What is a Short Sale?
A short sale is the sale of real estate where the owner owes more to the bank than the property is worth. Homeowners who are experiencing a financial hardship often turn to a short sale to avoid foreclosure or bankruptcy. On the other end of the spectrum many investors are anxious to buy short sale properties because they can be bargains.
The Buzz About Short Sales
Bookstores are full of books about “buying a short sale at discounted prices.” An equal number of websites promise bargains on short sale homes, or promote “foreclosure lists” for a fee. In reality, there are good buys on short sale homes, but there is also a high price to pay. The process of locating, buying a short sale, and working through the legal and emotional complications of a short sale is not for everyone.
Benefits of Selling a Home With a Short Sale
There are many benefits to selling your house as a short sale. We have outlined a few of the main benefits of selling your house as a short sale. Depending on your own specific situation, the benefits can be significant.
- Working out an arrangement with the lender avoids any legal action by the lender later.
- Often the property value is so far below what is owed, it becomes clear that value may never come back.
- Selling at a short sale helps both homeowners and lenders get a fair price for the property and liquidate a declining asset.
- Avoid foreclosure, stay out of public record filings.
- Possibly avoid bankruptcy.
- Wrap up a bad investment with no loose ends or lingering liability.
Benefits Of a Short Sale For A Home Buyer
Many investors assume that the very status of a property as a “short sale” home listing makes it a bargain, this is simply not true and a dangerous approach to real estate investing. The benefits of short sale for a buyer are determined by the particular transaction, not some formula or universal criteria.
If you are interested in buying a short sale home, it could prove to be a lucrative and rewarding experience. This is especially true when you hire a professional, to make sure that you avoid making the common mistakes that most investors make. McFarlin LLP has a in-house brokerage Clear Point Real Estate Services, which can assist you with every aspect of buying a short sale house.
Challenges When Buying a Short Sale Home
- A short sale usually means that the home has decreased in value since the last sale, and may be in a declining market.
- Short sale homes are sold “as is” without any representations or warranties from the lender, so a thorough inspection is advisable.
- It can take much longer to close a short sale transaction because the lender must approve all aspects of the deal.
When buying a short sale, or considering a short sale home, investors should be aware that lenders typically refuse to pay for common items such as:
- Suggested repairs on a home inspection
- Pest control (even if it is determined the home has such problems)
- Roof certifications or roof repairs
- Home protection plans
- Deferred maintenance.
Real Estate Agents & Short Sales
If you think a short sale might be right for you, it is critical you work with the right professionals. Real Estate Agents are paid only on short sales that actually close, which can create a terrible conflict of interest if closing the short sale would not be in the homeowner’s best interest. Frequently lenders ask homeowners to sign a promissory note or specifically agree to liability after the transaction closes. Closing a short sale on these terms actually makes the homeowner worse off. Only a qualified real estate and short sale attorney can give you legal advice and fully represent your interests.
Tax Issues & Short Sales
It is important to talk to your tax advisor, or work with a short sale attorney, before selling your property due to potential tax repercussions. The IRS considers the difference between the value at which you sell your house, and the balance on the mortgage as “income,” unless directed otherwise. Most short sale sellers can close the transaction without owing any additional taxes, but the deal must be structured right. Again, only an attorney can give you legal advice and fully protect your interests.
Short Sale F.A.Q.s
Tim McFarlin of McFarlin LLP spoke to Orange County Register’s John Gittelsohn to answers some important questions about Short Sales.
Q. How Did You Develop This Practice Area?
A. There are many consumers in distress and many people to help; this practice area is in great demand. Many distressed borrowers are people who initiated loans through subprime lenders. What’s happening now is a lot of folks don’t have equity they were expecting, and can’t refinance as they hoped. Often the best solution for these borrowers is a short sale to stop foreclosure.
Q. What’s The Advantage Of A Short Sale?
A. A short sale is when the borrower can’t maintain mortgage payments, and the bank allows the property to be sold at a loss instead of going all the way through foreclosure process. With a short sale, the consumer typically doesn’t have a foreclosure or a deficiency judgment. The consumer hopes to walk away with his credit mostly intact. (Note: By law, if the owner still has the original purchase loan on the property and sells the home for less, the bank can’t go after the seller for the balance of the loan. However, the difference could be treated as income by the IRS.)
Q. Why Would They Hire An Attorney?
A. Frequently, when the borrower doesn’t have equity, there’s not a lot to fight over. You’re only talking about some possibly unlawful fees and damages. But it’s not as easy as it seems to do a short sale. You need your documents presented properly and you need to get them together fast. If it’s not done right, the bank will move you through to foreclosure.
Q. How Much Does It Cost A Client?
A. The fee to represent a client in a short sale can vary. There are Realtors out there who will offer to do a short sale for free, but that’s not who you want representing you. Realtors just want to “take a shot” at putting the deal together with no legal background or ability to address issues that often arise, such as allegations by the bank of mortgage fraud.
Q. As A California Foreclosure Attorney, You Represent Borrowers In Truth In Lending Act Lawsuits. What Happens In These Cases?
A. The Act requires an accurate disclosure that shows how much monthly payments are going to be, and the total finance charges, among other things. What happens frequently is the terms change and there are new, previously undisclosed, fees and charges that are only disclosed when it’s time to sign all the loan documents. The mortgage company is required to give the borrower a rescission period, a three-day cooling-off period, after the documents are signed, but when they sit down to sign the loan documents, the client doesn’t have much time to reflect.
Q. Is There Any Lender You See More Than Others In These Truth-In-Lending Cases?
A. There are so many different companies out there, so many different corporate structures, it’s hard to know who is actually involved in each loan sometimes. I have had a couple of cases with People’s Choice and New Century, who have each filed for bankruptcy protection. I had just one with Quick Loan Funding. That loan was transferred to Countrywide for servicing. It’s hard to keep up with the changing face of the mortgage industry.
Need Assistance Buying or Selling With a Short Sale?
Whether you are selling your house as a short sale, or you are interested in buying a short sale home, McFarlin LLP in-house brokerage Clear Point Real Estate Services can meet all of your needs. We want to make your short sale process a success, and protect you from the complications that can arise with short sales. We offer free consultations to prospective clients. Contact us today (888) 728 0044, or email us.
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