosing. For the home owner, the advantages include avoidance of having a
foreclosure on their credit history. Additionally, a short sale is typically faster and less
expensive than a foreclosure.

In short, a short sale is nothing more than negotiating with lien holders a payoff for less
than what they are owed, or rather a sale of a debt, generally on a piece of real estate,
short of the full debt amount.

Lenders have a department (typically called a loss mitigation department) which
processes potential short sale transactions. Typically, lenders do not accept short sale
offers or requests for short sales until a Notice of Default has been issued or recorded
with the locality where the property is located. Lenders have to approve of any buyer's
or listing agent's commission in advance, a primary reason for non-brokered short sales
with a specialist or facilitator to save on the margin. [2] Many of these facilitators work
with a private lending party for their financing, such as a partner or syndicate.

Lenders have a varying tolerance for short sales and mitigated losses. The majority of
lenders have a predetermined criteria for such transactions. Other distressed lenders
may allow any reasonable offer subject to a loss mitigation approval. "Red tape" is very
common in short sales, similar to REO and HUD properties, requiring potentially multiple
levels of approvals and conditions. Junior liens, such as second mortgagees, HELOC
lenders, and HOA (special assessment liens), may need to approve of the short sale.
Frequent objectors to short sales include tax liens (income, estate or corporate
franchise tax - as opposed to real property taxes, which have priority even unrecorded)
and mechanic's lien holders. It is possible for junior lien holders to prevent the short
sale.

While it is frequent if not common for a lender to forgive the balance of the loan in
question, it is unlikely that a lien holder that is not a mortgagee will forgive any of their
balance. Further, it is common for a lender to omit updating the zero balance and
settlement option on the mortgagor's credit report, or even flat refuse to do so "due to
their financial loss."

The Mortgage Forgiveness Debt Relief Act of 2007

When the lender decides to forgive all or a portion of a borrower's debt and accept
less, the forgiven amount is considered as income for the borrower and is liable to be
taxed.

However, after the signing of The Mortgage Forgiveness Debt Relief Act of 2007 by
President Bush, amendments have been made to remove such tax liability and allow the
borrower and lender to work freely together to find a common solution that is beneficial
to both parties. This protection is limited to primary residences so consultation with a
tax advisor is necessary ensure that a borrower qualifies.