FAQ’s About Short Sales

If you’ve been around the real estate world at all, or even listened to TV and radio commercials, you’ve probably heard about short sales. They seem to be a big commodity in today’s market, yet many buyers and sellers often wonder what it really means and how the short sales process takes place. Here are some FAQ’s that will answer some of the most common questions.

Exactly What Is A Short Sale?

Short sales happen when a home is sold for less than the existing amount of the loan. If the lender accepts a payoff that is discounted in order to satisfy the debt owed on the loan, then a short sale happens. Almost always, the seller will need to prove that he has fallen on hard times and cannot pay the full amount of the loan.

How Does A Foreclosure Differ From A Short Sale? 

The bank owns a foreclosure and has most likely already foreclosed on the property, whereas in a short sale, the property is still owned by a struggling owner who is asking if the lender will be willing to take a discounted payoff of the loan.

Are Short Sales Always Heavily Discounted When Sold? 

No. Banks decide the selling price by getting the property appraised. Almost always, the bank will not accept an offer, which is more than 10% below the appraisal value.

Why Do Short Sales Take A Long Time? 

During a normal real estate transaction, the deal is closed once the buyer and seller agree to all terms and draw up a contract for the purchase. However, in a short sale, there is a bit of a lengthy process of determining the property’s fair market value, as well as the process that determines if the seller can qualify for a short sale.

Who Pays The Real Estate Agent’s Commission And Seller’s Closing Cost? 

This is usually paid by the current lender and includes, commissions, closing costs and any back taxes and liens.

Does The Seller Have To Pay Tax On The Debt That Has Been Forgiven? 

It’s important to discuss this with an accountant, but generally the lender will declare a loss to the IRS as bad debt for the deficiency. The borrower will usually receive a 1099 form from the lender representing the income gain that comes from the waiver of indebtedness. It will be necessary for the seller to account for this income. The Mortgage Debt Relief Act of 2007 protects the primary residence of borrowers who are short selling their homes. This happens by allowing much of the reported income to be excluded. Insolvency may be declared on a borrower’s secondary investment property and this would allow the owner to also exclude that income as well.

For more information on Short Sales and how they might affect you, call us today at Jerry Pinkas Real Estate Experts. We have the answers you’re looking for!

Jerry Pinkas Real Estate Team
854 Frontage Road West
Myrtle Beach, SC 29577