A short sale occurs when the lender agrees to accept less than the full amount owed and will terminate the mortgage of record such that the seller can provide clear and marketable title to the next buyer. Unless otherwise agreed to in writing, a short sale does not mean the seller is released from responsibility for the balance which is due to the lender (a/k/a the deficiency balance).

1. Do I need to Hire an Attorney? It makes sense to consult with an attorney about your property and the potential solutions that are available to you, including a short sale. DHR Law understand short sales, has negotiated and closed hundreds of them, and can also discuss any other potential solutions available to you.

2. Value of Property. First, you must determine the value of your property. It is advisable to use a real estate agent to list the property.

3. Estimate the Net to Lender. Next, you will need to determine the total amount owed against the property and estimate your closing costs to determine the actually “net” to the lender. At DHR Law, we can assist by preparing a draft settlement statement for the lender which will include all usual and customary charges and pro-rations in the format the lender desires.

4. Contact Lenders. At this point, it is time to contact your Lenders and speak to someone in their “loss mitigation” or “workout“ department and tell them the situation and your desire to engage in a short sale.

5. Specific Requirements. Ask the Lender what its procedures are for a short sale. Generally speaking, in order to get the short sale approved Lenders require the following documentation:

• Hardship Letter
• Two months of Bank Statements (checking and savings)
• Two years of Tax Returns
• Two months of Paystubs
• Income & Expenses worksheet
• Listing Agreement
• Contract for Sale of Property
• Proposed HUD-1 Statements

6. Negotiate the Deficiency. Depending upon the terms of the lender’s approval letter, you may find that you have to deal with the deficiency which remains after the proposed short-sale. The best time to deal with this is prior to closing. The lender already has your financial information and is in the best possible position to evaluate your ability to settle the debt. Some lenders will require a lump-sum payment prior to or at closing. Other lenders will allow you to sign a promissory note for the deficiency. Generally speaking: (1) the more money and assets you have (or earn), the more you can expect to pay; (2) the more cash you can pay at closing, the less you can expect to pay toward the deficiency amount; (3) you will not have to repay the entire deficiency amount in full. A few other points to consider: (1) second lenders will want something from you to settle the deficiency; (2) every person’s situation is different and you should not rely on the urban legends you hear from friends and family about deficiency settlement; and, (3) the fact that the lender has approved the short-sale does not mean that they are going to waive their rights to a deficiency judgment unless this has been put in writing in the short-sale approval letter.

7. Sell the Property. Assuming that you have been able to gather everything required for the short sale and have received written approval from the lender, now you only have left to do one thing: Close of the sale of the property!

You may have significant tax consequences as a result of a short sale, because in the event the Lender “writes off” the deficiency and issues you a 1099C, this is seen as debt forgiveness by the IRS and may be treated as income. Please consult with your with your tax advisor for specific details regarding your situation.