DISCLAIMER

The information provided on this website is for general informational purposes only.  We are not qualified to give Tax or Legal or Credit advice.  It is strongly recommended the User verify with a professional/expert, including, but not limited to, certified public accountants, tax advisors, real estate or tax attorneys and licensed mortgage brokers, the ramifications and potential liability prior to entering into a Short Sale, Deed-In-Lieu-Of-Foreclosure or Foreclosure.  The authors of this site are based in Arizona and much of the information, while general in nature, may apply more directly to Arizona than other states.


A. UNDERSTAND THIS FIRST

1. Every Short Sale is different.  Successful outcomes will vary state to state, bank to bank and within each individual circumstance. 

2. Federal, State, Tax laws regarding Short Sales and the ramifications of doing them change constantly.

3. Short Sales are in general much more favorable than letting your home go to Foreclosure and/or doing a Deed-in-Lieu.  

4. Short Sales give you the ability, but not the guarantee, to have the terms and conditions of a negotiated purchase contract as evidence of lien holder acceptance.  

5. Short sale negotiations take an average two to four months - some much less.  (\Down from four to seven months in 2009)

6. Due to their complexity and specialized nature as outlined above, it is important to work with someone who specializes in Short Sales.

B.  WHAT IS A SHORT SALE?

1.  The underlying lien holder(s) agree to accept less than what is owed on a property.  

2.  The gap between the approved sales price and the amount owed is termed  'forgiven debt'.  

3.  In a perfect world, an 'approved' short sale is having the debt forgiven, settled as agreed and paid in full.

4.  The world is not always perfect.

C.  FORGIVEN DEBT - SHORT SALE OF PRIMARY RESIDENCE -  (AZ)

1.  1st Lien, debt is forgiven, not subject to deficiency judgment or tax event.

2.  Purchase Money 2nd lien, debt is forgiven not subject to deficiency judgment or tax event. 

3.  Non-purchase money lien such as a HELOC (Home equity credit line) may be subject to a deficiency judgment and/or 1099C tax event and/or other liability.  (see below for more on Deficiency)

4.  Short Sales allow the Seller an opportunity to negotiate and potentially reduce/mitigate deficiency/tax event.

5.  Foreclosure/ Deed-in-lieu have no such option like #4 above.

D.  QUALIFICATIONS FOR ANTI-DEFICIENCY (ARIZONA)

1.   Decrease in homes value not do to neglect.

2.   On 2.5 acres or less

3.   Single family or duplex

4.   Purchase Money Mortgage(s)

5.   Utilized as a dwelling (lived in) for at least 6 months

6.   VA loans exempt         

E.  INVESTMENT PROPERTY (ARIZONA)

1. Not subject to Deficiency Judgment if criteria in Section D. is met.

2.  Subject to tax event on the Deficiency.

3.  Short Sale allows the Seller an opportunity to negotiate and potentially reduce/mitigate tax event.

4.  Foreclosure/ Deed-in-lieu offers no such option.

F.  HOME EQUITY LINES OF CREDIT 

1. May be subject to Deficiency Judgment

2. May be subject to tax event on the Deficiency.

3. Short Sale allows the Seller an opportunity to negotiate and potentially reduce/mitigate tax event.

4.  Foreclosure/ Deed-in-lieu offers no such option.

G.   CREDIT

1.  Credit score will take a hit.

2.  By doing Short Sale your Recovery period to be able to purchase another home is generally 30% faster or more vs. Foreclosures or     Deed in lieu's.

3.  More options helping to preserve Credit during Short Sale process are emerging, but generally banks require default in order to proceed. (see below)

4.  Bank of America's HAFA program (Home Affordable Foreclosure Alternative) allows a small of amount of loans to proceed to Short Sale without being in default.

5.  FHA has released new guidelines allowing Short Sellers to purchase their next home immediately upon close of escrow of their    Short Sale.

6.  Short Sales give you the ability to have agent add language in purchase contract as evidence lien holder reports to the credit bureaus that loan has been settled as agreed and paid in full.  

7.  THIS IS NOT A GUARANTEE YOUR CREDIT HIT WILL BE MITIGATED

8.  SEE A.6 ABOVE - Every Short Sale is different.   Work with someone who knows what they are doing.

9.  Foreclosure/ Deed-in-lieu offers no such options.

H. FHA GUIDELINES THAT MAY ALLOW PURCHASE OF NEXT HOME WITH FHA FINANCING IMMEDIATELY UPON COMPLETING SHORT SALE

1.  Must be Primary Residence.

2.  Must be current on Mortgage and other installment debts at time of Short Sale

3.  Proceeds of Short Sale must serve as payment in full.

4.  Not eligible if pursued Short Sale to take advantage of a declining market and purchased similar property at reduced price.

5.  Visit http://www.usa.gov/Agencies/Federal/Executive/HUD.shtml for more information on FHA guidelines.
 

I.   SHORT SALES 'FREE' TO SHORT SELLERS?

1.  En vogue marketing campaign from Realtors  "We'll short sell      your home for 'free' at no cost to you!"

2.  Realtors must negotiate their commissions with the lien holder(s) in Short Sales, so technically there are no Seller commissions to pay.  If Short Sale fails, Realtor does not get paid.

3.  The 1st Lienholder USUALLY covers most of the closing costs and taxes but typically does not cover:

a.  Home-owner association costs/fees

b.  Anything beyond a small portion of the 2nd lien.

c.  If Buyer is seriously delinquent on a lien, they may need to make payments in order to prevent loan from being 'charged-off'. (see below)

d.  An experienced Short Sale agent will attempt to negotiate to have Buyer pay some expected charges in    purchase contract.  (A. 6. above)          

4.  Point being:  While the short seller does not pay any commission, they may incur expenses to get the deal done. 

5.  With the alternative being foreclosure - in general, it still makes the most sense to complete the short sale.

J.   PROMISSORY NOTES, 3RD PARTY SERVICERS, CHARGE-OFFS, LOANS WITH DIFFERENT BANKS AND OTHER WILDCARDS

1.  In some cases, in exchange for releasing the lien as 'settled as agreed and paid in full' lien holder(s) will try to negotiate a promissory note with the Short Seller.

a.  Usually a percentage of the remaining lien balance, typically interest only over a 3 to 5 year period.

b.  Some Short Sellers will not accept this alternative or any part thereof.  Some will negotiate it out.

c.  Some banks will negotiate more than others.

d.  For example - 2nd lien holders who know they have basically lost everything may be tougher to negotiate with.

e.  3rd Party Servicers who may have purchased your loan for cents on the dollar - may be tougher to negotiate with.  (see below) 

2.   A. 6. above:  Every Short Sale is different.  Work with someone who knows what they are doing.
 

K.   LENDERS MAY HAVE DIFFERENT LEVELS OF SHORT SALE NEGOTIATION BASED ON DELINQUENCY PERIOD

1.   'Loss/Mitigation' and 'Home Retention' are just two of several euphemisms lenders call their Short Sale Departments.

2.   'Recovery Dept' is one euphemism for a more extreme level of short sale  - 'The Charge-Off' Dept.

3.   Typically after 6 months of delinquency or more and no further received payments your loan may be 'Charged-Off and sent to Recovery.    Once here, it becomes much more difficult to negotiate an approval. Charge-Off departments generally want much more of a percentage on your outstanding loan to issue an  approval.  

4.   If you are asked to make payments in order to prevent your loan from being Charged-Off, it is our recommendation you make those payments.  It generally helps get the approval letter.

5.  Every Short Sale is different.  Work with someone who knows what they are doing.

L.    IF YOU HAVE RECEIVED THE DREADED 'TRUSTEE SALE NOTICE'...

1. Do not panic. but don't ignore it either.

2. Your experienced agent is aware you typically have 90 days from receipt to get the sale date postponed/extended.

3. Trustee dates have been postponed within 24 hours of the actual sale. (We would not wait that long.  There is no guarantee)

4.  The goal is to get an offer on your property, submit it along with the Short Sale package lender and begin the approval process.

5.  Lenders will not postpone Trustee sales unless the loan is brought current or they receive an offer for review.

M.   THE SHORT SALE PACKAGE  (AZ)

Letter of Authorization (if 3^rd Party agent is negotiating on your behalf)

2.   Financial Information
a.  2 most recent tax returns – 1040’s
b.  If self-employed – 2 most recent 1099’s
c.  2 most recent pay stubs
d.  2 most recent bank statements
e.  Profit & Loss statement (Net Sheet) if self-employed or small business owner

3.   Hardship letter (more details below)

Purchase Contract, Counter offers, Other addenda

Short sale and As-is addendums to Purchase Contract

If home is Listed with Broker:
a. Listing Agreement
b. Short Sale addendum to Listing Agreement
c.  MLS sheet

From Title/Escrow company – HUD-1 breakdown

Buyer’s Pre-Approval letter (LSR)

IF ALL CASH BUYER – Proof of Funds letter


N.  HARDSHIP LETTER

1.  In order to receive Short Sale approval you must explain your             hardship that you are unable to continue on with the Property and     have no other viable options available and must enter into a Short Sale.

2.  Property decreasing in value is not an example of hardship.

3.  Sample Hardships include:
a. Unemployment
b. Reduced Income
c. Divorce or Separation
d. Medical issues, illness, expense
e. Debt – other financial situations
f.  Death of Spouse/Relative
g. Military Service
h. Loan Payment Increase
i.  Business failure or reduction in business
j.  Job Relocation
k. Damage to Property
l.  Incarceration
m. Other (Please Specify)