By the end of the first decade of the twenty-first century, “short sale” had become a buzzword in the real estate industry. While some real estate sales professionals seized the opportunity and found ways to profit from the short sale explosion, other real estate professionals avoided short sales like the proverbial plague or reluctantly maneuvered clients through the unsavory transactions.
Short sales are a way for homeowners to sell their property for less than the balance due on the loan amount. The necessity for short sales arose when homeowners discovered they were upside down in their loans, when property values plummeted. Since it was impossible for some homeowner to sell their home and pay off the lender, they began looking to short sales as way to get out from under their property.
Short Sale vs. Foreclosure
One difference between a short sale and a foreclosure, in a foreclosure the lender takes back the property, while in a short sale the homeowner puts the property on the market, in an attempt to avoid foreclosure. After a buyer makes an offer accepted by the homeowner, the offer goes to the lender, who decides to accept or reject. Without the lender’s approval, the short sale won’t close escrow.
Owing the IRS for Unpaid Balances
When a debt is forgiven by a lender, the debtor can be responsible for income tax on the forgiven amount. For example, if a homeowner owed $150,000 on the property, yet completed a short sale for $100,000 and the lender discharged the $50,000 difference, the property owner could be liable for income tax on $50,000. The Mortgage Debt Relief Act of 2007 gives relief to some property owners facing short sales, notably those involving primary residences.
Before listing a property for sale, the seller typically seeks permission from the lender to proceed with a short sale. Unfortunately, most lenders won’t commit, and will only give their definitive answer when an offer is made by a qualified buyer. This makes the process frustrating for buyer and seller alike, as it can drag on for months, before buyer or seller can move through the escrow process.
Deficiency Judgments Possible
Depending on the state, the lender may be able to file a deficiency judgment, for the unpaid balance, even after agreeing to accept the short sale. In some states, the lender has up to six years to file. This is an unpleasant surprise, driving some sellers to the bankruptcy court. If your state does not allow deficiency judgments, verify that applies to short sales, as well as foreclosures.
Before proceeding with a short sale, homeowners should compare the ramifications of a short sale verses foreclosure, taking into consideration state and federal laws. They might discover foreclosure is the better option for their situation.
Bobbi Holmes - A graduate of California State University, with a Bachelor’s Degree in Communications, and an emphasis in photography, Bobbi Holmes ...
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