Selling A House That is Under Water and The Short Sale

In today’s distressed economy, many people find themselves in the position of owning a
home that is worth less than what is owed on it. Whether because of a divorce, job
transfer or another reason, many homeowners can’t ride out the market and have to sell
now. The most obvious yet quite unattractive option is for the seller to make up the
difference, bringing money to the closing table so that the existing mortgage can be fully
satisfied, as well as paying the remaining closing costs (realtor commission, transfer
taxes, title charges, survey, etc...). Many sellers are unable to come up with the cash.
As a seller, your lender might consider what is known as a short sale, especially if you
are already behind on your payments to the mortgage company and the other option is
a foreclosure. A short sale is named for the fact that the amount of money that the
homeowner can get for their home at fair market value will be cause the seller to be
“short” on funds needed to bring to the closing table. Price negotiations are no longer
between seller and buyer only. The seller’s lender(s) must approve the contract price
and all expenses paid out, as the lender is being asked to take a haircut and receive
less than the full amount needed to pay off the loan. A word of warning- this does not
necessarily mean that the remainder of the loan (the “deficiency”) is forgiven- the
homeowner may still be liable for the balance of the mortgage. This is something that
should be ascertained in the short sale process. As a seller, you want to make sure that
the lender is willing to waive any deficiency (you can still, however, get taxed on this
amount). Obtaining lender approval on a short sale contract can be a lengthy process,
typically 90 days but it is not unusual to take longer. If the contract is not approved, the
bank may come back with a counter-offer, requiring the buyer to increase their price if
they still want to buy. The buyer may reject the counter-offer and walk away from the
deal. A buyer making an offer on a short sale needs to understand the process and be
somewhat flexible, especially when it comes to a closing date. A seller in a short sale
should also understand that a contract does not necessarily mean a sale, and neither
party is guaranteed a closing until and unless the short sale is approved by the lender.

Carol O'Connor Cadiz
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Attorney & Owner at O'Connor Cadiz Law: Injury & Accidents, Disability Insurance.
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