A short sale is usually anything but short. Sort of like the attorney’s “legal brief” which is never brief, a short sale is very rarely “short”. The term refers to the situation when the seller OWES more on the property than the property is worth, and is attempting to persuade the lender to take less than is owed on the property in full satisfaction of the loan. You have probably heard the term “underwater” – a short sale seller is underwater on the house (has borrowed more against it than is supported by its current market value) and is trying to sell the home without having to cough up the difference at closing.
A short sale can take MONTHS and MONTHS (although I HAVE had one approved in two weeks – that is very unusual). The lender generally doesn’t WANT to take less than is owed, as you might imagine. Therefore it’s somewhat of a fight, and if/when there are multiple lenders and lienholders (as there often are) it is often next to impossible to get them all to agree. We agents sometimes say that it’s the THIRD short sale buyer who actually gets the house, meaning that most buyers who make an offer on a short sale get tired of waiting for the approval and just go on and buy something else. Of course, the short sale may or may not EVER happen. The seller may just stay and pay – or it may end up as a foreclosure.
Even when the short sale lender or lenders approve the short sale, they will sometimes reserve the right to disapprove the short sale at any time before closing – which poses another problem; it could fall through at the last minute. In fact, you can be sitting at the closing table when the word comes that the lender has decided to withdraw approval and foreclose instead.
Other potential snafus are that the seller usually wants a release from any and all liability with respect to the loan, while the short sale lender(s) will often require that the seller sign a personal note back to the lender for the remainder owed. Another problem I have seen is when the seller does not realize that they may be TAXED on the forgiveness of debt (why the seller’s agent did not bring up this issue to the seller prior to getting a contract is beyond me, but it happens). The IRS considers forgiveness of debt taxable income, and the seller will be responsible for paying that tax. A side note – if you are the seller, please consult your accountant on this one – because if it is your personal residence you are selling, the forgiveness may be excludable, much as GAIN from the sale is excludable if you have lived in the house as your main residence for two of the past five years.
In other words, short sales are a PAIN, but you CAN get a great deal. It’s best to look for PREAPPROVED short sales where only one lender is involved. Pre-approved means the lender has already agreed to accept a short pay-off, and these deals are much more likely to go through. In any event, I usually counsel buyers to go ahead and make an offer on a short sale if that is the property that they really like, but the to KEEP LOOKING. You can always terminate your short sale offer if you find something better in the interim.
We agents are all ready for the day when regular sales again outnumber foreclosures and short sales, but I am also glad to see those sales moving through the system. The quicker we turn over the troubled properties to buyers who can handle the payments, the faster the housing market will recover.