Many real estate investors have done well with their investments, while others have encountered difficulties. Making house payments that you cannot afford and having the house’s value drop below what you owe on it spells trouble. Besides foreclosure, what is a homeowner to do≠ A short sale may be a good way to go.
What is a short sale≠
A short sale occurs when a homeowner sells his house for less than what is still owed on the outstanding mortgage(s). The sale must be agreed to by the mortgage lender(s) in advance of the sale. Finding the right real estate agent to represent you in this scenario is extremely important. Unless the transaction is negotiated properly, the homeowner could be held responsible for some or all of the outstanding balance of the mortgage loan(s).
Why go for a short sale≠
A short sale can help a borrower eliminate a mortgage debt and avoid foreclosure. The lender may also benefit, as approving a sale for less than the amount owed may ultimately have lower costs than foreclosing, repossessing and remarketing a property for sale. Lenders are thus very selective about which properties are considered for a short sale approval. Many factors are considered in the approval decision, including:
Ability to pay. The borrower will likely have to prove extreme financial distress to be considered. Lenders will hold the homeowner to his obligation if he has the ability to make the mortgage payments or if a co-signer on the mortgage can be made to pay for the obligation.
Cost to foreclose. Lenders will compare costs to repossessing the home and marketing it for sale versus the cost associated with approving a short sale. Costs are high, often more than $40,000 per foreclosure. By negotiating a sale of the property with a buyer before the home goes to foreclosure, the lender can save significant costs.
Ask your tax professional
As a seller, you may qualify for income “forgiveness” on your tax return. President Bush signed into law a provision where loan amounts not repaid are not to be considered income and therefore are not taxed. Often times, the lender will mark the debt as satisfied after the short sale has closed, thereby somewhat preserving the seller’s credit rating. You should always seek professional tax advice before deciding if a short sale is a viable option for you.
Jodi Nearing is a realtor with Keller Williams Realty Professional Partners and is a certified negotiation expert.