During 2008-2011 it felt like every single house was either a short sale or a foreclosure. Once again banks are now providing mortgages with very low down payments. If the market drops by 10% we may see quite a few homeowners underwater (owing more than the house is worth). Homeowners being underwater can lead to short sales.
To put it simply a short sale is when you sell your home for less than what you own on it. A person would do a short sale if they are unable to make their payments and the current value of their home is lower then what they owe. If for instance there was a great job in Texas but in California you owed more than the house was worth and you could not rent it for the mortgage you may consider a short sale if you cannot afford the loss on the California home monthly and the cost of living in Texas.
If you are ever considering a short sale here is what you need to know:
- There is no guarantee your lender will agree to take a loss on the house. If you have assets they may have you pay the loss or a portion of the loss to agree to the sale price.
- If the lender agrees to take a loss you may be liable for taxes on the portion they took the loss on. Example: you owe 400k and sell home for 300k. The bank is forgiving a loss of 100k. Key word is giving. It could be considered a gift and you may be liable for taxes on it. Make sure you talk with a tax advisor. A Realtor will not have the accurate information on your tax liability and should not represent that they do. I hear people tell me all the time, “well the Realtor said I would not have to pay taxes.” That is the same as having a roofer advise on side effects of heart surgery.
- You need to work with a Realtor that understands short sales and has experience doing them. Short sales require a lot of patience, documentation and negotiating. It is not for the faint of heart. You do not want to be a Realtor’s first short sale. The layers of negotiating that go into the final document is substantial and can affect you greatly.
- Currently (6/2018) based on conventional guidelines you will not be eligible to buy a home until 4 years after the short sale has closed. FHA is 3 years. Jumbo loan timeframes vary among lenders but is generally 5 years + a really good explanation of why you short sold your house (job relocation, partner died, lost your job).
If you are considering buying a home that is a short sale you need to know:
- Until the bank (bank taking the loss on the property) agrees to your offer price, your offer price means nothing. The owner may accept it but if the bank feels the price is too low they do not have to honor the contract. Many times, people literally just put a sign in their yard with a low price and as the buyer you are thrilled but if it is a nickel less then what the owner owes all power lies with the bank as to whether they will accept your offer.
- It could take 30 days to 18 months for a short sale to be approved. It may never be approved. They are not a sure thing unless the Realtor already has the short sale approved by the lender at a certain price and you are buying the home at that price. Even then the lender can always change their mind. There is no sure thing with a short sale.
- Do not give notice on your current home until the short sale is fully approved by the bank and even then, I would advise to fully close the purchase first.
- Any lender can finance a short sale. I did a ton of financing on short sales back in the day and the trick is to never lock the interest rate until you have lender approval of the short sale.
Short Sales and Fraud:
- You do not do a short sale just because your house is worth less then you owe. In 2009-2013 we saw a ton of what we called “buy and bails,” where people would buy a new house and then short sale their old house. This is mortgage fraud. If a Realtor is pitching this as an idea to you, hang up and call someone who will not lead you into trouble.
- If someone advises you to sell the house for way less to a buyer and then have the buyer give you some extra cash outside of escrow that is also fraud.
- If someone tells you they will short sale your house to an investor who will then let you live there really cheap be terrified. This was one of the biggest scams. People in desperate positions thought they had saviors coming in and they were working the system and then as soon as they closed the investors would serve eviction notices. And the investors were 100% within their legal right. The people got conned. This went hand in hand with another scheme where the investors said they would buy the house cheap, rent to you and then sell it back to you at a lower price then what you owed. Once again too good to be true. Often the investors already had a buyer lined up that was not the homeowner to sell the house to.
Bottom Line: Whether you are considering buying a short sale or selling your home via a short sale make sure you fully understand what you are getting into. The timing is never cut and dry.