Many people are unaware of the term Short Sale. Since, over several years, we had continually seen real estate appreciate in value, we haven’t really had to understand this concept since the late 80’s.
A short sale is when a homeowner needs to sell their house, but can only sell for a price which is less than their debts on the house. So, they are selling “short” of fulfilling their obligations.
With so many Arizona homeowners upside-down on their mortgage, this is becoming a rapidly growing niche in the real estate market. However, most Realtors are uneducated and unprepared on how best to help these people.
Here are some common questions and answers related to short sales:
Why would a bank allow a home to be sold for less than what is owed?
In most cases, a short sale can actually pay off more of the debt on the home than a bank could get through a foreclosure. The average foreclosure action costs a bank $40,000 in lost income and added expenses. Plus, the process takes a long time to execute. However, in a short sale, the process can be shorter and net the bank more money.
Why would a homeowner choose to short-sell a house instead of letting it go into foreclosure?
A foreclosure has A REALLY BAD affect on your credit. It can literally follow you around for life! It will likely be on your credit report for 7 years or more, affecting your ability to borrow money, get credit cards, get insurance, and even get a job! It will also affect the interest rates you pay, your insurance rates, and make you appear to be unreliable as a debtor. Also, when you complete a job, mortgage or rental application, they always ask if you have ever had a foreclosure or a bankruptcy. Some employers and lenders may not work with you if you’ve had a prior foreclosure. However, a short sale will likely never appear on your credit report! Typically the banks will list a short sale as a “negotiated settlement”. It will, likely affect your credit for up to 2 years, but it is much less severe than a foreclosure.
Is there any other negative affect from a short sale?
Somebody who sells their house without full satisfaction of their debt will likely be issued a 1099 for the amount of debt that was forgiven. This is to be treated like income, since the individual committed to repayment of the debt, but was relieved of that portion of the obligation. This is still a better option than a foreclosure.