Real Estate

Short Sales

A short sale allows a home to be sold for less than the amount owed against it. It is an option for Sellers who must sell in a down market, but the process entails risk, is difficult and should not be commenced without consulting a tax adviser, a real estate attorney and a licensed real estate professional skilled in this still new area of real estate sales. Many problems can arise. In some cases, other options, including a foreclosure, may be a better solution. Some of the more common areas of concern are:

1. Tax consequences. The general rule is that forgiveness of real estate debt constitutes taxable income to the extent of the debt forgiven. In 2007 President Bush signed into law a measure directing the IRS not to consider mortgage debt forgiven as taxable income. But there are many exceptions to this new law. Many sellers will still be issued a 1099. It is important that you determine if you will be one of them before you sell. Consultation with your tax adviser is highly recommended when investigating the short sale option.


2. Debt forgiveness. This is the most important consideration for a seller. But it is not a given that this will happen—and often does not. If debt forgiveness does not occur, the seller, who no longer owns the home but still owes the debt, is placed in a very bad position. The problem usually arises with a second deed of trust. Often the holder of a second deed of trust will accept a small payment to release its deed of trust and allow a short sale to proceed. But release of the deed of trust is not a forgiveness of the debt itself. Unless a written release of the debt is obtained, the seller may remain responsible for the full amount of the debt and can be sued to collect—perhaps years later. The key here is in the drafting of the sales contract and a careful review of all subsequent documents including the short sale agreement with the lender(s). Key documents often appear to release a debt, but they may not. The wording is technical and critical. We strongly recommend that all contract documents be reviewed carefully by a real estate attorney.


3. Anti-deficiency treatment. Arizona is fortunate to have an anti-deficiency statute. The Arizona statute has many exceptions, but if you fall within its protection, you have the option of allowing a property to be foreclosed and escape financial responsibility for any deficiency that might exist after the foreclosure. To be sure, a foreclosure damages credit standing. But there is no financial liability. For homeowners with anti-deficiency protection, a foreclosure may be preferable to the difficult and uncertain short sale procedure. If a seller’s goal is relief from real estate debt, it should be noted that anti-deficiency protection, when available, is statutory. Short sale protection is a bargained for matter and must be well documented with the seller bearing the risk if the documentation is lacking or insufficient. Consultation with a qualified real estate attorney before taking action will educate a seller concerning available options and will provide the information needed to reach a decision that makes sense.