Why Do a Short Sale?

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Question: Why Do a Short Sale?

A reader asks: "My husband says all of our neighbors are doing a short sale so we should, too. I'm not sure he knows what a short sale is. I'm not sure I know what a short sale is or why anybody would do it. But if everybody is doing short sales, it seems like that's the way to go, right? Can you tell me why to short sale? I mean, why not just move out and leave town? I don't know why we should do a short sale."

Answer: Short sale is the buzz word for selling short. I realize the word is ubiquitous to the point that it has become synonymous with selling but a short sale is a certain type of sale. Not every home and seller qualifies for a short sale. So, while I hate to say this, that just because everybody around you is doing a short sale, it doesn't mean that you can do a short sale as well. And if you can't do a short sale, that might be a blessing in disguise for you because it could mean that you have equity.

#1 Qualifier for Short Sale is No Equity

For starters, people who short sale have no equity. It means they owe more than their home is worth. It's a mistake to presume that simply because your home has fallen in value that you can do a short sale. You can't do a short sale if you have equity.

Equity doesn't just mean your mortgage balance is less than the sales price, resulting in equity. That's because you have costs of sale.

If, after you deduct the cost of sale -- the commission, the title fees, recording fees, all the miscellaneous fees to sell -- you have no equity, then you do not have enough equity to sell. For example:

  • Too Much Equity to Do a Short Sale:

    Market value: $200,000

    Payoff existing mortgage: $150,000

    Costs of sale (approx): $18,000

    Net Equity: $32,000

  • No Equity and Must Try to Short Sale

    Market value: $200,000

    Payoff existing mortgage: $190,000

    Costs of sale (approx): $18,000

    Equity Shortage: - $8,000

In the second example above, it is easy to see that you don't have to necessarily owe more than your home is worth to be a candidate for a short sale. You simply must have not enough equity to sell.

Two Loans on a Short Sale

Some sellers have two loans on a short sale. The market value might be high enough to payoff the first loan but not the second. In that instance, the seller would do a short sale for the second loan, and not the first. The first lender would not participate in the short sale but the second lender would.

Or, both loans could be underwater. It is more common to see both loans underwater but that scenario is not always the case.

Who Can Do a Short Sale?

There are two basic qualifiers for a short sale. While these two qualifiers do not cover every conceivable type of short sale, they are pretty standard for about 90% of the short sales. They are:

  • No Equity
  • Seller Hardship

With a few exceptions, if you've got those two qualifiers going for you, you are likely to get short sale approval. There are a few banks who will not do a short sale under normal circumstances, but you can just stay away from PNC Bank and eliminate half the battle.

Most banks aggressively pursue short sales and want to approve them.

Why Do a Short Sale?

There is no reason on our green earth to walk away from a home if you can do a short sale and get a release of liability. A short sale is better for your:

  • Sanity
  • Credit Report
  • Future

Under certain circumstances, there is no deficiency judgment and most likely no taxes due on the forgiven debt. Please check with your accountant and get legal advice before embarking on a short sale to find out if you will owe taxes and whether you will be released from the debt.

There is no magic short sale pill that will make debt vanish unless you qualify for no deficiency or have negotiated no deficiency with your bank. The I.R.S. has some exclusions for personal residences but you need to make sure you are exempt. Some I.R.S.

rules apply to both foreclosures and short sales alike.

If you abandon your home, which is what walking away from your home means, you could still be liable, not only for the debt but also for any damage that happens to your home in your absence. By throwing up your hands and walking away, the following parties could be very interested in your whereabouts:

  • The government
  • The bank
  • Your insurance company

By obtaining tax and legal advice and completing a short sale without a deficiency, you are receiving a new lease on life and a clean slate. Find a short sale agent with plenty of experience to guide you.

At the time of writing, Elizabeth Weintraub, DRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.