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Short Sale Can Be a Smart Buyer’s Affordable Route to Homeownership

  • May 23, 2012

by Don DeBat


There’s a tsunami of foreclosures underway in the nation’s housing market, and Illinois has the dubious distinction of being near the peak of the wave.

With a whopping 7.5 percent of its mortgage loans on one-to-four unit properties in foreclosure at the end of March, Illinois ranks right up there with Florida and New Jersey as leaders in failed homeownership. The national foreclosure rate is 4.39 percent.

In recent years, 250,000 new American families fell into the quicksand of foreclosure every three months. However, today thousands of homeowners are avoiding the lengthy foreclosure process that can take up to two years by opting for a “short sale” which can result in a closing in approximately 120 days.

A new directive from Freddie Mac and Fannie Mae requires that banks and loan servicers review and respond to borrower requests for short sales within 30 days after receipt of a short-sale offer, and advise the borrower of the final decision within 60 days.

Any homeowner who is two months late on his or her mortgage, and can demonstrate the inability to make their loan payment may be a short-sale candidate.

A short sale happens when the homeowner sells the property before a foreclosure takes place. A short sale can only occur when the property’s mortgage balance is greater than its market value.

The listing price of the home — often dubbed the “upside-down” price — is determined by a broker-price opinion (BPO), recent comparable sales in the area, and the condition of the home. Ultimately, in a short sale the lender agrees to accept less money than is actually owed on the mortgage.

“From a buyer’s point of view, there is much less risk in purchasing a short sale than getting involved in the lengthy process of purchasing a foreclosure,” said Chicago buyer broker Sara Benson of Benson Stanley Realty.

While the price of a short sale typically can be slightly higher than a foreclosed property, the buyer usually is getting a better deal because the home is in better shape, Benson said.

“Typically the short-sale home is occupied and therefore is not vandalized with missing kitchen appliances, cabinets, furnace and even electrical wiring. And, it hasn’t been left abandoned in winter to suffer such damage as frozen pipes,” Benson said.

Before starry-eyed buyers dive into the lucrative world of short sales, Benson advises that they find both a veteran buyer broker and a real estate lawyer who is experienced in the short-sale process.

“It also helps if the seller’s Realtor is experienced, not just an agent who passed a short-sale designation in a two-hour course,” said Benson, a 25-year real estate veteran.

“A designation from the National Association of Realtors may help, but the seller’s broker should have a minimum of five years of experience in real estate, and it is a good idea that the agent is not a family member or a best friend.”

Examples of short sale bargains for buyers abound in today’s market, Benson said. Here are some deals on Chicago’s North Side Benson found for her clients:

  • Sheridan Park. A 2-bedroom, 1-bath condominium in a vintage 19-unit building originally sold for $280,000 in 2006, and the owners still owed $250,000 on the mortgage. Because of debt forgiveness by the bank, the short-sale price was $150,000.

  • North Park. A 3-bedroom, 2-bath brick bungalow with a finished basement and 2-car garage originally sold for $145,000 in 1995. Over the years, the owners had refinanced the property twice to take out cash, and the current mortgage was $244,000. Debt forgiveness by the bank brought the short-sale price down to $180,000.

  • West Rogers Park. A 2,200-square-foot condo with 3 bedrooms, 2 baths and a parking space originally sold for $160,000 in 2002. Its value rose to about $330,000 during the boom, and the owner refinanced taking out a new mortgage for $285,000. Because of debt forgiveness by the bank, the short-sale price was $135,000.
Short-sale sellers also should be aware of the Mortgage Forgiveness Debt Relief Act, which allows taxpayers to exclude from their income the amount of debt that is forgiven or canceled by the lenders in a short sale of a principal residence.

When a seller has completed a short sale and the lender has agreed to cancel or forgive the debt, the lender reports it to the Internal Revenue Service on a Form 1099c. However, tax experts say the act will expire on December 31, 2012, and there are no guarantees that it will be extended.


Don DeBat’s weekly real estate column is syndicated by DeBat Media Services. For more home-buying information visit his website at:

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