A short sale is often the only way to sell your home if you owe more on it than it's worth. But they are usually harder than you think to pull off and you have to be very careful to get the results you expected.
They Are Harder to Do than May First Appear
In a short sale, a house is sold by "shorting"-underpaying-one or more of the lien holders. They often don't succeed because:
- Unresponsive mortgage creditors: Your first mortgage lender is often working through a loan servicing company. They tend to not have enough staff and not be well-organized to process short sales.
- Every lien holder has to agree to the deal: By definition in a short sale, there isn't enough money being paid by the buyer to satisfy everybody. And that means not just the first and second mortgage holders. Often homeowners have other liens on their homes, such as: a third mortgage, an ex-spouse's trust deed, judgment liens by creditors, utility and municipal liens, child support liens, and property and income tax liens. Some of these creditors may be especially unhappy with you, and any one of them can sink the sale.
- The middlemen often have more to gain than you: Realtors, title companies, appraisers, and sometimes attorneys often get the most benefit from short sales. Realtors need to be creative to make commissions, and understandably tend to be biased towards an option that can make money for them. There are good reasons that unbiased bankruptcy judges and trustees discourage short sales, since they see many where it's clear that the realtors are the primary beneficiaries.
- The "deficiency balance": The last thing you want is to continue to owe money to one of your mortgage lenders after the short sale is completed, but sometimes they will insist. In that case you would likely be wise to not proceed with the sale yourself. But by that time you may have an angry buyer who believes that you are contractually obligated to sell the house. You don't want to put yourself into this position.
Your Goal Often Stymied
The main reason for a short sale is that the owner can't afford the house anymore and so needs and wants to get out.
Even if all your lienholder go along with the deal and accept less money or even no money out of it, the problem is that in many cases you would still owe money to them. Creditors holding the second or third mortgage, or how have judgment/child and spousal support/income tax liens will want to get paid, and often have very aggressive means to pursue you. With the loss of security in the house, the sale may well spur them to use those means. In California, if the lender consents to the short sale then new legislation prohibits them from seeking a deficiency judgment. Please check your state to determine if there is any existing state legislature that prohibits a deficiency judgement for short sales.
The Chapter 13 Alternative
A Chapter 13 bankruptcy may be able to help in two distinct situations better than a short sale. First, it can enable you to keep your home by reducing what you pay to your other creditors, and sometimes what you pay on the home itself. And second, a Chapter 13 case can often buy you more time to sell the house so you're not trying to do so under pressure.
Chapter 13 in some circumstances can get you out of a second or third mortgage altogether. Very likely it would provide a manageable way to pay any debts that have to be paid, like property or income taxes, or child or spousal support. And instead of worrying about when the next collection axe is going to fall, all collection action stops while you pay what you can afford to pay, while keeping your home, or selling it on a more reasonable schedule.