While real estate short sales can provide sellers a way out of an unmanageable mortgage, and buyers an opportunity to buy a property at a bargain, they have typically been considered a rarer option. However, with recent declines in the economy, the North Carolina real estate market has seen an increase in “short sale” transactions.
What is a short sale?
In a typical real estate sale, the seller will try to sell the property for a high enough price to cover the remainder that they owe on their mortgage, as well as make an extra profit. In a short sale, however, the mortgage lender agrees to let the seller sell their property for less than- or short of- what they currently owe on the property. A short sale can only happen with the lender’s consent, because they will have to release the seller from their mortgage and accept the short sale amount as satisfying the loan amount, resulting in a loss. In North Carolina, the lender is not legally obligated to agree to a short sale.
A short sale can have negative consequences for a seller, so it’s not typically a first, or even second, option. Often, the loan forgiveness is viewed as income to the seller, and can be taxed, even if the seller did not keep any profit from the sale of the property. It is also important to note that even if a lender agrees to a short sale and releases a loan, they might refuse to consider the loan fully settled and still hold the seller responsible for the deficiency amount. This needs to be carefully negotiated in the short agreement, so it’s important to have a real estate attorney review any contract before entering into a legal agreement.
Why would a seller choose a short sale?
While a less common form of real estate transaction, a short sale can also be used when the property’s value has decreased to the point that it is no longer worth the amount owed on the mortgage, such as if the seller bought the house during a period when home prices were high and tries to sell after the real estate market reverses and home prices have drastically decreased.
The most common reason sellers choose to sell their property through a short sale is that their mortgage payments are simply too high for them to afford. In these instances, a lender is likely to be willing to agree to the short sale in order to avoid the additional costs associated with eventually foreclosing on the property.
How does a short sale differ from a foreclosure?
In a foreclosure, the seller is already in default – or behind on payments – on their loan, so the lender takes possession of the property and puts it for sale to recoup some of the cost of the property. On the other hand, a short sale takes place before the loan is defaulted on and the seller receives permission from the lender to sell the property themself.
Will a short sale as a seller hurt my credit score?
The lending institution will report the short sale to the credit-reporting bureaus, and the short sale will show on your credit report as an unpaid or uncollected debt, unless you pay off the deficiency amount that remains after the short sale.
A short sale will have a significant negative impact on your credit score, dropping it anywhere from 80 to 160 points.
Starling, Rodriguez & Associates can guide you through a short sale
Choosing to sell your property in a short sale is not a decision that should be taken lightly. Similarly, buying a home through a short sale can be a complicated process. Knowing the financial and tax consequences a short sale will have on you – whether you’re buying or selling – as well as all of your legal options, is important.
Whether you’re a buyer or seller, having a seasoned real estate attorney to guide you and inform you in any real estate transaction is vital, so let the attorneys at Starling, Rodriguez & Associates be your guide through the North Carolina short sale process. Contact our office to get in touch with an attorney today.