How to Avoid the Pitfalls of a Short Sale

Though an attractive option, due diligence is key

Tips for Sellers

Don’t assume you need a short sale. Talk to a real estate agent and find out what your home is worth. “If you have enough equity, try to sell your home on the open market,” Riles advises.

Open the lines of communication early.
Once you know you need to pursue a short sale, be sure you are communicating with your lender on a regular basis. “This can mean the difference between foreclosure and getting your sale done,” Riles says.

Have your documentation ready. You will need several documents including tax returns, pay stubs, bank statements, and other important forms, and they must have the proper signatures.

Be prepared for last-minute changes at closing. “Usually the closing attorney is seeking approvals from the seller’s lender, the buyer’s lender, and of course the parties in the deal,” says Wood. “With so many people to appease, oftentimes the figures will change frequently as you approach closing.”


National Association of Realtors’ Field Guide to Short Sales

HUD Guide to Avoiding Foreclosure

Making Home Affordable Program

Freddie Mac Guide to Avoid Foreclosure


1. I Will Live Within My Means
2. I Will Maximize My Income Potential Through Education and Training
3. I Will Effectively Manage My Budget, Credit, Debt, and Tax Obligations
4. I Will Save At Least 10% of My Income
5. I Will Use Homeownership as a Foundation For Building Wealth
6. I Will Devise An Investment Plan For My Retirement Needs And Childrens’ Education
7. I Will Ensure That My Entire Family Adheres To Sensible Money Management Principles
8. I Will Support the Creation and Growth of Minority-Owned Businesses
9. I Will Guarantee My Wealth Is Passed On To Future Generations Through Proper Insurance And Estate Planning

10. I Will Strengthen My Community Through Philanthropy

For more on short sales and buying distressed properties, check out the September 2009 issue of Black Enterprise magazine.

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  • Anthony Hall

    Thank you for reporting on this timely subject as many homeowners, myself included, have faced or are facing this complex decision.

    While informative, you left out a couple of important points for sellers and buyers to look out for when considering short sale as an option.

    This is especially true if the home in question is in foreclosure due to the sub prime lending fiasco, Option ARM or other such questionable home purchasing practices:

    1. Are there more than one loan on the home? In some instances, the real estate agent and/or mortgage broker may have negotiated 100% financing through an 80/20 loan. This means there are two loans that need to be resolved in a short sale.

    If the both loans are held by the same lender, then the process should be fairly straight forward, but still subject to the delays mentioned in the article.

    However, the original lender may have sold one or both loans to investors and if they are split up, it could be impossible to get the holder of the junior loan to agree to right off the loss.

    This goes for foreclosures as well. Often times the holder of the smaller loan continues to bill the former homeowner, even though a house has been foreclosed and then sold at auction. You might consider this as a topic for another article.

    2. The seller may have to count the deficit (the difference between short sale price and amount owed to lender) as income on their taxes for the year the house sells.

    With the fall in home values in states like California, Florida & Nevada, that could be over $100K added to the seller’s Adjusted Gross Income, which they will owe taxes on.

    This crisis is far from over, but with articles like these that serve as a resource and guide, many existing and prospective homeowners will be helped to navigate these treacherous waters.

    Kind regards,
    Anthony Hall
    Cleveland, OH

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