Currently there are many properties advertised as “short sales” on the Multiple Listing Service in the San Diego area. So, what is a short sale? Owners who can no longer afford to keep mortgage payments current due to job loss, divorce, illness or an ARM resetting used to have only two options: bankruptcy or foreclosure. However, more lenders are now agreeing to short sales in the hope of quickly recouping their losses and minimizing their costs of carrying a home without mortgage payments from the owner. In a short sale, the seller hires an agent to find a buyer for the house and sells the house for a less than the total amount due on the loan. In some cases, the lender still demands that the homeowner make some kind of payment or share the loss, but short sales may have less impact on the owner’s credit than either bankruptcy or foreclosure, which can haunt former homeowners for up to 10 years. The homeowner should be aware that there can be some adverse tax consequences by choosing the short sale route. The difference between the sales price and the loan is considered forgiveness of debt income which is taxable income to the homeowner. Having a better credit score may not be worth the potential of owing thousands of dollars in taxes to Uncle Sam.

As the lender is receiving less than the value of the home when the loan was issued, short sales do require the approval of the mortgage holder. For buyers, the bottom line is that they generally get a good deal on the property. The price is usually at or slightly below market value because the lenders are motivated to sell the property quickly to avoid foreclosure and carrying costs. Lenders tend to be more realistic about market values than homeowners who may have emotional ties to the property. Another plus for buyers!

Keep in mind that many listing agents will try to attract offers or stimulate a bidding war by listing the homes at prices far below what the lender will accept. Remember that short sales are all subject to the lender’s approval. If you’re a buyer, don’t get your hopes up when you see a home priced $50,000 or more below the last sales’ comparable for the area. If it looks too good to be true, it probably is and after you’ve taken the time to submit an offer, it will likely be rejected by the mortgage holder.

To minimize your efforts and maximize your chances of a successful purchase, have your Realtor® ask the following questions of the listing agent:

1. Has the lender indicated a price they are willing to accept for the home?
2. Have there been other offers? If so what were they and what was the lender’s response to them?
3. Is there more than one lender on this property? If so, have all the lenders been contacted and are they willing to accept a short sale? Does the first or second mortgage holder have the final say?
4. What is the total outstanding loan balance?
5. What has been the average response time for the lender? Many sub-prime lenders are in bankruptcy themselves while others are simply overwhelmed by offers and may take from a week to a month to respond.
6. How did you come up with the listing price? If it seems like more of a stab in the dark than a reasoned number based upon recent sales’ comparables, it’s unlikely to pass the lender’s scrutiny.

It may be helpful to give the lender a deadline with your offer to purchase. That way, if they don’t respond within the set timeframe, you’re free to pursue another property that might be more promising. And, in the rush to take advantage of a good deal, be sure that you don’t end up with a lemon. As with any other property purchase, it’s very important that you obtain a home inspection and pay for other types of inspections such as termite/pest. Don’t waive your right to obtain these inspections and make sure that your offer to purchase is contingent on approving them.
Sure, short sales make for a buyers’ market, but you may have to kiss several frogs before finding that dream home.