It’s a question I have been asking myself of late. A Short Sale is when a lender (the mortgagee) agrees to release the mortgage from the property so that it may be sold to a buyer for less than when is owed on the mortgage. I am hearing that many people are exploring short sales as a means of “avoiding foreclosure.” But there are many variables that will make a short sale successful, and unless all of those variables are working in the homeowners favor, the short sale is not a good idea.
Let’s assume you’re a homeowner that owes $350,000 on a house that is listed for $299,000. A qualified buyer has stepped up and offered to buy the house for $290,000, leaving a short fall of $60,000 (a deficiency). The mortgagee (the entity that holds the mortgage) might agree to the terms of the sale, might agree to release the mortgage and then and all the proceeds from the sale goes to the mortgagee. The homeowner/seller gets nothing.
But what about the $60,000? Some lenders might forgive the debt. There may be tax implications for that, and it’s important to know whether you might be exposed to tax liability is the deficiency is forgiven. You’re going to need to see an accountant or tax attorney to be sure that you’re not going to have a tax bill on April 15.
Some lenders may not forgive the debt. They do not have to if they do not want to. You, the seller/homeowner are responsible for the deficiency. The lender may sue you. They might try and attach your bank account (which you may now need to pay rent), or try garnish your wages. Or perhaps the lender will just sell the deficiency (the note balance) in the debt market, and eventually some debt holder will step up and sue you for it. In other words, things might not actually get better.
Don’t forget about capital gains. Let’s assume our homeowner in our example bought the house in 1985 for $85,000. The house is sold for $290,000. That’s a gain of $205,000. Is there capital gains tax exposure? Maybe. It depends on your circumstances. It really doesn’t matter that you refinanced it so many times that there is no equity left and you have no money in your pocket when you walk aware from the table. Think of it this way, you got the money before the house sold, and the IRS may view it as simply as a gain. You’ll need to check with a financial advisor, tax attorney or CPA for that information.
And finally, there’s the big picture. If your debt situation feels like the entire house is engulfed in flames, make sure that the short sale you’re contemplating is not going to be the equivalent of only putting out the fire that spread to the garage or family room.
My point is this: don’t assume that short sales are good for you just because someone tells you they can do them. Don’t assume it’s better than losing the house in foreclosure. Don’t assume that it will help you when you want to buy another house in the future. Make sure you look at all the facts and make an informed decision – knowing full well what your financial exposure may be. Ask yourself: is allowing it to go to foreclosure better? Is bankruptcy better? Is the short sale better, or am I just doing it because for now I am avoiding bankruptcy and foreclosure?
And if you’re seriously considering a short sale, do it soon – not after the foreclosure auction has been scheduled. If you don’t have all the facts and consider all the implications of how a short sale may affect you, then the answer to my question is this: a short sale is just silly.
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