There's an old term in the real estate lexicon that's being bantered about a lot these days. That term is "short sale." Short sales have been around for a long time, but until recently they have been somewhat rare. Simply stated, a short sale is a scenario in which the current market value of a home is insufficient to cover the costs of selling, plus paying off the mortgage debt and any other existing liens against the property. The short sale occurs when the mortgagee agrees to waive or defer some part of the mortgage debt as the only way to enable a sale to a third party.

Why would a mortgagee do this? Not out of sympathy for the homeowner, to be sure! Actually, it's a calculated business decision. Lenders typically suffer significant financial losses when forced to take over a property through foreclosure. In addition, they incur liability, maintenance, management and possibly even restoration headaches during the holding and disposition of foreclosed properties. If the lender calculates that it would be less costly to forgive part of the debt to avoid such a scenario, the short sale process may go forward.

While the concept may sound simple and straightforward in theory, in practice it is usually a somewhat arduous and drawn out experience for the participants. The lender has to confirm that the seller has no other assets that could be applied against the debt and that the proposed sale price is truly the best that could be obtained. This requires considerable documentation and time before an ultimate decision is rendered, and there is no guarantee that the lender will finally agree to the short sale.

Buyers of short sale homes should be prepared to wait four to eight weeks just to find out if the transaction can proceed, and there's always the possibility that it will not or that the lender will "shop" the offering price to see if a higher price can be obtained.

Sellers in short sale situations should be aware that there are potentially severe credit rating ramifications, possible tax obligations if debt is forgiven and the IRS treats it as income, and that the lender may require payback of the "forgiven" sum via an unsecured loan arrangement.

Both buyers and sellers would be well advised to obtain professional assistance from a REALTOR(r), lawyer and tax advisor in any short sale transaction.

Bob Dohn
www.BobDohn.com
Coldwell Banker Residential Brokerage
140-A South Roselle Road, Schaumburg, IL 60193
Direct Phone: 847-301-3126