However, in the last few years, a “short sale” has evolved into another meaning associated with real property sales.  From a legal perspective, “short sales” do not exist. They only exist if a lender permits them to exist.

A “short sale” occurs when a property is sold and the lender agrees to accept a lesser amount on the mortgage (a discounted payoff), meaning the lender will release its mortgage lien on receipt of less money than is actually owed.

There are many companies advertising their services that promise to either complete a loan modification of a short sale.  Beware of anyone recommending such a "fix-it" scheme -- especially when it appears to be inexpensive.  Our offices routinely receive phone calls from homeowners after they have entered into these agreements. For what appears to be very little money, they are given a promise of a loan modification or a "short sale" but learn later that it will take thousands more to have the company continue the process.

Just be cautious - if something appears to be too good to be true - it probably is.

If you are considering a short sale, it is important to evaluate: 

1. Market conditions;
2. How great the shortfall on the loan is;
3. Is there a second lien on the property;
4. Is the property the primary residence;
5. How well the property has been marketed for sale;
6. And whether the lender is an independent bank, a commercial bank, or a government lender - each have different standards.

The lender will of course want the most amount of money to satisfy the loan. The lender will most likely request an appraisal of the property to help determine the property’s current market value and the legitimacy of the buyer’s agreed-to purchase price. The bank will want to know what the real estate listing agent has done to market the property and get the highest and best price.

Towards the end of 2009, the New York State Bar Association reported that banks were accepting generally about 90% of the loan amount for primary home loans.  That amount has decreased in some instances to 80% of the loan amount. 

With that knowledge in mind in 2010, our offices have received acceptances of short sales for high-end properties that are "short" over $500,000.  But these deals were very difficult to do, dependent on the work of all the parties involved, and took a great deal of time and patience. 
There is no guarantee that all short sales will be accepted. 

CHASE Bank has posted on their web site their short sale application and short sale package in order to expedite the process.  We invite you to review their requirements which are typical of most banks.

There are horror stories of months of dragged-on discussions, lack of returned phone calls, and speaking with bank personnel who are less than knowledgeable. 

Is is of the utmost importance that a superb real estate sales agent represent the seller in a short sale because the attorney can only do as well as the information that is provided, and the people with whom he or she must work.  The Law Offices of Michele A. Peters usually receive an answer within a month's time after submission of a completed short sale package; however, depending on the bank, that time can increase to over six months.

Ms. Peters past experience working with distressed properties, brokers, and banks and her continuing involvement with the real estate community allow her to understand the unique demands of these types of sales.  Sometimes filing a bankruptcy petition is the only way to help a homeowner.

Our offices are prepared to evaluate the needs of the client and prepare the way to assist in effectuating a “closed” short sale and recommend a course of action.

What about real estate brokerage commissions?
April 5, 2010, the National Association of Realtors published a press release regarding the Home Affordable Foreclosure Alternatives (HAFA) Commission's policy regarding real estate commissions - there are two different standards, one prior to the contract and one after an executed contract is submitted.  Please refer to the press release for further information regarding this issue.

How does a short sale affect my credit rating?
According to the FHA, if the borrower was delinquent at the time of the short sale, they must wait 3 years to be eligible for an FHA mortgage in accordance with the requirements outlined in para. 2-3 (d) of the 4155.1 REV-5 Handbook. If they were current at the time of the short sale and the new lender has documentation evidencing no further liability, then they would not have to wait 3 years.

The credit agency, Experian, has further information regarding credit and how a short sale can affect a borrower's rating.

Tax Consequences of a Short Sale:
The Mortgage Forgiveness Debt Relief Act of 2007, includes a host of provisions not connected to mortgage forgiveness relief, but it does exclude from gross income, the discharge of “qualified principal residence indebtedness.”  There are limits to debt forgiveness - one million dollars for a single borrower, and up to two million dollars for a couple.

• If a refinance/equity loan were undertaken by the homeowner to obtain funds over and above the original loan amount, the additional funds may be taxable.  Speak to your accountant.

In July 2008, the American Housing Rescue and Foreclosure Prevention Act of 2008, was enacted. The Rescue Act also carries a number of tax changes, including, but not limited to, tax breaks for first-time homebuyers.

Please speak with your accountant as to how you might benefit from these laws.
The Internal Revenue Service's website is the most valuable resource for understanding tax ramifications in foreclosures and short sales. This is one of the many links to the site which details information for consumers.  IRS Newsroom.