In these uncertain economic times, many Americans are living from paycheck to paycheck, often extending themselves even further through credit card debt. For owners who can no longer afford to keep mortgage payments current, there are alternatives to bankruptcy or foreclosure proceedings. One option is a real estate short sale.
To help understand how a short sale differs from a foreclosure, it may be helpful to point out that short sales can also be referred to as “pre-foreclosure sales” which, as the name implies, precedes the home being officially repossessed or foreclosed on by the lender.
When lenders agree to do a short sale in real estate, it means the lender is accepting less than the total amount due. Banks grant short sales for two reasons: the seller has a hardship, and the seller owes more on the mortgage than the home is worth. It might seem counterintuitive for a lender to go along with a short sale. After all, a lender is legally entitled to pursue the full balance of the loan. Foreclosure is an expensive and time-consuming process for a lender. By agreeing to a short sale, the lender wraps up this little mess quickly, and perhaps with less of a loss than it would have incurred with a foreclosure.
Remember, after foreclosing, the lender owns the home and has to maintain it, insure it and pay taxes on it. So instead of receiving payments each month, the lender is now forking out money every month. Plus, short sales help the lender look good on paper — the property never gets listed as an actual foreclosure, which helps the lender’s numbers look better to bank regulators. They see it as the lesser of two evils — if the numbers make sense for them.
It should be noted that there are still negative implications for sellers in a short sale, even if less damaging than those associated with foreclosures and/or bankruptcy. For example, a short sale homeowner’s credit will still be adversely affected by settling with the lender. However, short sales do carry less negative effects than foreclosures. Short sale sellers are widely seen as less risky than foreclosed sellers. Case in point, Fannie Mae recently adjusted their guidelines to dictate only a two year waiting period for a short sale seller to buy another primary residence, while they extended the waiting period for foreclosures to five years.
Except for certain conditions pursuant to the Mortgage Forgiveness Debt Relief Act of 2007, be aware the IRS could consider debt forgiveness as income, and there is no guarantee that a lender who accepts a short sale will not legally pursue a borrower for the difference between the amount owed and the amount paid. I suggest that all borrowers obtain legal advice from a competent real estate attorney and call their accountant to discuss short sale tax ramifications.
At its best, a short sale can be a win-win for both parties. For the seller, a short sale provides the opportunity to avoid foreclosure and the dreaded implications that a foreclosure brings, in addition to being able to return to home ownership sooner. For the lender, a short sale attains most of the value of the loan sooner, and avoids incurring additional legal or carrying costs while the foreclosure process plays out, which can sometimes even take years.
And, frankly, short sales are great options for savvy buyers. The short sale process is still a mystery to many people, even after all these years. Lots of buyer’s agents are confused; puzzled buyers are looking for direction, and not every short sale listing agent knows how to do a short sale. Two of our agents at Meadows Mountain Realty are experts in short sales. Tammy Mobley received the coveted Certified Distressed Property Expert (CDPE) Designation in 2009 and Tom Goldacker completed the Short Sale and Foreclosure Course earlier this year to receive his SFR Designation.
If you are considering buying or selling a home in a short sale situation, call the experts at Meadows Mountain Realty at 828-526-1717 or stop by our office at 450 N. 4th Street in Highlands. We can also be reached by email at [email protected]