To continue on from our last article entitled Short Sales and Foreclosure, let’s discuss Short Sales, what they are for buyers and for sellers. Let’s begin with what a short sale is.
- When a homeowner needs or wishes to sell their home where the current market value of the home is less than what is owed on the home by the borrower. They would be selling short.
- When you hear “Short Sales are anything but Short”, that is a reference for the time it takes to get one sold.
- When the home is sold for less than what is owed, the bank must authorize it. In some cases, they will require the borrower to sign a note to pay off the balance separately or simply forgive the debt. Uncle Sam however is not that forgiving. The borrower will receive a 1099 from the lender showing the balance to the borrower as income, and they may have to pay income tax on the amount. The Mortgage Forgiveness Debt Act, which allowed borrowers to not have to pay the tax if the short sale was on their primary home, expired and was not reauthorized by Congress.
While there are different processes for different lenders, most if not all decisions are based upon the demonstration of hardship by the seller, which includes and is not limited to, loss of income by the primary borrower, death by one or more of the borrowers and other circumstances that make continued payment of the mortgage unlikely.
Since the market has improved, Lenders and Borrowers are less enthusiastic about participating in a short sale for two different reasons. For Borrowers, Congress failed to reauthorize the Mortgage Forgiveness Debt Act as we mentioned above. Add to that it is very hard for the borrower to find a place to live, and the fact that in NJ it can take 4 or more years to foreclose, there is little incentive for those who are underwater to work within the short sale rules. Lenders are also seeing the market go up and if a short sale is approved, in many cases the bank may not approve the price offered for the home.
Education on the short sale process and what to expect from Buyers and from Sellers takes time. A Seller is always encouraged to speak to their Tax professional to see if a short sale is the best way to go for them. Buyers who are contemplating the purchase of a home in the short sale process will need a lot of patience. There is no guarantee that an offer accepted by the seller will be accepted by the bank.
The number of liens on a property and the presence of Mortgage Insurance from a buyer in default also will play a part in the decision making. It is important for buyers and sellers to have a real estate professional who is familiar and experienced with the short sale process. The attorney representing a seller is crucial in the process and should also be experienced in this process.
If you would like to sit down to discuss this in much further detail to see if this could be right for you as a Buyer or Seller, please feel free to contact myself or a member of my team.
Christian J. Schlueter, Broker-Salesperson
SFR (Short Sale & Foreclosure Resource), CDPE (Certified Distressed Property Expert).