The Long and
Short of Real Estate Short Sales
A short sale is a
sale of real property where the proceeds from the sale are insufficient to pay
the balance owed on the loan securing the real property sold
• This article was
published in the June 2009 issue of the Scottsdale Airpark News
• Special thanks to
Nussbaum & Gillis attorney Andrea Landeen
for her assistance with this article
The recent drop in real property values has
generated a substantial amount of publicity regarding short sales, since
many Arizona homes are now worth less than the debt against the property. For
owners who need to sell those houses, either because they are seeking
alternative housing or can no longer afford them, a short sale may be the only
means by which that home can be sold, absent lender foreclosure. Until recently,
short sales were rarely employed and, as a result, many real estate
professionals and lawyers may not understand the process or know when a short
sale may be appropriate. As important, short sales have led to a variety of
unintended consequences which may not be in the seller’s best interest.
In a short sale transaction, one or more of the
lenders secured by the real property permit the sale of the property free and
clear of the lenders’ liens without being paid in full. A short sale does not
necessarily mean that the underlying debt is released or satisfied, but rather
that the lien or liens securing the debt are released. The release of the real
property as security for the debt is separate from the amount due under of the
promissory note for which the property serves as security.
Lenders sometimes consent to short sales when they
realize that it is the best means to maximize their return on their real
property security. Since the property is worth less than the debt against the
property, a short sale usually allows the lender to recover more than through
foreclosure. Therefore, a short sale may be an opportunity to make the best of
what is a bad financial situation for all involved.
For example, if a home is worth $200,000, but has a
first deed of trust lien for $250,000 and a second deed of trust lien for
$50,000, a $200,000 short sale allows the first lienholder to net $200,000
(minus customary closing costs and commissions). Frequently, to encourage a
second lienholder to accept a short sale and release its lien, the second
lienholder sometimes receives a minimal amount with the consent of the first
lienholder. The second lienholder is encouraged to accept this limited amount as
opposed to receiving nothing for its lien if the real property is foreclosed. A
short sale may allow the second lienholder to receive at least something and the
first lienholder can avoid a reduced sale’s price at foreclosure and eliminate
the time and cost involved with a trustee’s sale, which takes 90 days once the
process is initiated. More important, the trustee’s sale price is normally
significantly less than when the property is sold as part of a consensual
transaction. Furthermore, if the lender is the successful bidder at the
trustee’s sale, the lender is then burdened with a property it must maintain and
market in addition to incurring selling costs. All these concerns are taken into
consideration by the lenders in deciding whether to consent to a short sale.
Notwithstanding rumors to the contrary, short sales
are treated similar to foreclosures on your credit history. As a result, your
credit score will likely drop approximately 100 points. The only good news is
that future credit grantors may understand a person having financial difficulty
during this economic downturn.
Besides credit problems, there are other concerns
with a short sale. For example, if the real property is subject to a home owners
association, HOA fees are a personal obligation separate and apart from the real
property. Although a short sale permits you to terminate future HOA fees because
you no longer own the property, your obligation for past due HOA fees remains.
If your loan is a recourse obligation, a short sale
will reduce the amount of any shortfall for which you may be liable. A recourse
loan is when the borrower is responsible for the difference between the amount
owing and the amount realized from the sale and/or the foreclosure of the
property. Thus, the greater the amount generated from a short sale of the
property, the smaller the shortfall and the less the borrower may have to pay
the lender.
Finally, short sales may have tax consequences to
the seller for debt forgiveness income. Consequently, before pursuing a short
sale, you should consult a qualified real estate attorney, speak with a
competent CPA to discuss possible tax consequences, and find a real estate agent
experienced in handling short sales, all of whom may be able to help ascertain
whether the short sale is the best option for you. |
