Short sale

Key Takeaways

• A short sale closes only if the lienholder agrees in writing to accept less than the balance owed and release its lien.
• A short sale is a voluntary sale by the owner with lender consent, not a foreclosure; the seller signs the deed and title passes at closing.
• The shortfall between the net sale proceeds and the loan balance survives closing unless the lender's written approval forgives it.
• In Washington the deficiency bar in RCW 61.24.100 follows a trustee's sale, and a short sale is not a trustee's sale, so that bar does not apply to it.

What It Means

A short sale is a sale in which the property will not bring enough to pay off what is owed against it, and the lienholder agrees to accept less than its full balance so the sale can close. The word short refers to the payoff coming up short, not to a short escrow. The seller still owns the property, signs the listing, accepts the offer, and delivers the deed at closing. What makes the transaction different is that the lender holds a veto over the price and the terms.

Because of that veto a short sale runs on two tracks. The buyer and seller agree on price and terms, and then the file goes to the lender's loss mitigation department, which reviews the seller's hardship, the value of the property, and the net proceeds the lender would receive. Approval can take weeks, and the lender can counter the price, the closing costs, or the commission before it signs off.

The part sellers most often misunderstand is the shortfall. Agreeing to accept less than the balance is not the same as forgiving the rest of the debt, and that difference is what separates a short sale from a completed Foreclosure in the seller's own finances.

How It Works in Washington

Washington's angle on short sales is the deficiency. RCW 61.24.100(1) provides that, except to the extent the section permits for deeds of trust securing commercial loans, a deficiency judgment shall not be obtained on the obligations secured by a Deed Of Trust against any borrower, grantor, or guarantor after a trustee's sale under that deed of trust. That protection is tied to a completed Trustees Sale. A short sale is a voluntary conveyance by the owner, so no trustee's sale occurs and RCW 61.24.100 never engages. Whether the Washington seller still owes the shortfall turns entirely on the words of the lender's written approval, and a Deficiency Judgment stays possible where the approval reserves the right to collect. Sellers need legal and tax advice on that language before they sign anything.

A second Washington rule catches licensees. Chapter 61.34 RCW (Distressed Property Conveyances) puts fiduciary duties and criminal exposure on a distressed home consultant. RCW 61.34.020 excludes from that definition a person licensed under chapter 18.85 RCW when rendering real estate brokerage services under chapter 18.86 RCW, regardless of whether the person renders additional services, and provided the person is not engaged in activities designed to or represented to result in a distressed home conveyance. A Washington broker who lists and sells a short sale stays inside that exclusion. A broker who steps outside brokerage services, or who arranges to take title to the distressed home, does not.

Example

Alicia owns a house in Everett and owes $412,000 on the first deed of trust. She has lost the income that supported the payments. Her broker lists the house at $365,000, which is what the market supports, and a buyer offers $358,000. Closing costs and the commission come to 8 percent of the price, or $28,640, so the lender's net from the sale is $358,000 minus $28,640, which is $329,360.

That leaves a shortfall of $412,000 minus $329,360, or $82,640. The lender reviews Alicia's hardship package and approves the sale, and the approval letter is where the $82,640 gets decided. If the letter releases her from the remaining balance, the debt ends at closing. If it reserves the lender's right to collect, she still owes $82,640 after she hands over the keys. Had the lender instead foreclosed by trustee's sale, RCW 61.24.100(1) would have barred a deficiency judgment on that obligation, which is why the choice between the two paths is about more than credit scores.

Common Mistakes and Exam Traps

• A short sale is the owner selling with the lender's consent, while a foreclosure is the lender enforcing its security instrument. Only the short sale transfers title by the owner's own deed.
• The word short describes the loan payoff falling short of the balance owed, not a short escrow or a fast closing.
• A signed purchase and sale agreement does not make a short sale a deal. The lienholder's written approval is the controlling condition.
• Approval from the first lienholder alone may not be enough, because every lien has to be released before the buyer can take clear title.