A short sale means the seller or the seller's agent sells the home to a buyer at or near market value, and the lender agrees to accept the proceeds as payment in full on the mortgage, even though the sales price is less than the existing encumbrances.
The downside is lenders are not required to negotiate discounted payoffs, and there is no guarantee your lender will let you do a short sale.
Who Makes a Profit on a Short Sale?
The question is if the seller isn't making any money on a short sale, who is making money? Because you know that somebody is going to come out ahead. And it's not going to be the seller. The truth is everybody under the sun will make money on a short sale except the seller.
Let's look at who profits from short sales:
- Existing Mortgagee Gains An Advantage But Not Necessarily a Profit
The existing lender avoids filing foreclosure, avoids carrying the property on the books when nobody bids at the auction and avoids the time on market looking for its own buyer.
- Listing Agents and Buying Agents Profit From a Short Sale.
Granted, the agents may take a hit on the commission because the lender could insist on a fee reduction, but the bottom line is the agents and their brokers get paid for selling the property.
- Title Companies Profit From a Short Sale
The tile company issues an owner's title policy in favor of the new buyer and an ALTA policy in favor of the new lender. In some states, title companies provide abstract services instead, but, regardless, they get paid.
- Escrow Companies Profit From a Short Sale
In states where escrow companies act as an independent third party in real estate transactions, these companies come out ahead, too. They get paid by the lender or the fee is divided between the lender and the buyer.
- Real Estate Lawyers Can Profit From a Short Sale
Sellers of short sales should always seek legal advice before entering into a contract to sell on a short sale. So, the lawyers get paid. Some lawyers specialize in negotiating short sales and charge for that service.
- Tax Consultants and CPAs Profit From a Short Sale
Sellers of short sales should always seek tax advice before entering into a contract to sell on a short sale. There could be tax ramifications due to debt forgiveness.
- The Internal Revenue Service May Profit From a Short Sale
The IRS will collect its fair share if the lender issues a 1099 to the seller, providing the seller is subject to taxation on the short sale.
- The Buyer May Profit From a Short Sale
It is likely the buyer purchased the property at or a bit below market value, which lowers the buyer's basis in the property. Depending on state and county jurisdiction, it might lower its future taxation by the tax assessor. Regardless, the buyer's mortgage payment is reduced because the loan is less.
- The New Lender Makes a Profit on a Short Sale
The new lender makes money because a new loan generates new business and new revenue. A new loan pays the underwriter and loan processor as well.
- The Appraiser Profits From a Short Sale
Even though the property may be selling for less than market value, the new lender will require that the buyer obtain an appraisal. Appraisers can earn $250 to $650 for an appraisal.
- The New Mortgage Broker Profits From a Short Sale.
- County Tax Assessor May or May Not Profit From a Short Sale.
In areas where property is reassessed upon sale, the tax assessor will continue to collect property taxes on a timely basis and perhaps at a higher assessment value due to the resale value. Refinancing a loan does not ordinarily affect tax assessments.
- Insurance Companies Profit From a Short Sale
The buyer's insurance company picks up a premium for insuring the buyer and the new home. In addition, the insurance agent earns a commission on the homeowner insurance policy.
At the time of writing, Elizabeth Weintraub, DRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.