What's a "Short Sale"?

The term "Short Sale" is a label used to describe the circumstance when a property is sold for less than the amount of the mortgage debt against it. For example, a house is being sold for $300,000, but the mortgage debt against it is $350,000. Consequently, the seller is "short" $50,000.

How Does Selling "Short" Effect the Seller and Buyer?

Using the example above, if a seller is able to bring the $50,000 deficiency to the closing to pay the lender the difference between the sale price and the amount of the mortgage debt, the seller is then in control of the sale, just like a normal sale.

However, if the seller doesn't have the $50,000 to make up the short fall, several negative effects occur when trying to sell "short." For example:

1. Although the property is owned by the seller, the lender has the last word on whether or not they will accept less than the amount of the mortgage balance. Consequently, the seller does not have the ability to close the sale without the lender's approval. This brings us to our 2nd point.

2. Generally, it's difficult to get lenders to make a decision to either accept or reject a "short sale" contract offer. This can, and commonly does take many weeks; first, to find the right person with the authority to make the decision, then, to get them to make a firm decision in writing. By then, most buyers lose interest and move on to buy another house; they don't want to wait forever under the cloud of uncertainty, they want to buy a house to live in. And, the seller is just getting further behind on mortgage payments. This scenario usually ends in foreclosure.

Assuming the best possible outcome, where the lender decides to accept the "short" amount, there are additional consequences to both the buyer and the seller.

AS FOR THE BUYER:

1. Buyers must realize, that a lender will continue to consider offers to purchase right up to the day of closing; they want to minimize their loss. As a result, at the last minute, a lender may change their mind and refuse to close with the original buyer in favor of selling to another buyer at a higher price.

This leaves the original buyer out in the cold, and out money for things like the title search, the appraisal, mortgage application fees, home inspection fees, etc. So, after months of riding the emotional rollercoaster, the dream of owning that home turns to a big nightmare. To top it off, there's usually no recourse to the seller, because the seller has no control of the situation in the first place.

2. They are also buying a home where there will likely be no recourse to either the seller or the lender for defects or hidden damage to the house found after closing, because 1) the seller is gone and has no money anyway, and, 2) most lenders refuse to provide buyers a Seller's Property Disclosure Statement (SPDS) claiming they know nothing about the house.

AS FOR THE SELLER:

In some circumstances, a residential homeowner in Arizona presently is not legally required to pay the lender the "short," or deficient amount. However, many a surprised Arizona homeowner has received a 1099 Income Tax form with the amount of the deficiency reported to the Internal Revenue Service as TAXABLE INCOME.

So, if a seller sold "short" by $80,000 and receives a 1099 for that amount, they now have an income tax liability for that $80,000; and, that's IN ADDITION to the amount of their earnings for that same year.

IN THE END, a buyer attempting to buy a "short sale" will experience a very emotionality stressful event which can, and normally does, go on for many weeks and frequently many months. Moreover, many attempts to buy a "short sale" ends in frustration. In my opinion, this type of adventure is not a good idea for the typical buyer looking to buy a home as their primary residence.

As for the typical seller who lives in the home being sold, it's a very difficult, and even more emotionally stressful event than for the most buyers, since their family relationships and financial future will likely be significantly effected.

For some sellers, there are options other than a "short sale" that can be beneficial. However, their availability, desirability and effectiveness vary dramatically with each person's circumstance.