What’s a “short” sale?

In some areas of the country, and from time to time, real estate values decline.

In such situations it sometimes happens that owners need to move but the value of the mortgage is greater than the value of the property. The owner is said to be financially “upside down.”

If the property is sold at a loss, the owner is generally responsible for repaying the entire mortgage nationally (a purchase money mortgage in California may be an exception — see an attorney for details). But, sometimes owners do not have enough cash from the sale to re-pay the loan and so they try to work out a deal with the lender to pay less than is owed — a short sale.

The lender, of course, wants back every dime loaned to the borrower. That was the deal. And lenders point out, properly, that if the value of the property rose the borrower would not turn around and be required to offer some of that profit to the mortgage company.

Lenders will sometimes allow a short sale if it is a better alternative than a foreclosure sale in a down market. However, before making such a decision, a lender will want to see how such a deal can be structured. Perhaps the borrower has other assets, or perhaps the short-fall can be made up with a note to the lender.

In the event that a borrower faces a short-sale situation, the best approach is to have an attorney contact the lender on your behalf. It may be possible to work out a different monthly payment, an interest rate lowered to current levels, a long extension, etc.

Or, alternatively, rent the property if possible.

If the property is rented on a fair market basis it may then be possible to write off any losses. In contrast, with residential property, it is not possible to write off losses at this time.

See a tax professional and realty attorney for details before making any decisions.

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