Finance and capital markets
Short sale basics
A short sale occurs when someone wants to sell a home, but owes more on the home than its value. We explore some of the major considerations that go into a short sale in this video. Created by Sal Khan.
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- Sal says, "You might have to pay taxes..."What determines whether somebody has to pay taxes on the forgiven amount?(7 votes)
- i think he says that for two reasons. The first reason is he probably doesn't want to get sued by someone claiming they got bad advice from Sal. The other reason is that that answer is complicated by a number of factors including where you live and how much is being forgiven.(12 votes)
- Is it legal for the bank to not report the short sale to credit agencies? Does that vary by state?(11 votes)
- Sal mentions in his video that the House is short saled at $120K. Assuming that we are at the beginning of the mortgage loan payments (that is the Loan is still $150K) , the banks agrees to waive the $30K. But what happens to the downpayment of $50K made by the debtor? Wouldn't the bank say OK my income from the short sale is is $120K and there is still the Equity of the debtor, I can always go ahead and deduct my loss from the Equity of the debtor and (depending on the laws of various States) return whatever is left to the debtor?which in this case should be $20K. After all did we not mention that it is the Equity which takes all the risk.(6 votes)
- The $50K vanishes. The equity was only $50K when the house was worth $200K. Now, since the house is worth only $120K, the equity has become -$30K. The bank is only agreeing to accept the -$30K for itself.(8 votes)
- What does a credit agency do?
What would happen to that person if the bank reported to the credit agency?
Thank you(5 votes)
- The credit agency figures out how likely you are going to pay loan. Their credit rating would go down, making it harder to find banks that will give them loans.(4 votes)
- Is the housing short sale similar to the short selling for stock market? Do we need to make up the loss if the house price goes up instead of going down?(4 votes)
- No, a short sale of a house is totally different. A short sale of a house is when the bank that holds the mortgage allows the house to be sold for an amount less than the total mortgage, and then considers the mortgage paid.(5 votes)
- so if the $30k becomes the income to the debtor, then does the debtor have to pay for the taxes of that income? is that all? - if so, what benefit is there for the bank? because if the debtor pays the taxes for that $30k (which is partly the loss of the bank), the tax just goes to the government not the bank, doesn't it?(3 votes)
- Yes the taxes go to the government but the bank reduces their taxable income by $30k. This is far from what the lender wants but the government shares the lenders gains and losses.(3 votes)
- If the bank agrees to a short sale, does down payment go back to the owner or the bank?(2 votes)
- It's worth noting that you should probably never consider the notion that you might get a down payment back. It almost all cases this money is gone forever.(1 vote)
- Do banks really go for short sales agreement + do not report to the credit agencies about it? any case studies in New York?(2 votes)
- Well, they do, and they usually won't report if they agree, but if you a getting a loan for a another house, there will be a question asking if you had ever deeded a house back to a bank, which will then report that to the credit agency if you said yes.(3 votes)
- Are there other options regarding the handling of the $30,000 difference? Could the bank turn this in to some type of personal loan with a different interest rate and payment schedule?(2 votes)
- Refinancing 30k when you are in a position that you have to short sell your house is not an easy task!
To find someone to lend you 30k, although, may not be impossible, but then you have the situation where you lose all your equity and just have a personal loan while still considering you may be in a situation where you can't pay off that loan.(2 votes)
- when Sal talks about the 150k, he is just talking about the principal of the loan, what about the interest on that?
You bought your house recently for $200,000, and the way that you were able to pay $200,000 is you were able to put 25% down. So you made a $50,000 down payment. And the balance, the other 75%, you borrowed from the bank. So $150,000 loan from the bank, and you pay it off with your monthly payments that include paying down the loan and the interest. Now something happened in your life. Maybe, unfortunately, you lost your job or your spouse lost their job. Or maybe you just overestimated your ability to pay off your mortgage payments, and so you're having difficulty making them. Frankly, you can't make your mortgage payments anymore. So in this situation, you have a couple of options for you. One option is you can try to sell the house, so some type of a sale. Or the other option is you could essentially give the house back to the bank, and that we'll call foreclosure. In another video we'll go more in depth of what happens in foreclosure. But the bank's going to get the property, try to auction it off. If it can't auction it off, then the bank will own the property. And then maybe they'll try to sell it at a later date. And this is not a good option for you. This will kill your credit, which will make it very hard for you to get a loan-- really of any type of loan, but especially a mortgage loan-- anytime in the near future, really over the next several or many years. So you say, OK, I want to do the sale option. Now unfortunately for you, the housing market has deflated dramatically. And so when you talk to a realtor, the realtor figures out, well look, after all is said and done-- I mean, you try to sell it for more than your loan amount, but you're not able to. You're getting really low offers. The offers are like 120,000, 130,000. And so when you really sit with the realtor and you think about what the market is willing to pay for your house, you realize that the most you're going to get for your house after you pay the real estate commissions and all the other things that are involved when you sell a house, you could get maybe 120,000 for the house. And let's say you still owe pretty close to 150,000 on the loan for the bank. Your loan might have even been an interest-only loan, but even after a year or two you're probably not going to pay down the balance of your loan too much. It might be like 140,000 or 145,000. And you're only able to get 120,000 for the house. So what do you do? You don't want to go to a situation where you sell the house for 120,000, you still owe 150,000 on the loan. And so you're still going to have to pay $30,000 for a house that you don't even have anymore. So what do you do? Well, one option-- and this is not always going to be an option-- is to go to your bank and say, can I do a short sale. And a short sale is essentially selling the house for less than you owe on the loan. So let me write this down. Selling for less than what you owe. And the bank doesn't have to, but the bank might-- well, one, the bank would have to agree to the short sale, because their loan is secured by this property that you're selling. And in most cases, the reason why you would want to do the short sale is that the bank may forgive the balance of the loan. So you try to convince a bank to forgive. So for example, you could go to the bank. And you say, look, I lost my job. We're having trouble paying for this house now. After paying real estate commissions and all the rest, I could only get 120,000 for this house. I know that I owe you 150,000. Can you forgive the extra 30,000 that I owe? And the bank might choose to do that. Now, even in this situation, you have to be very, very, very, very, very careful. And this has to be negotiated with the bank and all the rest is because the bank could still report you to credit agencies, which is really not going to be a whole lot better than getting a foreclosure. So in part of this negotiation process-- and the bank is under no obligation to either forgive your loan and let you go forth with that short sale. And they're under no obligation to hide it-- I wouldn't say hide it, but to not talk to the credit agencies. But part of that negotiation you should try to convince them, or you would ideally try to convince them, not to report it to the credit agencies. The other issue with a short sale-- and this is something that few people think about-- is when you have, let's say, in this case $30,000 forgiven, the IRS might consider that to be income. So you might have to pay income tax on this right over here. And people always ask me, wait. If someone forgives a loan, why is that considered income? And the best way to think about it is if the IRS did not consider that income, it would be a huge loophole in how someone could compensate someone. If I wanted to pay someone, I could give them-- so this is me. This is the person that I'm trying to pay. I could give them a loan. Let's say I could give them $100,000 loan, and then I could forgive the loan. And so it would essentially be I gave them $100,000 maybe to do some work for me. It would be a transfer of money by giving a loan and then keep forgiving over and over and over. It would be completely identical to giving someone a gift, which is taxed, or giving someone some type of income. So a short sale, you're not always going to be able to do it in this scenario. But if your house is selling less than the value of the loan, you might be able to negotiate with the bank to allow you to sell the house for less than the value of the loan. The bank's other option is that they're going to have to go into some type of a foreclosure proceeding and take ownership of the house, which is expensive for the bank as well. But they keys here are even if the bank is willing to let you sell the house for less than the loan amount, the owner really needs to make sure that the bank is willing to forgive the balance and ideally not report to credit agencies.