As anyone who has been on either end of a short sale knows, there's nothing "short" about this type of real-estate transaction.
Complicated from the get-go, a short sale is basically when a homeowner owes more on a house than it is worth and lists it for less than the amount owed. Based on a documented case of economic and financial hardship, the lender agrees to accept the lower price, forgiving any outstanding debt.
For instance, if a house was purchased for $300,000 but is now worth only $250,000 and the homeowner still owes $290,000, the realtor would list the home at the market price.
"We would list at $250,000, and they would probably get an offer at $230,000 or $240,000," explains Melinda Peterson, short-sales specialist, principal broker and owner of Real Estate Café in Grants Pass. "Then the short-sale process begins. Once they get a negotiated offer between the seller and buyer, the realtor sends a packet to the seller's mortgage company, who then decides whether or not they'll accept the lower price."
If it goes through, a short sale satisfies the homeowner's debt and often is less stressful than a foreclosure because the home is actually sold on the market.
But because short sales can be "tricky transactions," it's important to understand the entire process, says Scott Gephart, a short-sales specialist with RE/MAX Platinum in Medford and Ashland.
"In order to properly handle them, one must be a great negotiator when dealing with banks," Gephart explains, adding that banks are "extremely picky" about what is required and the order in which documents must be submitted to lenders. "These minor details can quickly kill a potential deal or cause a client to lose first position due to an improperly written offer."
Bank statements, tax returns, a financial worksheet and hardship letter are included in the packets, which can contain as many as 75 pages. Sometimes the bank will immediately decline the offer but, most often, a short sale takes an average of three to six months, and sometimes nine, to negotiate, says Peterson, who has been representing buyers and sellers in short sales for more than a decade.
"Most of the time we see them agree, but they don't always agree on our first offering price — they may come back with another price or send out their own appraisers to come up with prices," Peterson says.
Because this process takes so long, it is typical for buyers to keep looking, often finding something else before the short sale goes through.
"But if the buyer is patient and willing and really loves the house, it can work out well for everybody," says Peterson.
The main benefit for the seller is that a successful short sale does less damage than a foreclosure to the seller's credit score. While foreclosure dings consumers' credit scores for seven years, making it difficult to get a home loan for up to a decade after the foreclosure, a short sale mars a credit score for just two years.
"We've been told that banks look more favorably on a short sale when looking to lend again to the seller," says Peterson. "It can happen in as little as two to three years."
But a short sale also can backfire.
"We can get all the way to the end, and the bank will say 'no' and the house will end up in foreclosure anyway," Peterson says. "And sometimes banks will send a 1099 at the end of the year for the loss, adding to the homeowner's tax bill."
In today's challenging post-mortgage crisis climate, however, the federal government often allows homeowners to not pay taxes on a short-sale shortfall as long as the home was their primary residence.
"That's not necessarily true for people who own investment properties, though," warns Peterson. "For those people, we highly recommend they seek advice from a certified public accountant."
If sellers or buyers think a short sale sounds like a good solution, they should be careful to find a realtor who is qualified to represent them. Although the realtor's board offers a "distressed property certification," a realtor isn't required to have actually worked on a short sale to receive the certification.
Protect yourself by asking the realtor a few questions: Have you ever handled a short sale before? If so, how many? And what is your success rate?
"There are so many variables that can change the picture, and if a professional hasn't been down in the trenches, it can be a disaster," says Peterson.
Gephart agrees. "Ask a potential short-sales specialist if they offer a no-obligation consultation to help explain the ins and outs of this complicated process," he suggests. "Some time spent discussing options will help sellers and buyers decide if a short sale is right for them."
If all the real-estate stars align, a short sale can be a great resource for people in financial distress — and for buyers looking for a sweet investment or a good deal on a primary residence.