The Saunders Group 
Short Sale Division
Downing-Frye Realty, Inc.

A short sale is when homeowners agree to sell their house for less than what is owed. If the lender(s) accepts the lower offer, the foreclosure proceeding is stopped and the homeowner can walk away from the house with no foreclosure recorded on his/her credit and much less liability for whatever deficiency—the difference between what is owed and what the bank gets—remaining after the sale. And sometimes there is no deficiency at all.

A short sale is advisable for homeowners who cannot afford their mortgage payments and all the associated homeownership costs and when no other sound options exist such as refinancing to lower monthly payments or putting in place a reasonable workout plan.

A short sale may also be a better option than bankruptcy and even homeowners who are already in bankruptcy can benefit from a short sale by eliminating any possibility of the double hit of a bankruptcy and foreclosure!

Some Commonly asked questions:

What are my liabilities once the bank accepts a short sale?

In many cases when a short sale is successful, you will be subject to some form of deficiency judgment. It may be a tax liability, an unsecured promissory note or a negotiated payoff. It is also possible that you will not have any remaining debt once the short sale is concluded!

Let’s first talk about the one that causes the most anxiety—the IRS!

Normally, debt forgiveness results in taxable income. But under the Mortgage Forgiveness Debt Relief Act of 2007, enacted December 20, taxpayers may exclude debt forgiven on their principal residence if the balance of their loan was less than $2 million. The limit is $1 million for a married person filing a separate return. Details are on Form 982 and its instructions, available now on IRS.gov.

The new law applies to debt forgiven in 2007, 2008, 2009, 2010 & 2011. Debt reduced through mortgage restructuring as well as mortgage debt forgiven in connection with a foreclosure, may qualify for this relief. Debt forgiven on second homes, rental properties, business property, credit cards or car loans does not qualify for the new tax-relief provision. In some cases, however, other kinds of tax relief, based on insolvency, for example, may be available.

The bottom line here is that you may or may not owe the IRS money after the short sale is concluded. It will depend soley on your financial circumstances and the nature of the deficiency and these issues can best be resolved with the assistance of a certified tax preparer or CPA.

Another potential liability can occur when the lender requires the homeowner to sign an unsecured promissory note, usually with no interest over an extended period of time, for whatever the deficiency amount is. This is a highly negotiable debt which can often be reduced. In any event, signing an unsecured note for a deficiency amount is far more desirable than incurring a foreclosure which will certainly result in a far greater debt obligation.

When should I move?

Once the homeowners have made the decision to do the short sale, they should immediately begin looking for new living accommodations. Homeowners can move at anytime during the short sale negotiating process. We always encourage homeowners to move as soon as is practical and to give themselves adequate time to find just the right apartment or house.

Can I rent my house back after the short sale is done?

No.  The homeowners can in no way benefit from the sale of their home in a short sale. No money can pass between the broker and the homeowner and under no conditions can the homeowner come back into the house as  a renter.

How will this affect my credit?

A foreclosure is noted on your credit for 10 to 12 years and of course, it adversely affects your credit scores. Similarly, a short sale is also recorded on your credit as a “negotiated payoff.” Not as severe as a foreclosure and not as long standing, but still damaging to your credit.

There are many qualified credit counseling agencies that the homeowner should consult after the short sale is completed. Homeowners should, however, exercise care before agreeing to work with any of these credit counseling agencies/services. At a minimum, the better business bureau should be consulted.

The bottom line again is that homeowners who go through a foreclosure or short sale will have their credit damaged but after a period of time, usually 1 to 2 years, of paying ones bills on time and not incurring additional debt, credit scores will begin to improve.

How can I do a Short Sale?

Call The Saunders Group and we will give you an absolutely free consultation to see if you qualify for a Short Sale!