What is a short sale? Hard to believe some people don’t know what that means since it is all the rage in this housing meltdown. A short sale is when you sell your home for less than you owe on your mortgage (or mortgages). It does not mean selling for less than you paid for the home.
When people call me asking if a short sale will solve their problems my first question is: Do you have a buyer who has made an offer in writing?
First, many people think if they just list their home for short sale, the work is over. This is not the case. A short sale listing means nothing until a buyer puts an offer in writing. Then it needs to be submitted to the bank – and that is where the fun begins… the waiting.
While some banks are becoming smarter in this housing market, most banks take too long to decide, or never decide at all. Usually this results in the buyer walking away from the offer and pursuing a different home.
Second, there is possibly a misconception that selling a home in a short sale saves one’s credit score. This may not be the case. Think about it, if you are considering a short sale, chances are that you are already behind on your mortgage. You have already taken a hit to your credit score. Also, if you are behind on the home, you most likely were already behind on your credit cards or other bills. Your credit score has already taken the hit. Also, even with a successful short sale, the mortgage may be reported as settled for less than full amount – further damaging your credit rating.
Third, do you have a junior mortgage or home equity line? The possibility of short sale success just dropped dramatically (not that the possibility of success was that high anyway). Now you need two lenders to agree to the short sale. Most likely the offer from the buyer is less than you owe on the first mortgage. So why would the second mortgage lender agree to take $0? They won’t. The next problem is that the first mortgage lender will most likely not allow the second mortgage holder to get more than $1,000 in a short sale. Again, the second mortgage lender will most likely say no (even though they will end up with $0 anyway if the home is foreclosed).
Fourth, the home is likely not your only debt. Fine, you proved me wrong and you got a short sale approved on your home. Did you also fall behind on credit cards when you fell behind on the home? What are the balances? In many cases, this debt mounted so high, you cannot pay it. So while you may have solved one debt problem, the other problem may be just as large now.
Fifth, there may be tax consequences. Under certain circumstances, forgiveness of debt on a primary residence is not a taxable event with the IRS. But in the housing boom before the meltdown, did you refinance your home? How did you use the money? If you spent money on anything other than the home (like cars, trips, paying off credit card debt, etc), this amount of debt is not forgiven by the IRS. You will most likely have to pay taxes on this amount.
Unfortunately, people are convinced a short sale is best for them by the real estate industry. Realtors make money by selling houses. Now that the market is in the tank, they are pushing short sales. But your realtor probably cannot offer you proper advice on your other debts, tax consequences, and credit score effects.
There are other avenues for people who are having trouble with mortgage debt. Bankruptcy may eliminate all personal liability on the mortgage (then cutting off any tax liability to the IRS). Bankruptcy may also allow you to cancel your unsecured junior mortgages (lien strip). Foreclosure defense is also available – which may give you valuable additional time in the home before the home can be sold at auction.
Call 407-749-0080 now for a free consultation to go over all of your options. If the short sale is right for you, I will tell you. Would a realtor lose a commission to tell you a short sale is not a good idea for you?