December 14, 2018
What are Short Sales and How do They Affect Title?
When a home goes through a short sale, it generally indicates hardship for those on the selling end of the deal. This happens in a situation where the seller is forced to sell the house for less than they still owe on the mortgage, and generally the seller doesn’t have the cash on hand to make up the difference to the lender. (Indeed, the seller must provide documentation of financial hardship for this to become an option). The only reason a lender will agree to and accept the loss of income represented by a short sale on a property is if they believe it will be a better situation than putting the property through foreclosure. It can sometimes be the case that the short sale will net them roughly the same profit as selling the home at auction following foreclosure at any rate.
Should a title search of the sort we perform here at Topouzis & Associates, P.C. reveal any liens against the property—levied by a homeowner’s association for unpaid dues, for example, or a tax lien, or a second mortgage—all of these lienholders must approve a short sale before it can proceed, which may well prevent its becoming an option (albeit a form of “last resort”) at all. In that case, the lienholders may decide to refuse to allow the short sale to occur—since they would be effectively forgiving the debt owed them altogether in that case—and instead allow foreclosure to proceed, followed by a lawsuit against the homeowner to collect on the debt.
A short sale damages the credit of a seller, which may prevent that person from purchasing a home in the future—or at the very least make it more difficult. At the earliest, they must wait four years before they will be eligible for a new home loan. (Compare that to seven years in the case of foreclosure.)
Moreover, the difference between the sale price of the home and the amount that was still owed on it is reported to the IRS, which may tax it as income, especially if the home was a second home or there was a home equity line of credit, for both of which the IRS offers no exceptions.
Short sales are much less common now than they were in the wake of the foreclosure crisis—they reached their peak in 2009, when they comprised 18% of single-family home sales—but they can still happen.
The only really good news about a short sale falls to the buyer in such a transaction—who may get the home for cheaper than might have otherwise have been the case, though they do often take ownership on an “as-is” basis. The title is cleared, and they take full ownership rights. Liens on the former mortgage do not get passed along with the home.
If you’re considering buying a home in short sale, we stand ready to aid in the closing. We at Topouzis & Associates, P.C. are experts at ferreting-out problems with title and disposing with them in advance of closing. We take pride in the great amount and quality of experience we bring to the closing table in Rhode Island, Massachusetts, and Florida. Contact us if you want a partner in your property closing—one who makes everyone involved feel like family.