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What Is A Short Sale?

A short sale is the sale of a property in which the sale prices is less than the balance due on the mortgage.  For example, the mortgage balance owed is $200,000 and house is worth $175,000.  In certain circumstances when a property has one or more mortgages, the banks of one or more of the mortgages may agree to take a payoff which is less than what they are owed in order to settle the debt and release the lien.  In essence, a short sale is a pre-foreclosure sale that can allow the borrower (homeowner) to be released of some or all of their liability on the mortgage loan.  This permits the bank to save time and costs associated with the lengthy foreclosure process, and result in a discounted purchase price to the homebuyer. 

Now I will provide a simple example to better demonstrate.

House is originally worth $200,000

House is currently worth $175,000

Mortgage is $190,000

The homeowners originally bought house at the height of the market with a low down payment.  Now, in this poor economy the homeowners lost their jobs and can no longer afford their payments.  They are 3 months behind on their mortgage payments and want to sell their house but they owe $190,000. 

Newly renovated houses in the area sell for $175,000, but the homeowner’s house needs to be updated and have repairs done and could only sell for $150,000.  The homeowners called a real estate expert and they negotiated and dealt with the Bank for a few months.  The Bank did not want the house on their books and incur more legal costs, so they accepted a payoff $150,000. 

The homeowners sold the house at $150,000 and did not have to come up with $40,000 to pay-off the rest of their mortgage. 

(Please Note – the homeowner maybe taxed on the $40,000 write-off of their loan.  They should check with their tax accountant or attorney).

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February 20, 2010 - Posted by | Uncategorized | , , ,

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