What Is a Short Sale?

30 Aug What Is a Short Sale?

Many realtors talk about short salesto aid a homeowner who can’t get enough money out of the sale of their home in today’s market to pay the liens.

A short sale is simply an arrangement made with a mortgage company to take less than what is actually owed to them on the mortgage loan, in exchange for them releasing the lien on the property so you can sell it.

Thus, if a home has, for example, a first of $200,000 and a second mortgage of $100,000 but will only bring $280,000 on the market, the homeowner can only sell it if the mortgage holder(s) reduce the amount owed by $20,000 (not accounting for costs of sale). Since in this example, the sales price is sufficient to cover the first mortgage, the second mortgage is likely the one you would need to deal with.

If you file for bankruptcy, you may not be obligated on the mortgage any longer, so the lender knows the only way it will get paid is by taking the property or agreeing to the sale. Sometimes it will help move the negotiations along since the lender knows you may walk away from the house.

Sometimes this makes a lot of sense. For example if the first mortgage in the above example is about to foreclosure, the second mortgage holder might get completely wiped out. Better to take $80,000 or even $60,000 than end up with nothing.

  • However just because it makes sense, don’t expect the mortgage company(s) to necessarily take you up on the offer.

If the lender will work with you on a short sale what most borrowers want is for the company to release the lien and write off the deficiencybalance you owe – but you need to consult your tax consultant about any possible tax uponforgivendebt. Others will agree to the short sale, but will expect you to pay the difference.

Bankruptcy might help you avoid any issues with owing the difference or having to pay taxes, so you might want to consult a good bankruptcy lawyer if you are facing this problem.

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Douglas Jacobs is a California bankruptcy attorney and partner in the Chico law firm of Jacobs, Anderson, Potter & Chaplin. Since 1988, Mr. Jacobs has taught Constitutional law and Debtor-Creditor/Bankruptcy law at the Cal Northern School of Law. He has served as Dean of Students since 1994. He is a frequent lecturer on the subject of consumer bankruptcy law, and has spoken at both state and national levels.
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