"Selling short" has been a term used in the securities industry for many years. Some people have made a fortune by "selling short." Typically one could sell a security that is not owned in anticipation of making a profit by purchasing the security later at a lower price. The difference between what the security (most often stock) costs and the price at which the security was sold is profit. As we know with any investment the greater the return the greater the degree of risk. Selling short is risky. You must have the wherewithal to cover your short position.
"Selling short" was never in the vocabulary of the typical home seller or buyer. All we ever had to do was buy and hold. Inflation would do the rest. If not inflation, buyers would help our situation along with a little, as Federal Reserve Chairman Greenspan would say, "irrational exuberance." We would ride the tide of higher and higher prices and our investment would be secure. The last few years of the decades of the 70s & 80s made us believe southern California real estate prices had no place to go but up. We saw appreciation sometimes hitting 20-25% per year in certain areas.
We also took advantage of the opportunity to use this new found wealth to enhance our lifestyles and our investment portfolio. Mortgage lenders also went along with this growth. Money was easy to come by; for who could lose? Equity lines of credit became readily available. Lenders had good equity positions. Houses that sold in 1978 for $200,000 were selling ten years later for $400,000-$500,000. Unfortunately values did not hold; "Short Sale/Short Pay" enters the jargon of the real estate industry.
When you want or need to sell a home, the selling price is not determined by what you owe on the home. If the job market is soft and relocation is a necessity, you can't control the timing to sell. If illness, divorce, or any other fiscal misfortune hits, the lender still wants the payment. All of us can enumerate a list of reasons why we may have a need to sell immediately. If we have not had the experience ourselves, we can definitely relate to this necessity in the lives of relatives or friends.
What happens when a situation arises that makes the sale of a home an immediate need. What transpires when the loan is greater than the value of the home? The result is called "a short sale/short pay"? For many, the short sale/short pay is the only alternative to a foreclosure. For some, the short sale may be a way to walk away from a property that has dropped substantially in value. Whatever situation exists that puts you in a position to undertake a short sale/short pay, remember all note holders must agree to the short sale. If you plan to sell short a lender will require documentation as to your financial situation. You will also be required to submit a "hardship letter" as to your current financial circumstances.
If you continue to make payments on your home and do not show a financial imperative to sell the lender may not grant the short sale request. Lenders are not in the real estate business . . . they do not want to take back homes. However, lenders will not allow one to walk away from an obligation without justification. If you are planning to undertake a short sale, I recommend consulting your tax advisor. There are definite tax consequences to the short sale. You may have income tax liability due to "debt forgiveness." If you used the 1034 rollover from the sale of a previous home(s), you may have a capital gains tax liability. Consulting your tax advisor prior to sale may enable you to do some tax planning before year end and offset some potential tax consequences.
The protection of your credit rating should also be undertaken when you consider liquidating your property through a "short sale." It is imperative that you speak with your lender to determine how the "short pay" will be reflected on your credit report. Some lenders will report the short sale as a foreclosure, some as a paid foreclosure and others as settled. It is best to know this information in advance and develop a plan to minimize the impact on your credit report. Don't be embarrassed to speak with your lender(s) as to how it reports your situation to the credit bureaus.
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