WITH the ever increasing number of mortgage defaults daily, I am often asked whether doing a "short sale" is a good idea to avoid foreclosure. What is troubling to me is the amount of misinformation out there that is misleading a lot of people who are facing perhaps the most difficult time of their lives. Sadly, a lot of this misinformation comes from non-professionals who lack a thorough understanding of the homeowner’s specific situation.
A "short sale" or "short pay" occurs where the lender (or lenders, if there is more than one mortgage holder on the property) agrees to accept less than the full amount owed by the homeowner as a payoff for the outstanding mortgage balance. Because most properties today are "upside down" (i.e., the amount owed on the property exceeds the property’s value), it has become impossible for most homeowners to sell their property for enough money to cover outstanding loan obligations and selling costs. From the lender’s perspective, a short sale may help mitigate (lessen) further financial losses if the homeowner has stopped paying and is already in foreclosure. For the prospective buyer, the purchase may be a "good deal" if he or she is buying below market value. Thus, at the end of the day, everyone benefits- The bank cuts its losses, the homeowner avoids the agony of foreclosure (and possibly foreclosure deficiency) and the buyer gets instant equity (and don’t forget the realtor who earned a nice commission!). Thus, this should be a win-win situation for everyone. Or is it really?
Unfortunately, we don’t live in a perfect world. The reality is that a short sale often sounds easier said than done. Here’s what typically happens. First of all, the homeowner has no clue that a short sale can be a frustrating and time-consuming process. The real estate agent, anxious to make a sale, prices the property way below market value just to get a lot of offers. Sure enough, buyers looking for a "good deal" create a frenzy of competing offers with everyone hoping to have the highest bid.
The realtor then submits the highest offer to the lender "to see if they will approve it". Unfortunately, it could take anywhere from 2-6 months or longer to get an answer from the lender. Often, there are multiple decision makers involved that will determine whether: (a) seller actually qualifies for a short sale (i.e., Can they prove hardship and inability to pay? Is there a possibility of refinance to keep them in the home? etc.) (b) the offer price reflects a fair price for the property.
Lastly, who actually decides whether the offer is acceptable? Because a majority of today’s defaulted loans involve 2nd trust deed holders that represent pools of investors that purchased the security on Wall Street, often it is unclear as to whom you are negotiating with in trying to get the short sale approved. Thus, the time frame is uncertain and you never know when you’re going to get an answer. And then after months of waiting, the answer could simply be "NO" and that is the end of it. All the hard work and months of waiting- for nothing! If the sale falls through and payments are delinquent, then the property ends up in foreclosure anyway.
I suggest that if you decide to explore the short sale route (to avoid foreclosure and possibly bankruptcy), make sure that your real estate agent is familiar with and experienced in this process. Don’t rely on promises without knowing what you are getting into. It is also important to know that in some cases, a short sale may result in tax liability (A short sale is a type of debt cancellation and the amount forgiven is taxable by the IRS). There are exceptions to this rule and you should consult with a tax professional who can properly advise you in this regard.
If you need help in evaluating all available options, call toll-free 1-866-477-7772 to schedule a free consultation. We have offices in Glendale, Cerritos, West Covina and Valencia.
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None of the information herein is intended to give legal advice for any specific situation. Atty. Ray Bulaon has successfully helped over 4,000 clients in getting out of debt. For a free attorney evaluation of your situation, please call Ray Bulaon Law Offices at TOLL FREE 1-866-477-7772. (Advertising Supplement)
( Published July 21, 2010 in Asian Journal Los Angeles p. B2 )
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