Everything you wanted to know about short sales but were afraid to ask

Short sales represent nearly 50 percent of all the active listings in Maricopa, and that trend is expected to continue for the next year or two. A short sale is a pre-foreclosure sale, allowing the current owner of a house to list their home for sale, secure a fair market offer for the home, and request that their lender accept that offer, “short” of what the mortgage balance currently is.

A short sale can be a long and frustrating endeavor due to the process involved to receive approval from the lender or lenders. It does require the seller to prove a financial hardship and a valid reason for not being able to remain current with the terms of the note. Once the lender considers the hardship valid, they will then order a BPO, or broker price opinion, which is an independent value assessment of the home, and that is the value the lender will compare all offers to.

If there is a mortgage insurance premium involved, there is a good chance that the MI company will ask for a promissory note from the seller, but that can often times be negotiated as well. From that point, if there is an offer that lines up with the BPO value, and the net proceeds are satisfactory to the lender, the offer will then need approval from the final investor, which in 95% of the cases, is Fannie Mae or Freddie Mac.

Once the final investor approves of the net proceeds, an approval letter is sent out, which spells out the terms of the sale and states whether or not the lender is relieving the seller of the entire financial obligation. Fortunately for most Arizona homeowners, the Arizona legislature has adopted anti-deficiency statutes to protect short sellers, but it is important to carefully read the approval letter from the lender once it is received.

For homeowners with second mortgages, and especially HELOC’s, (home equity lines of credit), that is often not the case, and the second lien holder can and usually does pursue the seller for most, if not all of the balance.

At this point, if all parties are agreeable, the short sale then goes through the escrow process like any other sale. Buyers are afforded their ten day inspection period, sometimes reduced to seven, and normal close of escrow time is typically 30 days from receipt of approval.

Upon completion of the short sale, the lender does have the right to send the seller a 1099 for the balance of the note, which the seller would have to claim as income, and which would be subject to income taxes. However, the Mortgage Debt Relief Act of January 2007 relieves most primary residence homeowners of that obligation – aside from the fact that most home owners have not been receiving 1099s. But it does need to be considered, and I encourage all homeowners to seek the appropriate counsel of an accountant or an attorney to get more specific information pertaining to your individual situation.

For those pursuing loan modification, a word of caution. Less than 3 percent of all loans have been successfully modified, and according to a Congressional Oversight Panel report released this week, the Treasury Department’s Home Affordable Modification Program can be considered a failure in that the program will only prevent 700,000 to 800,000 foreclosures, far short of the 3 or 4 million it was supposed to help.

Jay Shaver is an Associate Broker at The Maricopa Real Estate Company. He can be reached at 602-228-2384 or [email protected]