Short Sale


A “short sale” is the sale of your home for less than the note.  That is it; that is all.  Real estate salespeople advertise it as a solution; however, remember that they are making a commission, and their normal business is thin in this economy.  Banks offer it as an alternative – a “non-retention” option, but the fact is that they do not disclose the myriad logistical problems involved.  Most often, the lender would prefer a quiet and compliant foreclosure.  Federal regulators have encouraged the lenders to endorse the mechanism, and the reality is that it forces the lender to take the entire loss on value.  In an environment where lenders never compromise principal balance to the existing homeowner, how attractive is a short sale in which the lender absorbs the entire loss.

The problem with short selling your home is a combination of false expectations and lack of understanding the legal consequences.

False Expectation:

Is a short sale simple?  No.

Will it relieve you of the deficiency on the loan? Maybe, but there are usually negative consequences.

Will it be easier on your credit rating? No evidence to support that contention.

Will you feel more moral or ethical than you might in a foreclosure? This is your emotional response. That counts, but it is not a business consideration.

The reality is that a short sale is a mechanism for exiting your home place; however, it has problems that might well outweigh the benefits.

First: A short sale results in a deficiency: the difference between the debt on the property (note) and the sales price.  Two results: the lender “waives” the deficiency or does not.  If the deficiency is “waived” , it is usually at a price to the homeowner – it is not free.  You pay the bank several thousand dollars for its waiver.  If you have a second mortgage, another waiver needs to be secured from that subordinate lender also to be free of deficiency, and remember that the second mortgage holder will gain nothing from the short sale because all sales proceeds will go to satisfy the first mortgage.  The second mortgage holder will certainly exact a fee for its waiver; otherwise it keeps a six-year right to sue you.  If there is a waiver, the lender will issue a IRS 1099-C, and the waived amount is taxable as regular income.  There is an escape – the “qualified primary residence exemption” under current federal law which does not count as taxable that portion of the waiver that represents the purchase, repair or improvement of the property.  If you used a refinancing or second mortgage (including “home equity lines of credit – HELOC) for any non-house purpose, it is not excluded and is taxable.

If the lender(s) does not waive the deficiency, you face exposure to lawsuit for six years – an unwise liability and prime meat for a collection agency years in the future.  Remember that a lender in Nevada can sue on a deficiency in a foreclosure for only six months – as opposed to six years.

Second: A short sale is a sale: it is largely out of your control.  A realtor will be listing and showing your house.  The lender will determine the qualification of the buyer.  You will find out about the waiver of deficiency at the last minute.  You will have to vacate when the sale closes.  In contrast, using legal means to delay a foreclosure means that you have more opportunity to plan and leave when you want to leave.