Why Sellers hate short sales

A short sale is designed to help a homeowner sell their home and prevent foreclosure. Basically, their lender agrees to accept an amount from a buyer that is 'short' the amount owed for the home. After closing costs, the seller walks away with nothing - but salvages some of their credit and dignity.

When dealing with the Loss Mitigation area of the lending company, there are so many things (beyond the seller's control) that can delay a short sale to the point that the buyer gives up and walks away and the home ends up in foreclosure. This is one reason why sellers often hate the short sale process.

Here are a few other reasons why the short sale process doesn't work out very often for the homeowner:

• You must complete the short sale package with the lender. Every single little detail must be complete. It is up to you to make sure it is complete. If it isn't completed, you won't progress toward a short sale. You need everything from bank statements and collection letters to tax returns and financial statements. Until the lender tells you that your short sale package is complete, it may not be and you won't know it. It is up to you to make contact, stay in contact and do the legwork.
• A seller must prove to their lender that they deserve to qualify as a short sale. Its kind of like getting a loan pre-approval letter - but in reverse. You must document why you are in a financial hardship and cannot meet your financial obligations - loss of job, health issues, catastrophic event, etc. Basically, you'll need to prove that you have no assets to tap into to help pay the mortgage or apply to the sale of this property. Unless you can prove that you have no other resources, they will assume that you are able, but just unwilling, to pay the debt. If you can't document your dire financial situation, you are out of luck.

• You need a Realtor's price opinion or an appraisal. Make sure it is accurate. Every lender has their own criteria for price considerations. They will only sell the property for what they feel it is worth. This is tricky since most lenders are in different states and rely on different appraisal criteria and formulas - that may or may not be relevant to our area.

• If the lender agrees to the short sale and the sale actually takes place, they may issue you a 1099 tax form for the shorted difference. This gives the IRS the amount of debt forgiveness and you will owe taxes on the amount. The IRS is pretty good at collecting tax debt, so be prepared.

• Your credit report will reflect significant loss. While the damage isn't quite as bad as a foreclosure, the drop in your FICO score is almost identical to a foreclosure reporting. However, instead of showing bad debt of the full amount of a mortgage, you'll only show bad debt for the 'short' amount difference of what the lender sold the house for and what you owed. Still, the ramifications are almost the same as foreclosure.

• You will have no control of the transaction. Forget about deadlines or making plans. The short sale process takes an indefinite amount of time. Your lender will call the shots - not you, not the buyer and not the agents.

• Lenders are not required to negotiate discounted payoffs (short sales). There is no guarantee that your lender will complete the sale. They may renege at the last minute and can opt to foreclose in the end. Lender last minute demands are not uncommon. They can request changes to any terms of the contract (including price, conditions, dates, ...) if they find any new information, they feel the market has changed, new laws are passed, etc.

• Not too many buyers are open to those kinds of terms. Would you be? And even if you get a buyer willing to wait out the process and to agree to last minute changes to the contract, their own lender must agree as well. What a nightmare.

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