Denver Realtor® Short Sale Expert - Anthony Rael, REMAX Alliance

What is a Short Sale?
A short sale in real estate takes place when the lender (bank or mortgage company) agrees to accept less than the remaining balance on the mortgage owed by the current owner of the property.

When the amount owed on the property is greater than its current market value, this is called "being upside down" on your mortgage. Foe example. You purchased a home in 2023 for $400,000 and put 5% down ($20,000). Your mortgage starts out at $380,000 and you still owe $375,000. Unfortunately the market has cooled off and your property is now worth $350,000. If you were to sell today, after factoring in expenses to list, market and sell (title fees, inspection concessions, agent commissions, HOA fees, taxes, etc), you might looking at an additional $20,000. Your net sale amount due at closing is $320,000 - which means you are short $55,000 needed to buy your way out of the property. The difference between what you owe on the mortgage loan and what the bank eventually settles for is referred to as a "deficiency". More about that below.

So, why would you mortgage lender agree to accept a short sale?
In most cases the mortgage lender will actually save money versus the cost of foreclosing on the property. For the owner of the property who is “upside down” on the mortgage, a short sale may be less damaging to their credit rating and the seller may qualify more quickly for a new loan. If the property ends up going into foreclosure, it may be harder for the former owner to find a willing lender on another property. In other words, a short sale is less damaging to your overall credit score than a foreclosure.

In order for your property to qualify for a short sale:

You must demonstrate, through comparisons with similar properties, that the value of your property has dropped;
You must show that you are close to having to default on your mortgage payments;
You must attest, in writing, that you have “fallen on hard times” through such things as unemployment, divorce or medical emergency;
You must not have any assets (e.g., investments, cash, and other properties) that the lender could point to as a source for meeting your mortgage payments.
You have a qualified buyer willing to accept the short sale;
The lender must agree to the short sale. Lenders may agree to the actual short sale price or offer an agreement for you to make up the difference at some later date.

Before agreeing to list your home for short sale, be sure to check with an attorney or accountant to determine legal or tax issues you need to know about before acting. Short sales are a specialized form of a real estate transaction. Work with a qualified and knowledgeable REALTOR® with experience in short sales to make sure all of the elements of the transaction take place properly.

The Short Sale Process and YOU
If you happen to be "upside down" or "underwater" on your mortgage, your bank *may* grant a short sale for two reasons: the seller has a hardship and the seller owes more on the mortgage than the home is worth. The most common hardship examples include:

Unemployment / reduced income
Divorce
Medical emergencies
Job transfer that requires you to move out of town
Bankruptcy
Death (you or a spouse)

As a seller, you will need to prepare a short-sale package for submission to your bank/lender. Each bank/lender has its own guidelines, but the basic procedures are pretty similar from bank to bank. A short-sale package will most likely consist of:

Letter of Authorization (which allows me to speak to the bank on your behalf)
Completed Financial Statement
Seller's Hardship Letter - (this is critical and necessary to getting a short-sale approved by your lender)
2 Years of Tax Returns
2 Years of W-2s
Recent Payroll Stubs
Last 2 Months of Bank Statements
HUD-1 or Preliminary Net Sheet
Comparative Market Analysis (CMA) with a list of recent comparable sales in your neighborhood

At this point, the process is not unlike a traditional sale - I will work with you to establish a listing price based upon current market conditions and we'll inform other agents (via the MLS) that this is a short sale - pending bank approval. We'll work hard to solicit offers, submit them to the bank and and wait for their loss mitigation department to respond. It can be several weeks to several months depending how backlogged they are. I can't stress enough that patience is essential for you and the buyer.

Potential Tax Consequences
Debt reduced through mortgage restructuring, as well as mortgage debt forgiven (aka "deficiency") in connection with a short sale or foreclosure, may be subject to taxes. Lenders can seek a personal judgment against the borrower after the short sale to recover the deficiency amount. Once the lender gets a deficiency judgment, it may collect this amount from the borrower using standard collection methods, like garnishing wages or levying a bank account.

Is it possible to avoid owing the bank for the deficiency?
Yes. Some lenders may agree to waive the deficiency. When we're negotiating with your lender for short-sale approval, we'll ask them to forgo the right to seek a deficiency judgment. If they agree, we'll make sure to add this provision to your short sale agreement to ensure it expressly states once the transaction closes the debt (deficiency) will be considered satisfied. In the absence of a waiver agreement (in writing), the lender might file a lawsuit against you to get a deficiency judgment after the short sale closes. Additionally, you can offer to settle for a lesser amount and even agree to make payments over a short period of time because collecting a deficiency debt from you can be a lengthy and costly process for both sides. Sometimes it just easier for the lender to accept a reduced amount than to fight for the full amount.

If the lender refuses to waive the deficiency, you might consider filing for bankruptcy to eliminate the debt because a Chapter 7 bankruptcy discharges the deficiency which in turn, relieves you of the debt, while a Chapter 13 bankruptcy will usually require that you pay a portion of the total amount owed. Bankruptcy might not be a good idea if a deficiency judgment is your only debt, but but it may be an option when you have multiple debts you can't afford to pay.

I am not an attorney or CPA so can not give legal or tax advice, so be aware that there may be potential tax consequences, so it’s always best to seek professional guidance in these areas as needed.

Buying a Short Sale Home
Short sales require patience. Non-cash buyers can use any lender they want for their new mortgage, but all parties need to understand that process can take anywhere from 30-days to several months to get "short sale approval" from the seller's bank. Our transaction team will communicate WEEKLY with your bank and keep all parties updated throughout the process. Some buyers may get tired of waiting for short sale approval and may threaten to cancel if they don't get an answer within a specified time period. Unfortunately, no amount of pressure will expedite the process. If a buyer becomes frustrated and no longer wants to wait for bank approval, hey should be allowed to terminate the contract if the lender approval is not received within a set timeframe as set forth in the Short Sale Addendum. If you're easily frustrated or very inpatient, pursuing a short sale is probably not a good idea for you because agents and sellers have no control over the bank approval or acceptance timeline. Patient buyers who are willing to allow the process to play out are rewarded with a great below-market opportunity.

Don't be overwhelmed or confused. Selling your home or condo via short sale is a better
alternative to foreclosure. Call Anthony Rael for a non-obligation consultation today!

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