A short sale is a real estate transaction in which homeowners sell their properties even though the sales price is not enough to pay off all of the homeowners' debts. These debts could include liens, unpaid property taxes, association fees and the costs associated with selling the house.
Homeowners facing foreclosure or those who want to immediately move away from their home without going through the traditional home sale process are more than likely to consider this option. While short sales are legal, homeowners must do due diligence before they enter into such transactions because of the risks involved in short sales.
It is to the homeowner's advantage to discuss a short sale with the mortgage lender or real estate professional that specializes in helping with the short sale process. It is possible for the lender to approve the short sale and work out an arrangement for the homeowner to pay less than the total amount of debt owed, including interest and penalties and the real estate agent can help with the rest of the transaction.
If a short sale is approved, there may be tax consequences for the homeowner, whose debt relief may be reported to the IRS as income. The homeowner will have to pay more in income taxes the following year. Should the homeowner fail to follow through with an agreement, or walk away from the home without first meeting with the mortgage lender, the lender can take legal action against the homeowner. The lender can go to court and seek a judgment against the homeowner for the total amount of money owed. A "deficiency judgment," as they are called, can be in force for a maximum of 20 years.
Homeowners with contractor liens, property tax debts, or more than one mortgage must weigh whether a short sale is the best option for them in light of these other financial obligations that encumber their property. While the first mortgage lender may approve of the short sale, others who are owed may not be so forgiving.
Homeowners who are desperate to leave their homes or who want quick relief from the financial burdens from the home have fallen prey to short sale scams. There have been reports of homeowners entering into a short sale agreement with a "company" that promises to either stop a foreclosure or pay all of the homeowners debts providing that the homeowner turn the title deed over to the "company." In some cases, the "company" tells homeowners that they can stay in their house, even after they transfer the title deed to the "company." The "company" also tells homeowners not to discuss the short sale with their mortgage lenders. After the short sale, the "company" does not pay the mortgage nor the outstanding debts on the property. Unfortunately, homeowners can no longer contact the "company" because it disappeared, and homeowners are eventually evicted out of their homes.
It is beneficial for homeowners to contact their mortgage lender or a real estate professional before going through with a short sale.