The Mechanics of a Short-Sale

A short-sale occurs when a seller owes more to the mortgage lien holder (s) (a.k.a. lender in my post) than the property will sell for and the seller cannot pay the difference including the closing costs.

Short-sale transactions are becoming a greater share of Kitsap County's sales. In fact, I completed a search of the MLS yesterday using "short-sale" and "bank-owned" in the agent remarks block for active properties and had 128 "hits."

The last time our markets saw this number of short-sales was during our last market cycle of 1994-1996. We eventually moved through that cycle as we will through this one. Unfortunately, don't expect that move until later next year or early 2010.

The remainder of this post will deal with the process of a short-sale. I won't address the nuances of a short-sale contract because the terms of the contract will vary with each purchase offer. Let's just say that sellers and buyers need someone who really knows what they're doing when they decide which REALTOR to use as their representative.

In a short-sale, the seller must receive permission from the lender to whom the seller makes mortgage payments before the sale "closes." This means the seller should alert the lender as soon as you realize there may be problems making future mortgage payments. If you must sell your house and you're using a REALTOR, you must send a hand-written letter to the lender giving your REALTOR access to the mortgage payment records. You will need to give your REALTOR the mortgage account number as a minimum so your REALTOR can deal with the lender directly.

If the lender agrees to a short-sale, then a listing price is established with lender approval (which may not reflect actual market conditions) and then you wait for a purchase offer. If an offer is received, you will sign the contract but the lender reserves the right to accept the terms. If this occurs, the property can be sold. However, the buyer may still have an opportunity to rescind their offer at any time during this prolonged process based on contract terms.

I would encourage both seller and buyer to consult with a real estate attorney and accountant to ensure the parties understand the pros and cons of their purchase and sale. The reasons: does the lender have the authority to transfer title; what category of title; whether the seller is obligated to repay the "short" amount to the lender in the future; and what tax consequences, if any, exist for the seller.

One final piece of advice: be prepared to wait several months, possibly more, for a short-sale to be completed.