Understanding Short Sales
After the real estate market collapsed in 2008, "short sale" became an everyday term in the industry. In fact, it became a specialized area in which many Realtors and attorneys devoted their efforts.
To sum up, a short sale takes place when the value of a home is less than the balance of the existing mortgage(s) on the property. This can occur with all types of property: residential and commercial, single family and multi-family homes, condominiums and townhouses.
When property values were booming and it was a "seller's market", homes were sold for top dollar and it was not unusual for a bidding war to start on a newly listed house. A few years later, due to the mortgage crisis and what are known as "toxic loans", the value of these home for which buyers paid top dollar, plummeted. Buyers were always obtaining high levels of financing. It was not unusual for a buyer to put down a minimal deposit and finance the vast majority of the purchase price.
As an example, in 2005, a house may have sold for $500,000.00 and the buyer may have financed 90% of the price or $450,000.00. On occasion, a buyer would take out two loans in order to avoid paying for Private Mortgage Insurance (PMI). So the same house worth $500,000.00 could have an 80% first mortgage loan of $400,000.00 and a second mortgage loan (or home equity line) of $100,000.00, in which case, the purchaser would have no equity at all in the property.
When the real estate crash occured, the value of the $500,000.00 property could easily have slipped to $400.000.00, or less. Unfortunately, the obligation to pay back the mortgage, is not contigent upon the current fair market value of the property. The homeowner is still obligated to make his/her mortage payments.
When attempting to sell your home as a short sale transaction, our office requires that the short sale approval letter state that the lender will accept the amount offered as "payment in full" and will not look to you for deficiency payments.
It is important to understand that New Jersey is a "recourse State." That means the lender has the option to pursue the homeowner after a foreclosure or short sale for any balance owed on the mortgage loan after the house is sold (called the "deficiency"). It is for this very reason that we require all approvals to clearly state that your lender is considering the funds received from your sale as "payment in full". It is critical that your Realtor and attorney protect you from future demands or litigation by your lender for deficiency amounts.