A short sale is when a property is sold at a price lower than the amount the homeowner owes on the mortgage, and the homeowner’s bank agrees to the short payoff. A bank may accept a short sale with a property that is worth less than the outstanding balance of the mortgage if the homeowner is unable to make their monthly loan payments, cannot pay back the full balance of loan, and needs to vacate the property.
In a short sale, the bank must confirm that the homeowner is unable to meet their obligations and consider if the advantages of a short sale outweigh those of a foreclosure since they will be receiving less than amount the homeowner owes on the mortgage.
According to the Consumer Financial Protection Bureau, “If you live in a state in which you are responsible for any deficiency, which is the difference between the value of your property and the amount you still owe on your mortgage loan, you will want to ask your lender to waive the deficiency before you go through with a short sale. In some states, after a short sale, your lender could sue you to collect the amount of the deficiency. Getting a waiver of deficiency means that the lender waived the right to collect this amount. If the lender waives the deficiency, get the waiver in writing and keep it for your records.”
Before undertaking a short sale, homeowners should consider that a sale in which the debt is forgiven is considered a relief of debt and may be subject to being taxed as income. The Mortgage Forgiveness Debt Relief Act of 2007 created a limited exemption that allowed homeowners to pay no taxes on debt relief; however, only cancelled debt used to purchase, build or upgrade a primary residence or refinance debt incurred for those purposes qualifies for that tax exemption.
According to the Washington State Department of Licensing, “Even if a lender agrees to a short sale, the lender and any junior lien holders may not agree to forgive the debt entirely and may require you to pay the difference as a personal obligation. This outstanding personal obligation could result in a subsequent collection action against you. For example, a lender may accept the short sale purchase price to “release the lien” on the property but still require you to pay the full amount of the original debt. You must be certain of the terms of any short sale before making a decision. All agreements between you and the lender must be in writing.”
Other conditions imposed on short sales, include the following:
- The homeowner may not charge a sales commission, a negotiator’s fee, or any amount that is not disclosed to the bank.
- The sale cannot involve a flip transaction.
- The property must be marketed at a fair price. Short sale properties cannot be listed for an amount greater than the fair market value.
“An owner may market his or her own property for sale without having to obtain a real estate license. However, if a person obtains an interest in real property from the owner with the intent of finding another buyer before completing the transaction with the original property owner, the person is putting transactions together for others and Department of Licensing will consider taking action against the perpetrators for the unlicensed practice of real estate activities,” the Washington State Department of Licensing says.