If you are a homeowner and have been approached by a lender offering you a "short sale", (a
sale of real property in which the sales price is less than the amount owed to the lender on the
mortgage) be warned that you are about to become a dupe in a game where the bank holds all the
cards. How does the game work?
First you need to find someone to buy your house and only then do you ask the bank for its
approval before you can sell. The catch is that the bank usually does not approve the amount
offered by the prospective buyer.
Short sales can take several years to complete and in many cases there is no sale at all.
Homeowners cannot wait so long in such an intolerable financial situation. While the
homeowner is attempting to sell the house, the bank will still require monthly payments in a
timely manner. The Bank is likely to reject any short sale offer because most of them are not
acceptable to the Bank who is receiving your monthly payments. The Bank is getting fatter on
your money while you see no end to your suffering.
During the time you are waiting for the short sale to happen you will become fair game for
predatory and unscrupulous tricksters who will offer you various programs to get you out of this
mess but who are only seeking to victimize you and make a fast buck for themselves. Finally,
you may end up in foreclosure after making all these hard earned monthly payments to the bank
The Banks are holding all the cards and have the deck stacked against you. They can sell the
mortgage to investors, rent out the property, or sue you for the deficiency on the mortgage (the
difference between the banks sale price of your property and the amount you owe on the
mortgage including late fees, penalties, attorney's fees and other charges related to the
foreclosure). This deficiency can sometimes run in the hundreds of thousands of dollars.
Following the foreclosure, you may hear from the I.R.S. who is very interested in the short sale
transaction because you may be taxed on the deficiency depending on the law existing at the time
of the sale. The Bank will issue a 1099 Cancellation of Debt form reporting how much income
you realized from the sale. The Bank receives a tax deduction from the write-off of the mortgage
- the loss - but you instead receive an income tax on the amount of the deficiency which could be
thousands of dollars catapulting you into financial ruin.
How could all this be possible? Why this result? Take a look at my future post on the difference
between recourse versus non-recourse mortgages.