Posted on August 29th, 2007 by Jonathan Dalton

Let’s start this with a basic definition - a short sale takes place when a piece of real estate is being sold for less than the amount of the existing mortgage(s).

In markets such as the Phoenix real estate market, where many homes had been purchased through 100% financing or where equity was taken out of homes at the height of the market through a second mortgage or refinance, short sales are becoming increasingly common.

Last night, I spoke with a couple relocating to New York and facing a short sale to make the move. Fortunately, these folks were current on their mortgage payments. In fact, if not for the corporate relocation, they would not be selling their home. But life has a habit of getting in the way.

Many others are not so fortunate and are facing short sales in advance of foreclosures. No matter what the circumstances, preparing for a short sale requires the same steps:

1. Contact a real estate agent to determine at what price your home is most likely to sell. Zillow gives its Zestimates and has some data on recent sales but Zillow doesn’t take into account currently active homes or new-build inventory.
2. Contact your accountant. There usually are tax ramifications to a short sale as the IRS likely will see the mortgage reduction as income. Check with whomever takes care of your taxes to make sure and see the impact it will have.
3. Contact your lenders and let them know your situation. If you have two mortgages, you need to contact both lenders as you’ll be negotiating a reduction in the mortgage with both. The first lender (the one holding the larger loan) likely won’t act until it knows the second also is surrendering some money.
4. Be patient, but stay in contact. Most lenders have two-foot-high stacks of homes going into foreclosure on their desks. Short sales tend to move to the back of the pack, and there are only so many bodies working on files. Don’t expect an answer right away - in fact, it may take a couple of months to get final agreement from your lender(s) on the short sale.
5. Price your home aggressively and get it sold.  There’s no reason to try and stretch above the current market on a short sale - at the end, there’s no equity coming back to the homeseller. What the seller does get is freedom from their mortgage.

Short sales should not be taken lightly because of the tax impact and also the possible impact on your credit. But sometimes, such as in the case of a corporate relocation, there may not be other options available.

Got questions? As always, drop me a line and I’ll be happy to help.

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Categories: Real Estate Bubble, Real Estate Financing, Phoenix Market, General Real Estate