In real estate, a short sale is when a bank or mortgage lender agrees to discount a loan balance due to an economic hardship on the part of the mortgagee.

Extenuating circumstances delegate whether or not banks will discount a loan balance. These circumstances are usually related to the current real estate market climate and the individual borrower's financial situation.

A short sale typically is executed to prevent a home foreclosure. Often a bank will choose to allow a short sale if they believe that it will result in a smaller financial loss than foreclosing. However, the home need not actually be in foreclosure but the homeowner is headed in that direction. Many lenders will actually accept a short sale offer based on the owner simply saying, "you know what, the market is declining, I can't make the payment, and I don't want the house anymore."

Types of short-sale offers
There are actually two type of offers: Retail and wholesale.
The retail is the result of a real estate agent or broker submitting the offer. First off, the majority of agents and brokers won't do a short sale offer for one or both of two reasons:
1.) They don't know how;
2.) They can't make any money on the deal because the reduced price reduces their potential commission because the lender will typically dictate a reduced commission because of the short sale.

With a retail short sale offer from a broker lenders typically will only discount what is owed by perhaps 10%. More often than not, the broker will not make a counter offer to the lender's price. If the fair market value is already well below that amount, the home will not sell because it is priced too high. You will see "short sale" on the realtor's for sale sign as if its some kind of special deal. It is not. If the price is too high especially in today's market, the house will sit on the market for months. If the property is in foreclosure, the owner does not have months to sit around waiting for it to sell, and the bank at some point will continue with the foreclosure process.

A wholesale short sale offer on the other hand submitted by someone who knows what they are doing is entirely different. The process is a lot of work and involves tons of information provided the lender justifying a much greater discount and brings with it an offer from a qualified buyer. Lenders are bean counters. They look at the offer compared to what it would cost them to take back the home in foreclosure. If the numbers are right, they will accept the offer. A good negotiator will come in low and if rejected, quickly submit a counter offer until a meeting of the minds is reached. If the initial offer is high there is no room for negotiation, the bank will accept it immediately because it is well within their favor. The difference in the right short sale price allows the property to be sold quickly at a competitive price compared to similar homes on the market in that area. This is a "wholesale" short sale. This is the expertise of Vested Interests, LLC.

Why would you short sale your property?
If you risk foreclosure because you cannot afford the property and you are upside down in value versus what you owe you should consider a short sale to stop the foreclosure. Yes, it is true you will not walk away with any money because there is no equity. But it will save your credit and keep you from facing the stress and embarrassment of public notice of default being filed against you by the lender. Additionally, if you wait until you're in foreclosure you have only 111 days to get that property sold. The short sale process can take up to 60 days leaving you very little room left to avoid foreclosure. You should begin this process before you get a notice of default. Also, many people forget that they may have refinanced their home and received a huge cash-out amount already, so they have actually in fact made money on their "equity" through that transaction. Unfortunately, now it comes time to pay the piper. For many, that is exactly what happened: they refinanced a cash out loan, the property dropped in value, then their mortgage interest rate adjusted, the mortgage payment went out the roof and they can no longer afford the home. Sound familiar? At that point the home owner needs to weigh the consequences of cutting losses and letting go and moving on, or risk the consequence of a lender foreclosure taking away the home. Understand also that in a short-sale submission you will need to provide the following documentation:

1. Completed Letter of Authorization for EACH LENDER to whomever is submitting the package
2. For each mortgage the loan face page showing loan details
3. All mortgage statements – last two months for each loan including account numbers
4. Monthly Budget - listing all monthly household income and outgoing expenses
5. W-2 Tax Returns – Copies of your last 2 years income tax returns
6. All Bank Accounts – Last two months full statements
7. Hardship Letter – describing your current financial situation and inability to pay
8. Most recent employee income payment stub for each person on the mortgage

If someone tells you they are submitting a short-sale on your behalf and have not collected these documents from you . . . you DO NOT have a short sale package submitted and in process.

Deed in Lieu of Foreclosure
We get asked this question all the time. Owners have been mislead to think that they can just send back the deed to the property to the lender and get out from under the obligation of the loan. Wrong. Under HUD guidelines before you can do a deed in lieu of foreclosure you must show you have made an honest attempt to sell the property on your own with supporting documentation. If you just send your deed to the lender and say, "that's it, here's my deed, I'm out of here" it is the same result as letting it go through foreclosure. Why? Because there has been no transaction recorded to take the property off the lender's books. They now have to take your property and put it back on the market and sell it in order to clear it off their books, usually at a loss. That is exactly the same as letting it go to trustee sale in foreclosure. Based on the difference between the balance owed and the cost of moving it off their books results in a tax consequence to the buyer as 1099 income. Be very careful when considering your options. With a short-sale completed the property is off the books, the debt is settled, and you are in much better shape in the long run credit-wise and tax-wise. Something to think about. For specific details regarding Deed in Lieu of Foreclosure, click here. To open and print this article, click here.