A short sale occurs when a property owner cannot sell a property for the amount sufficient to cover the liens and/or debts on the property. The property owner lacks the cash to cover the gap and close a real estate transaction and therefore appeals to the creditors to accept an offer and subsequent contract that will result in a deficiency (negative pay-off) at closing.

Lenders and the IRS treat short sales differently depending on the borrower. Typically, primary home owners, as opposed to second homes and investors, have in the past enjoyed less scrutiny enabling these “short-sellers” to escape IRS taxation and regain their ability to borrow in as few as 12 months.

Keep them at arms-length! Find the right buyer that is willing to hang in there for 3-4 months. Use a professional short sale negotiator. Agents or Realtors are not licensed to negotiate for sellers with regard to lenders. Attorneys are better suited for this role.

Sellers typically pay no closing costs, fees or commissions to close on a short sale. Unlike a conventional sale where sellers may pay for title insurance, documentary stamps on deed and a title closing fee, sellers are free of closing costs with a short sale.

Sellers may not be entirely off the hook as the lender or investor holding the note may require the seller to add a cash contribution at closing as a condition of the short sale approval. This cash contribution depends on factors such as the sellers’ cash position, the sellers’ age and hardship as well as the note holder’s policies.

FHA underwriting now offers sellers who have been involved in a short sale the ability to buy a home again within 12 months of completing the short sale. The current understanding guidelines appear to consider such circumstances as hardship and other mitigating circumstances outside the sellers’ control. This recent article sheds some light on the process.