Wow, now the federal government is working on a rescue package. It’s a huge risk, and only history will tell whether it was effective. Here in Wisconsin we were somewhat shielded from many of the poor lending practices that you read about in the news, but people who made thoughtful purchase decisions a couple of years ago may find themselves in a situation where they need to sell, or may be having problems making their payments due to unforeseen job situations. If they have equity, they may lose some of it. If they don’t have any equity, and if they can’t come up with the shortfall (including closing costs), they may need to see if their mortgage company will accept a “short sale”. This is where the bank will accept an amount for payment that is less than the amount outstanding on the mortgage balance.

On the surface, a short sale sounds like a win-win-win! Mortgage companies will often opt for a short sale rather than going through an expensive foreclosure procedure. The seller will get out from under a loan that they can’t afford to maintain, or from a house they need to sell so they can relocate. The buyer can often get a terrific price on a home. However, there are some pitfalls to be aware of.

First of all, in spite of the fact that mortgage companies stand to benefit from a quick process, communications seem to get bogged down in bureaucracy. Perhaps if I worked on the lending side of the business I would understand more about the reasons behind this, but I see many situations where the bank insists they have not received an offer and real estate agents and attorneys have proof they have sent in multiple copies. It also takes several weeks to review the seller’s documentation of hardship. In the meantime, basements can flood and cause damage and mold, vandals can access vacant properties, and other forms of deterioration can be left unremedied until closing.  Perhaps the industry is just slow in responding to this new, overwhelming, situation and have not been able to change their structure to handle it efficiently.

For sellers, they must be aware that they may owe income taxes on the forgiven amount. Their credit will also take a hit, though probably not as severe as it would in the case of a foreclosure. They also may not be able to continue making payments while the bank sorts out all the paper work, which might lead to foreclosure anyway. Finally, they could be asked to repay all or part of the shortfall after the sale.

Buyers must be flexible. Most transactions take about 30 days from the time an offer to purchase is accepted until closing. This is not the case in a short sale. In fact, the bank will have the final say in which offers (if any) get accepted. They could rescind this up until the actual closing, so the buyers would be well advised to keep another place to live if this is a primary residence. Many buyers, aware of this, shy away from properties that are short sales, which in turn makes it more difficult to sell the property even at a low price.

So what is the solution? Hopefully, the process will become more streamlined so the timeframe is shortened and buyers and sellers can move forward with the transfer of real estate. In the meantime, if you need to sell or want to buy on a short sale, be sure to work with a good attorney, real estate agent, or both. And stay positive – there are some win-wins out there!