Short Sale Issues For Both Buyers and Sellers

Short sale definition:

Where the sales price doesn’t yield enough money to pay all of the required expenses of the sale and the existing liens against the property, and the seller gets one or more of the “payees” to reduce their demands in order to allow the sale to close. Reasons: creative financing, cashing out equity, prepayment penalty, declining market values, 3 1/3 withholding, etc.

Challenges to Short Sales:

The seller is often unmotivated, because they are not getting any money out of the sale. Sometimes, the desire to preserve their credit just isn’t enough for all the work involved, especially if their credit is already damaged.

Lender Issues:

Will generally only deal with the borrower, or will require written consent to deal with the agent.

May not have established practices yet, since this hasn’t generally occurred for the past 10-12 years.

Some will require that the borrower be in default, or even already in foreclosure (watch out for Foreclosure Consultant laws).

Will require an application and financial information (a formal “workout” package).

May require others to make concessions, such as lowering commission or other lenders taking similar discounts.

May require payment of balance on an unsecured basis.

What they write off becomes taxable income, and most will issue a 1099.

Tax liens:

The IRS and FTB will generally consider releasing a property upon application, provided they are given estimated closing statements and conditioned on the seller and junior lien holders not receiving any proceeds whatsoever.