The Short Sale

The hottest topic in South Florida is the real estate "short sale." Actually a short sale is nothing new, but it now quite the vogue. A short sale basically means that the mortgage lender (or lenders) agree to satisfy its mortgage lien and allow the transfer of the real estate in exchange for receipt of less than the full amount of the amount due on its mortgage loan. In a short sale, the real estate is sold to a buyer who obtains a new mortgage. As the net proceeds of the sales price is less than the full amount due on the mortgage lien(s), the mortgage holder(s) must agree to accept a "short" payoff in exchange for release of its mortgage lien.

Despite this basic definition, there is more involved with the short sale and whether it is actually beneficial to the homeowner facing foreclosure. The fact that the internet is full of courses, books, and seminars offering to turn out "short sale experts" should in and of itself advise caution.

It is been my experience so far that many homeowners facing foreclosure seek out the "short sale", but do not entirely understand the process or many of its implications. Some do not even seem to understand where they stand on various issues even after a "short sale" supposedly took place. Apparently, one of the short sale's greatest boosters, at least at present, is the real estate broker or other "third party negotiator" who would earn a commission upon the closing of a short sale.

At this time, it seems that substantially more are failing to achieve a short sale than are those who have achieved one. Many seem to seek out the short sale as almost a holy grail and advise that they are in the "process of a short sale", but few have actually advised that they have completed one. Many seem to indicate frustration in the attempt to communicate with the mortgage lender(s) and/or actually complete a short sale.

Apparently the most difficult item in the short sale process is communicating with the lender and any second mortgage holder, such as a "home equity loan." In addition to the agreement of the first mortgage holder, the agreement of any junior mortgage holders must also be obtained. Outstanding judgment or tax liens may also be an issue as the buyer would need to receive clear title.

One of the most important issues in the short sale is whether the homeowner is actually released from liability for the "short" or unpaid amount. If the mortgage company and/or the second mortgage company do not release a person from liability for the unpaid portion, the benefit of a short sale to a homeowner may be questioned.

Another important issue is the federal income tax consequences. If the unpaid mortgage debt is forgiven, "discharge of indebtedness income" may be implicated. Discharge of indebtedness income basically involves the recognition as income for federal income tax purposes of the discharged mortgage debt. But there are various exceptions to the recognition of discharge of indebtedness income, such as the insolvency exception or discharge in bankruptcy. Although a form 1099 may be issued as to the homeowner/seller to the IRS, one of the various exceptions to the rule may apply and income taxation on the discharge amount may not be due. A complete analysis of this issue should be completed before one commits to undertake a "short sale."

Many seem to seek out the short sale to "save their credit." One should try to get the best understand possible of whether a short save will actually save or protect one's credit from the reporting of a foreclosure. In general, a credit reporting agency may report accurate information on your credit report. Although a "foreclosure" may not be reported on one's credit, a mortgage delinquency may. One may question the effective difference.

A short sale may be in the mortgage lender's supposed "best interest." But one should realize that many lenders may be under contractual or regulatory restrictions that may not permit them to agree to a short sale. Furthermore, one may actually be communicating with the lender's loan servicer and not the actual mortgage lender.

The apparent word on the street is that a short sale takes many weeks to pursue and that you need to furnish substantial documentation. One may need to furnish personal financial information such as paycheck stubs, bank statements, 401(k) statements, and tax returns. One may also need to further information about a hardship.Jordan E. Bublick, Miami and Palm Beach, Florida, Attorney at Law, Practice Limited to Bankruptcy Law, Member of the Florida Bar since 1983