CENTURY 21 R O Y A L
(914) 722-0700
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697 Central Park Ave.
Scarsdale, NY 10583
Tel: (914) 722-0700
Fax:(914) 722-4368
Info@Century21Royal.com
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|  George John
ABR, CIPS, CRB, CRS, GRI, SRES, TRC, e-PRO
President/Principal Broker
(914) 804-8693
View Our Short Sale Properties
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 What is a short sale / pre-foreclosure?
With the increase in foreclosures lately you may have heard the term “short sale” and wondered what it was. A short sale is when the lender will accept less than the full amount due on a mortgage when a property is sold. Usually, the lender will accept the short sale to avoid the time and expense of a foreclosure.
When a borrower is in default on a mortgage they not only owe the back payments but also may owe late fees, property inspection fees, attorney fees, etc. This can add up quickly to eat up all the equity the borrower had in the property. If the borrower is unable to bring the account current the lender will then foreclose on the property. With a foreclosure, the lender can lose up to 40% of the mortgage amount because of the extra costs involved with foreclosing on a property: attorney fees, court costs, lost interest, eviction costs, property maintenance costs, and selling costs. Foreclosing on a property can also take up to two years in some states. Therefore, it is sometimes in the best interest of the lender to accept the short sale.
It also can be in the best interest of the borrower. They will not have to endure the time and stress of a foreclosure and their credit may not be as adversely affected as it would with a foreclosure. It is quicker and easier and does not subject the borrower to the embarrassment of a foreclosure.
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 How does it work?
The first thing the borrower should do when they can no longer afford a property is to contact the lender immediately. The last thing a lender wants to do is foreclose on the property. Secondly, contact a real estate agent to negiotiate with the bank on your behalf. Be sure the agent is knowledgable about short sale properties, has successfully completed a pre-forclosure sale, and is capable of handling such a work load. This will be particularly handy during negotiations with the lender. An experienced short sale/pre-foreclosure agent knows who to contact, how to reach them, and how to approach each situation. Lenders typically have departments that work with real estate agents to resolve the situation.
The lender will usually require the agent to submit a lot of information to the lender on behalf of the borrower in order to consider the short sale. The information required may include:
- Income documentation such as W-2s and pay check stubs to verify the borrowers’ income
- Bank statements to verify the borrowers’ assets
- Hardship letter – this letter will describe for the lender the reasons the borrowers are in the financial position they are in and will ask the lender to accept the short sale
- Fair market value for the property – depending on the lender they may require an appraisal or may accept an opinion from the real estate agent known as a Comparative Market Analysis (CMA)
- Preliminary proceeds sheet from the sale of the property. This will show the proceeds of the sale of the property after the mortgage is paid off and all other closing costs and fees are paid. This will be negative in the case of the short sale and this negative amount is the amount of the shortage
- Exclusive Right to Sell Listing Agreement
- Offer to Purchase
- Purchase agreement
When the lender reviews all of this and accepts the short sale, you will close on the sale of your property and the lender will take the loss.
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 So, is the borrower off the hook?
Not necessarily. Although not the normal practice, the lender still has options to try to collect this shortage. As a condition of the short sale the lender may require the borrower to sign a note to repay the shortage. They may also file a collection or a judgment for the amount of the shortage. This is something that an attorney with expertise in this area of real estate needs to be consulted.
Also, the IRS may come after the borrowers for income taxes on the amount of the shortage. If the shortage was forgiven, the lender will report the shortage as income to the IRS and the IRS will collect taxes on this amount. Again, for the specifics on this please consult a tax professional.
Courtesy of John Barker | |
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All information is deemed accurate, but is not guarenteed.
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