Short Sales – Not Always Best Option
In today’s troubling economic climate, more and more homeowner’s find themselves in a distressed financial situation either delinquent in paying their mortgage or are paying a mortgage on a house that is “underwater” (i.e., the outstanding mortgage exceeds the current market value of the property). Although there are many options for distressed homeowner’s (i.e., loan modification, foreclosure defense, forbearance and/or repayment agreement, deed-inlieu, partial claim, short refinance, and cash-for-keys), one of the most widely known and heavily advertised option is the “short sale.” Generally speaking, a short sale is when the bank or an investor agrees to the sale of a real estate property for an amount less than the full amount of the outstanding balance that is owed on the property.
The difference between the selling price of the property and the full amount of the outstanding balance owed on the same to the bank or the investor is known as a deficiency. Distressed homeowners are usually solicited by their bank, investor, real estate agents, and general information websites which represents that a short sale will “cure” their distressed situation. This is simply not true. Listed below are four specific reasons why a short sale almost always does NOT benefit a distressed homeowner: A short sale benefits many people other than the distressed homeowner. A short sale benefits the mortgage lender, the investor, the realtor and the purchaser of the property greatly. In a short sale, the mortgage lender doesn’t have to foreclose (and pay for the foreclosure related fees, property taxes, homeowner’s insurance, maintenance fees, eviction costs, REO broker commission fees nor wait the 24-60 months it may take to actually foreclose).
The realtor selling the property will get a commission from the sale, usually around 6 percent of the sale price. Lastly, the purchaser usually gets a move-in ready home for under market value. In contrast, the distressed homeowner, who is the only party that receives no monetary benefit at the closing, must leave their home, disrupting their family’s life particularly with children that must change schools, and begin the insurmountable task of finding a rental with no cash in their pocket and terrible credit. If the distressed homeowner were not to do a short sale, they could save their money for as many months as it takes to foreclose on them, then usually negotiate with the lender to pay them a few thousand dollars for cash-for-keys to leave the property without destroying it nor forcing the lender to perform an eviction proceeding.
A short sale hurts your credit. Don’t believe the hype being put forth today by various industries and media outlets. A short sale causes the same harm to your credit as a foreclosure or a bankruptcy, if not more, should the lender or investor obtain a deficiency judgment against a homeowner which is reported on their credit for the next 20 years. At least with bankruptcy (i.e. Chapter 7), the homeowner is discharged of their debts and can begin rebuilding their credit within months after filing for bankruptcy.
You may owe taxes as the result of a short sale. Distressed homeowner may receive a 1099-C reflecting the difference between what they owed and what the mortgage lender agreed to accept in a short sale. This amount is considered income, and the homeowners will have to pay taxes on it. There are some exceptions to this general rule, such as insolvency and certain types of mortgage debt, so the homeowner is best advised to first consult with their tax adviser, which will usually cost them more money as well before proceeding with the short sale. (See the Mortgage Forgiveness Debt Relief Act of 2007.) The debt might not be forgiven. In many cases although the lender agrees to remove the lien from the property so it can be sold, the homeowner’s personal obligation for the debt is usually not released. In other words, the lender isn’t accepting the short sale amount as payment in full.
This is particularly true of second mortgages. It is this attorney’s opinion that if a short sale somehow benefits the homeowner it is probably because something is being done illegally (i.e. the homeowner remains in the house after the short sale, house is being sold to a family member or close friend or receives money at the closing.) Should any of these situations occur when representing a party at a short sale, I urge that you ask many questions about any part of the transaction and have documentation for any questionable part of the transaction. Being a participant to any illegal scheme of a short sale is not worth your practice, law license or reputation.
Note: Ivan E. Young is Principal Counsel at the Young Law Group, PLLC founded for the sole purpose of providing a new level of legal experience and expertise to individuals and businesses that are experiencing one or more financial hardships and/or financially related legal predicaments. Mr. Young’s area of practice includes but not limited to foreclosure defense, modification, bankruptcy, real estate, criminal, family law, motion practice.Mr.Young is the Co-Chair of the Real Property Committee and a member of the Suffolk County Bar Association, of the New York State Bar Association, of the American Bar Association, of Amistad, of the Long Island Hispanic Bar Association and a member of the National Hispanic Bar Association.