What is a "short sale"?

Under the above scenario what collateral does the bank have before the short sale anyway? A $450,000 mortgage on what would net $329,000. Some people would carry the excess to save their credit and live up to an agreement. Personally it wouldn't be enough for me but I am a schlub.

Please disregard. I didn't read the quote Shelly was referencing well enough and have spouted off nonsense in this case.

Let me get this straight....a person has a condo that has a $450,000 mortgage @ 6.50% fixed with 26 years remaining; they can only sell it for $350,000. So they sell the property, but retain the loan. They apply the $329,000 (net of the 6% Realtor's commission) to the original loan, and continue paying $121,000 @ 6.50% for the next 26 years. I imagine that will bring the monthly nut down to a more reasonable payment--but then what collateral does the bank have to back the loan?

And does the bank sell the property? Or does the loan-ower sell the property?

Or am I missing something?

Or do I need another JB on the rocks?

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Shelly, I don't think you are missing it. There is no collateral of property, and depending on the amount still owed, some will walk away, but they will suffer bad credit, plus a huge IRS monster knocking on the door. In most cases, it may be easier to avoid the IRS monster and pay the reduced interest. Remember that in many cases, the now seller, had 10% down, so that would knock off another $50K if the original note was $450K, which now makes that payment somewhere around $450 per month, rather than the $3400 per month they were paying (including tax and insurance).

Now, let's say this was an investment property, and compare the above $450 per month payment to the bank on property which you no longer own, to the payment of short term capital gains on the $71,000 ($121,000 less the $50K down payment). Let's throw the short seller into the 20% tax category. $71,000 x .20 = 14,200. Now remember that tax payment comes due within one year, and will need to be thrown into your quarterly payments to the IRS, or there may be additional penalties. So on one hand, you can pay the IRS $14,200 this year, or you can keep your credit history somewhat intact and pay the bank over time, and this year, pay only about $5,400, spread out over 12 months. Which lump would you take?

As I understand it, the bank keeps the loan unchanged, except for the principle owed, and that reduces new loan origination costs, and also probably because the short seller probably wouldn't qualify for a new loan.

In most cases, the seller would be the one who sells the property, but if it is a short sale, where they couldn't foot the difference to the lender, they would need permission from the lender to go through with a short sell, and this usually requires 90 late on payments and proof of inability to be able to pay, and lack of assets.

Now that I left everyone in a heavy fog, go drink another J&B.

Smiling JOe you are so right about this scenario. I think I would rather pay the IRS as much as I hate to say that. I have a situation where a 50% partner hasn't paid their part in 2 years and I have carried it. Instead of waiting until anything gets past due, I went ahead and spoke with the banker to get permission for a short sale and they told me to proceed. I think it is good to do that before things turn sour instead of waiting...but I guess it depends on the banker...

Smiling JOe you are so right about this scenario. I think I would rather pay the IRS as much as I hate to say that. I have a situation where a 50% partner hasn't paid their part in 2 years and I have carried it. Instead of waiting until anything gets past due, I went ahead and spoke with the banker to get permission for a short sale and they told me to proceed. I think it is good to do that before things turn sour instead of waiting...but I guess it depends on the banker...

And what are you going to do about your 50% partner?

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I don't know, but I can't have him arrested. The bank will probably have to end up dealing with him if I don't pay his part!

I don't know, but I can't have him arrested. The bank will probably have to end up dealing with him if I don't pay his part!

Didn't you have a partnership contract?


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Yes, we have one but all it really does is give me the rights to kick him out and take the debt, but the property is worth about half of what we paid of course.

Yes, we have one but all it really does is give me the rights to kick him out and take the debt, but the property is worth about half of what we paid of course.

Well then, you kicked him out and took on the debt--so you can say the contract did its job.

His name doesn't appear on the deed...right?

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The deeds in an LLC but we both signed the mortgage, jointly and severably of course...so I'm hoping for my first short sale. I've never wanted to loose money so badly. I can't believe I'm saying this...

There are other reasons, besides character, that a person may choose a short sale and live up to the terms. The lender generally isn't just going to let you walk away from the difference between what they end up selling your property for and the loan balance. You will be hounded for at least 10 years and unless lenders have another loan-a-thon you will not get credit for a candy bar. There is a good chance one could not keep any type of checking/savings account for that same period due to the distinct possibility of a lien on a current account and credit requirements for a new one. Individuals that are employed may also find their paycheck reduced by a substantial amount through a garnishment. Additionally, the borrowers other assets may be sought through the courts.

Pirate, thanks for adding the valid point above. I thought I mentioned the decent credit, vs lousy, or no credit, but it probably got lost in the math. Credit is a very important thing in today's world, especially if you cannot pay your bills.

There are other reasons, besides character, that a person may choose a short sale and live up to the terms. The lender generally isn't just going to let you walk away from the difference between what they end up selling your property for and the loan balance. You will be hounded for at least 10 years and unless lenders have another loan-a-thon you will not get credit for a candy bar. There is a good chance one could not keep any type of checking/savings account for that same period due to the distinct possibility of a lien on a current account and credit requirements for a new one. Individuals that are employed may also find their paycheck reduced by a substantial amount through a garnishment. Additionally, the borrowers other assets may be sought through the courts.

So you're saying there is a risky side to real estate investment?

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