The Facts About Short Sales

What is a Short Sale?
In the world of Real Estate, a short sale refers to the sale of real property for an amount less than the amount owed on the property. In the short sale scenario, the bank agrees to accept less than the full balance due on the debt, and usually ‘forgives’ all or a large portion of the difference.

Who benefits from the Short Sale?
Short sales are a win-win situation. Lenders, Mortgagees and Realtors all benefit from the successful short sale. Mortgagors get the majority of their money back, Mortgagees get the relief they need and are able to sell their property and avoid foreclosure, and Realtors can facilitate the transaction and receive compensation (commission) from the sale of the property.

Why would banks forgive the difference?
To mitigate their losses, banks often accept a settlement of less than what is owed on the property. When faced with the option of getting the property ‘back’ through foreclosure, a short sale often makes a much wiser business decision for the bank.

What is Negative Equity?
Also known as being "upside down" negative equity is the difference between the value of an asset and the outstanding portion of the loan taken out to pay for the asset, when the latter exceeds the former. For example, if your car is worth $10,000 and you owe $15,000 on it, you would have a negative equity of $5,000. Negative equity can result from a decline in the value of an asset after it is purchased.

Why does my property have negative equity?
Here are a few common reasons:

1. Person bought at the height of the market and the market has now declined or paid more than the property was worth.
2. The area has become less desirable for any number of reasons, so property values have declined.
3. Person purchased the home with little or no money down and wants to sell within a few years of purchase… and the property value has not increased during that time. Therefore, costs associated with selling the property may create a balance due at closing,
4. Person refinanced the home (with a high appraisal value) and now has little or no equity.
5. Person bought in a brand new subdivision or recently developed area that has not been fully developed or has not appreciated (or has depreciated) in value
6. The market is soft because there is too much builder (new home) inventory or too many existing homes on the market (buyer’s market)

What if I owe what my home is worth?
Even if you owe exactly what your home is worth, you may still need to do a short sale in order to pay for the costs of the sale (Realtor fees, Title Policy and other seller closing costs).

Why not just let my lender foreclose?
The foreclosure process is a legal process. It involves attorneys and it costs MONEY. Once they get the property back via foreclosure they must often sell it for MUCH LESS than market value and pay Realtor commissions and all customary closing costs. Doesn’t it make more sense for them to take at or a little below fair market value before foreclosing?

And, even when they do sell it through foreclosure... this does NOT remove your obligation to repay the remaining balance! It is not wiped away!!!

What if I'm not behind on my payments?
Short sales work – even if you’ve never missed a payment!

How long does it take?
Short sale approval can take 30 to 60 days and on some occassions a little longer.

Will my lender send me a 1099 on the debt forgiven?

In 2007 the U.S. Congress passed the Mortgage Debt Forgiveness Relief Act and it is in effect until 2012. As a result of that act, borrowers no longer pay taxes on the debt forgiven on their primary residence. So if the property is your primary residence, then no, you should net receive a 1099 for the debt forgiven or have to pay any taxes on the forgive debt.

For investment property, the lender does have the right to report to the IRS the amount they have ‘forgiven’ in a Short Sale transaction, the amount of the resulting tax will be far less than the debt forgiven. For example, we had one client who did get a 1099 for $30,000 forgiven. This resulted in additional taxes of $1,300 for that year. The resulting tax is far superior to paying the difference of the debt. Also, if the property is in foreclosure, the foreclosure would have a much more devastating effect on you than the amount of the 1099.

I want to press on a little further for those real estate agents out there that seem to be either wondering around trying to figure out this game; in essence taking listings that sound like a short sale only to find out that they don’t qualify and for those that are walking away from potential listings because they are out of their element and have no idea what to look for. For the latter, I want to mention that we have a processing company that will allow you to list the property yourself, giving you the ability to enjoy the marketing that comes with having a sign in the yard so you can capture those buyers while turning either the entire processing and closing process over to us or just the processing side. This will free you up to work on the areas that make you money, while giving you the very best chance to close those short sales that seem to be taking over the market. Don’t miss this market of the moment! For those agents out there that are taking short sale listings without really knowing which ones qualify or don’t qualify; I want to take a moment and tell you a true story.

I believe this story will help you understand that this way of business does more harm than good.

A True Story:

I went on a listing call for a short sale that was an expired listing. (Now, I want to say that I do not normally do listing calls for short sales, but I happened to be in the area that afternoon- so I told the home owner I would stop by. I also want to point out that an expired short sale listing should first tip off anyone out there that something is wrong.)As we sat down I asked the homeowner to tell me where they were at in the process and to bring me her file that she had. The first thing I noticed was the hardship letter was 3 pages long and was some woe is me story about how she had to drive further to work costing her extra gas money and her daughter had a shopping problem and she was also on some prescription drugs that cost her an additional $60.00 per month in expenses. (That is not a hardship letter!)I then asked her for the financial statement. After reviewing the statement I recognized that the home owner was coming up short almost $200.00 per month. (Not too bad, but when it comes down to shopping, it just isn’t going to fly!)The checking account had $650.00 in it, which is alright but then I saw the savings account. It read $15,000.00!! I asked her why she thought she qualified for a short sale and she said because when the real estate agent came over to list the property she said she was upside down $30,000.00 in equity, but everything was ok because she would just short sale it for her. At which point the real estate agent told her to stop making her mortgage payments. By the time I got there, the homeowner was over 4 months past due and the home was scheduled for foreclosure.

Do you see the problem? Thanks to the Real Estate Agent, that woman lost her home. The sad part is this goes on every single day. The stories go on and on and on…

It is so important that we begin to get educated in this area of business! My purpose in providing this information is to make sure that as Realtors, we are well educated and well versed in Short Sales so that we can help get America out of this crunch.

In essence, I want to help others in the real estate business have a basic understanding in order to help all of us that are working with buyers to help clean up this inventory mess we have and maybe just maybe lend some support to a crippled housing market. I think we can all agree that more foreclosures could be devastating to our friends, families and neighbors.

My objective is to simply give you some key elements to understand and utilize to maybe help you in this process of closing short sales.

I will say that this doesn’t really cover half of the particulars that come with successfully listing, negotiating and closing a short sale, however, it will give you some foundation to work from and if needed we can always help jump in and get the deal to a closing table. Simply contact our short sale team at getaggressive@aggressiverealestateagents.com or fill out our Short Sale Qualification form, if you would like more information on how we can help you close more Short Sales for you.

Let me first point out that the Pre-Qualification process is the most important step in the process. This will save you both time and money not to mention heartache.

However, before you begin the pre-qualification process it is good habit to find out as much information on the property and the neighborhood/market.

• Prepare your prequalification questionnaire
• You will need to obtain the complete address
• Look up the tax records
• Do a CMA if possible
• And lastly, if the candidate is an FHA borrower, then they need to stay in the house and the bank will dictate the process and the appraisal. However, we have started to require the borrower to pay for an appraisal up front to help facilitate the process and give us leverage over the BPO

The 5 most important facts in the pre-qualification are…

1. There has to be a Hardship
2. They have to owe more than house is worth
3. It is best that the homeowner is in arrears, but not always a factor
4. The homeowner must show they can’t afford the home anymore
5. They must want to leave or be prepared to leave because they simply can’t afford it anymore

Typically, if your seller meets all five criteria, the short sale proposal will be straightforward, and you should experience a greater than 90% success rate for getting those short sale listings approved, provided that your short sale proposal package is prepared and presented correctly. Once again, if you need help in the processing and negotiations on your short sale, simply fill out the confidential Short Sale Qualification Form.

Once again, there is just so much that needs to be covered in regards to fully understanding short sales, and my main objective was to give you enough information that can help protect you and your clients from making a poor decision along with increasing your opportunity to actually get your short sale to a closing table.

With that said, I want to close by looking at the issue of working with buyers and buyers agents.

You see the number one reason buyers walk out on a short sale is because they simply aren’t educated on the process. The other reason is that buyers and their agents don’t seem to understand that lenders almost never and I mean never knowingly settle for 30% less than the property valuation. Bottom line is that Short Sales provide a buyer with a discount, but not to the extreme of getting it like a foreclosure sale. The last reason I want to hit is the fact that if the deal is not properly structured the way banks expect to see it, it just isn’t going to fly. In order to help you in this process you will find that it is imperative that you put together a solid “Agent Guidelines” document that explains how the deal needs to be structured, along with the “Short Sale Disclosure” form and then review every offer against it.

Lastly, I want to leave you with a couple of tips:

Tip 1- Always remember that if your client has two mortgage liens on their property and both are found to be short, you will need to prepare and send a short sale package to each lien holder.

Tip 2- Remember, your mindset is key! You are going to need to befriend the loss mitigator. Approach them with the right mindset and start building a relationship. Try to put yourself in their shoes. Act like a partner, not an adversary and remember: they hold the cards!

I sincerely hope that this helps you close more deals and enhances your business and your personal life. I can say without a doubt there really is nothing like the feeling when you do something good and positive for someone who is down and out.

Remember, if you need help in the processing and negotiations on your short sale,simply contact Britton Brown at 816-785-3664 or visit or fill out the Short Sale Qualification Form.



Our Team Leader- Britton Brown is located in Kansas City, MO. He is one of the foremost experts in the country in Short Sales and works with professional Realtors and HomeOwners across the Nation.  

Short Sales Qualification Process