Already a Bloomberg.com user?
Sign in with the same account.
Home prices have dropped as much as 50% in some parts of the country, and many readers in those areas keep asking what they can do to stop the bleeding? In my last article, I described various strategies available to lower your monthly mortgage payments. But what options do you have if you are so far underwater that refinancing is not feasible and you are desperate to get out from under?
The short answer is the short sale.
What is a short sale? It is when you sell your home (including sales commissions and other closing costs) for less than you owe on the mortgage. For example, you owe the bank $400,000, and you sell your home for $300,000.
In a normal real estate market, the bank would come after you for that remaining $100,000. But things are far from normal everywhere, and especially in such areas as California, Florida and Nevada. So sometimes, to avoid the hassle and costs associated with going through a foreclosure, the lender will sanction a short sale by allowing a buyer to purchase the home for less than the mortgage balance.
Equally good, Uncle Sam may let you off the hook when it comes to the taxes associated with the sale. Normally, if you owe a debt and it is cancelled or forgiven, you are supposed to pay taxes on the amount that was wiped out. Under the Mortgage Debt Relief Act of 2007, however, most taxpayers will be able until 2012 to exclude the assumed income from the discharge of debt on their principal residence.
Not surprisingly, given all this, going through a short sale is complicated and extremely time-consuming. But in some situations it may be better than trying to hang on, and it can be more advantageous than allowing your home to go into foreclosure.
Obviously, you are the one who must make the call. Before you do, see if your situation covers these two common prequalifications:
Comparable sales in your area confirm the home is worth less than the existing mortgage.
You are having financial difficulties and can prove that you can't pay the difference due upon sale. Common examples of difficulties are: no assets, a loss of job, divorce, bankruptcy, serious illness, or death of the primary breadwinner.
What happens if you do?
What are some of the consequences if you go this route?
According Jay Blessent, owner of RE/MAX Experts in Buffalo Grove, Ill.: "While short sales are damaging to your credit, they are far less damaging than foreclosure. For example, foreclosures usually result in a seven-year wait before qualifying to buy another home and often cause a decrease in credit score of 300 or 400 points. With a short sale, the wait to buy another home is usually only two to three years and a hit to the credit score of less than 200 points—and sometimes as little as 20 points." Now that you understand a little bit about this alternative, if you are considering a short sale, please consult with a short-sales specialist.
First and foremost, there are attorneys who specialize in short sales and should protect you from any unexpected pitfalls. They understand how to analyze all of the elements to ensure it is the right choice for you, how to navigate the terrain, and how to communicate efficiently with the lender's representative. In addition, many local real estate professionals have extensive experience assisting the seller with gathering and organizing various elements required to supplement the attorney's efforts properly.
By the way, if you are a buyer, you may want to consider buying a home in a short-sale process. While it requires patience and some extra due diligence, there are some terrific deals out there right now.
One final note: While there has been a lot of discussion about the government and financial industry working together to launch a streamlined short-sale process—the initial talk had it happening by the end of this month, April 2010—as it as it stands today, short sales remain an extremely time-consuming and frustrating process. The banks are short-handed, servicers may not have the power to make quick decisions, and buyers may walk away before your bank provides approval.
Despite all that, if you are a candidate for foreclosure, a short sale is definitely worth exploring.