”That’s not near as many (short sales) as there were last year,” said Realtor Paul Teasdale. Not only have the short sale numbers dropped, so have regular listings, leading to a shortage and competing offers in the lower price ranges.

A short sale is an effort by the homeowner to sell the property for less than what is owed, which requires approval from the lender. Once approved, the lender may either ask for the difference in what is owed, token payments that are a fraction of what is owed or nothing at all. One of the goals of Realtors handling the sale is to negotiate complete forgiveness of the deficiency. Most of the time they are successful.

However, if the bank retains the right to pursue the deficiency, it has three months to do so, according to Utah law, which matches the deficiency law regarding foreclosures. The law was changed earlier this year. The prior law gave banks six years to sue for a deficiency in a short sale.

Another issue is that a deficiency could trigger a Form 1099 from the Internal Revenue Service to tax the deficiency as income. The Mortgage Forgiveness Debt Relief Act of 2007 protects most short sale sellers from that scenario when the debt is forgiven. Insolvency and bankruptcy can also help escape the deficiency, Realtor Brian Pitcher said, but consult an accountant for details on your particular case.

A bankruptcy can’t stop a tax liability, so if you see one coming, file for bankruptcy before it hits, he suggested. Short sale Realtor Jay Deher agrees. A tax liability of perhaps $50,000 to $100,000 or more from a deficiency could throw folks into absolute poverty.

”They never saw that money. They just got caught in the system,” he said.

The Debt Relief Act sunsets on Dec. 31 unless extended so any short sales should be completed by then to avoid the deficiency.

The general public grossly misunderstands short sales. Adding to the confusion is the fear mongering of bankruptcy lawyers, opines Pitcher, who may advise their clients not to do short sales because of a possible deficiency. If the 2007 Act isn’t extended some agents speculate that not only could it mean more foreclosures, it could also mean more bankruptcies. Even if it does, a short sale would still be better because the deficiency would likely be less. Short sales usually bring a higher price than a foreclosure.

Bankers prefer that underwater homeowners do a short sale rather than give up their house to a foreclosure. I sat in a briefing last spring with a Bank of America official who explained how a short sale is better for both the homeowner and the banks. Not only can the homeowner buy another house years earlier than if he went through a foreclosure, the banks make more money — let’s say, they don’t lose as much. Yet, if an offer comes in too low, the banks will opt for a foreclosure.

Foreclosures are tremendously expensive for a bank and they really don’t want your property. A short sale is better for the seller because the hit to their credit isn’t as bad.

Short sales can take a lot of time — three to six months isn’t unusual. The burden of getting it done quicker falls on the homeowner.

”If people would get their paperwork in I can get it through,” Realtor Pauline Webber said. “There’s a lot of paperwork and I need to collect it fast.”

Some banks give the agent just 48 hours to get the paperwork in or they’ll close the file and the agent has to start over, so it hurts the process to have homeowners drag their feet.

One the other hand, a frustrating issue for listing agents is that short sale buyers are fickle. They can make multiple offers with no cash up front and walk at any time before acceptance. Investors often make offers sight unseen as soon as a short sale property hits the market. They decide later if they want to stay with it. Hapless buyers looking for a deal on their first home are often left out in the cold.

That’s why savvy agents take backup offers on every deal. Some Realtors use professional negotiators to get a short sale through and to negotiate out the deficiency.

”Homeowners need to have confidence in their Realtor,” said Kellie Little. “We are trying to help and the system has improved.”

”I think (The Mortgage Forgiveness Debt Relief Act) will be extended,” Little said.

She works the real estate business with her husband Lerron Little. He was president of the Utah Association of Realtors last May when a contingent of local Realtors travelled to Washington, D.C. to meet with Utah representatives about getting the Act extended.

”It needs to be extended or we’ll end up where we started,” she said.

She suspects it will happen just before the deadline in true Fed fashion,

Rodger L. Hardy is a Realtor affiliated with Prudential Utah Real Estate and a former real estate editor. For answers to your real estate questions please email him at rhardy@utahresidentialEteam.com.