A short sale is a transaction type, where the home is put on the market for sale at a purchase price that is less than the amount owed on the current mortgage. It is a scenario that benefits the homeowner as they avoid the credit hit and a deficiency judgment that comes with a foreclosure.
A short sale has to be approved by a third-party called a “loan servicer” that represents the bank that owns your loan. A homeowner who is considering a short sale should be represented by a fully licensed and insured Real Estate Broker who follows the Realtor code of ethical conduct.
7 REASONS TO CONSIDER A SHORT SALE
- No Response causes Faster Foreclosures
It is hard to determine how long it will take the bank to foreclose. Don’t wait too late! Once a judgment is filed there is not much more anyone can do to settle the debt. However, if a short sale has been started (especially when you have a fully executed contract) judges are a lot more lenient to provide extra time so the short sale can conclude. If the judge determines the homeowner is not taking any steps to settle debt, they will surely take that into consideration when deciding to foreclose faster.
- Deficiency Judgement (Zombie Debt)
The owner will be liable to pay back the difference between the total amount owed and what the house sells for in foreclosure. Banks have one year (after foreclosure) to file the deficiency judgment against the homeowner. They can require the homeowner to pay this balance after foreclosure. This is called “Zombie Debt” because this judgement doesn’t die and follows you around until you get rid of it. Foreclosure defense attorneys can’t end a foreclosure, they can only delay it. Real Estate professionals can stop a foreclosure by performing short sale & settling the debt.
Any time mortgage debt is forgiven; it is considered a taxable event. The IRS states that any borrowed money that is not paid back is considered as income and is taxable. The loan amount is considered as income because there is no longer an obligation to repay the lender. The bank has two options: They can require that you pay the deficiency or issue the seller a Form 1099-C, Cancellation of Debt (COD). When the COD is given, it is considered as income and must be reported on the homeowner’s income tax form. Thus leading to capital gains and makes the sale income tax applicable. Short sales can release owners from this obligation and depending how they file will pay no tax on the deficiency. Check your states tax laws.
- Credit Problems & Employment
Homeowners who aren’t paying their mortgage are taking a credit hit on a monthly basis. A distressed homeowner should not wait to long to sell. After foreclosure, a homeowner’s credit score can drop on average 250 – 300 points. Poor credit can make the ability to make future purchases difficult or prevent some types of purchases altogether. Bad credit acts like a tax because the distressed homeowner will ultimately pay higher interest rates. Credit issues can also prevent the homeowner from future employment opportunities. Especially active duty military, employers that require a security clearance or employees that directly handle money. Since the homeowner is more than likely to rent after foreclosure, poor credit history can make this difficult. Sometimes you will be required to pay higher rents and/or rent deposits. A short sale allows the homeowner the ability to settle debt so credit strength can increase monthly.
There is a huge misconception about Bankruptcy as it relates to debt settlement. Bankruptcy relieves the homeowner from “Pre-petition” debt only. Which means all the debt you incur prior to filing your bankruptcy is forgiven. However, “Post-petition” debt is all debt that you incur after your bankruptcy case is filed. These debts will not be part of your bankruptcy case and cannot be discharged. You are still liable on this debt and must pay for it. So imagine if you walked away from your house and it sat idle for a year or two after you filed for bankruptcy. The debt from your mortgage is gone. However, recurring liability, such as code enforcement, HOA, association attorney, interest and fees would all be charged to the homeowner after bankruptcy. These debtors are more likely to pursue the judgement against you in these cases because you would not be eligible to file bankruptcy again for another 8 years. A short sale should always be completed after a bankruptcy. (See Deficiency Judgment Example Attached to compare debt scenarios)
- Property Maintenance
Continued maintenance and update of a property can be expensive. Some homeowners do not want the hassle or expense of putting on a new roof, replace the siding, or buy a new air conditioning unit. When you figure the life of most residential infrastructure is about 15 years, and you will not recoup repair dollars, it make sense to sell before it’s time to spend the big bucks. If you owe more money on your mortgage than it is worth, you are basically renting your home. Moreover, with the added responsibility of upkeep.
- Strategic Default
As a Licensed Real Estate Broker, I follow the Florida & Georgia Law Statues. I cannot give legal advice or provide counsel as a certified public accountant. Licensed Real Estate Brokers can never direct a client to stop paying their mortgage! A strategic default is a decision made by a borrower to stop making payments (i.e., to default) on a debt, despite having some financial ability to make payments. Some owners choose a strategic default if the mortgage balance is more than market value of the home and they know they will not recover the losses anytime soon. This is sometimes referred to as being “upside down” or “underwater” on your mortgage. Strategically this is a solution to get out of a bad investment and restart the life of their family. A short sale is one way to complete this process strategically.
Note: Deed In Lieu of Foreclosure
A deed in lieu of foreclosure is a transaction type in which the homeowner voluntarily transfers the title of the property to the bank in exchange for a release from the mortgage obligation. The Eureka Team does not negotiate deed in lieu’s as they do not benefit our clients. The difference between a foreclosure and a deed in lieu to your credit is minimal. Generally, the bank will only approve a deed in lieu of foreclosure if there aren’t any other liens on the property. Banks sometimes agree to these terms to avoid the expense and hassle of foreclosing.
Keith Jackson is a Licensed Real Estate Broker, Appraiser with a CPL and CPME property management certifications. He is a Mortgage Debt Settlement and Disposition Specialists with over 16 years and 10,000 of experience in Distress sales. Email or Call Keith Jackson today.