Pros & Cons of a Short Sale
Pros & Cons of a Short Sale
Well first – what the heck is a short sale?
Per WikiPedia:
In a short sale, the bank or mortgage lender agrees to discount a loan balance because of an economic or financial hardship on the part of the mortgagor. This negotiation is all done through communication with a bank’s loss mitigation or workout department. The home owner/debtor sells the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender, sometimes (but not always) in full satisfaction of the debt. In such instances, the lender would have the right to approve or disapprove of a proposed sale. Extenuating circumstances influence whether or not banks will discount a loan balance. These circumstances are usually related to the current real estate market and the borrower’s financial situation.
For realtors and family members. If a property can’t be sold the traditional way, the only option they know next is trying to sell it on a short sale. Doesn’t mean its your only option, but if its something your considering, here are some pros and cons of going the short sale route….
PRO’s
- If foreclosure is looming and you’ve exhausted all other options. Definitely a short sale is a better than a foreclosure. Per RealtyTrac, 2008 was a tough year for us. There were 861,664 foreclosures throughout this country. That’s a lot of properties and a lot of families affected by foreclosure. Foreclosure will have a huge impact on your credit score. Plus the lender takes a huge hit too. So both parties win when a short sale can be negotiated.
CON’s
- There is no guarantee that your lender will accept a short sale. You can put it on the market, try and sell it, not pay any payments while its going through the process and “hope” they say OK. If not, you’ll be that much closer to the foreclosure auction.
- If your sale does go through, it affects your entire neighborhood. You’re reduced price now sets the new market value for the neighborhood. If you have family in the neighborhood or own other property in the neighborhood, you’re setting a new “low” market price.
- You could end up owing the bank the difference. If you own any other kind of asset (the bank has access to your credit report you know) the bank can say “sure we’ll accept the short sale” and let’s say they take a $30,000 loss. They can simply sue you for that $30,000 short. Now in Texas, if you own a primary residence (let’s say you did the short sale on an investment property) they can’t force you to sell your homestead in order to pay for the judgement. They’d simply wait it out until you sold to collect their money.
- If they don’t sue you for the difference, they could 1099 you. Meaning they will report it to the IRS as income. Now if you were in serious financial trouble and can prove that to the IRS, then the IRS may waive that income. But what if you short sale in January 2010 and get back on your feet in 2010. When you file your taxes for 2010, you won’t be able to claim “poverty” to the IRS and you’ll end up increasing your taxable income. Depending on where you are on the income scale, you could lose benefits, pay a higher tax rate and all those other ugly little penalties the IRS imposes when you make more money.
When it’s the only way, a short sale is a good way to go. However you do have other options. I bought a house from Leigh & Levi. When I met them their house had been on the market vacant for 1 year. Their realtors (who were not making the vacant house payments for them) kept reducing the price. To a point where Leigh and Levi would have had to bring over $20,000 to the closing table to sell. It was at that point the realtor said “your only other option is a short sale or just let it go to foreclosure” they were seriously deciding on which way to go when they met me. I was able to help them get out from under that vacant house payment in 2 months. And they’ve had a great night sleep ever since.
So if someone is telling you “your only other option is a short sale or just let it go to foreclosure”, talk to me. Many times realtors and well meaning family members and simply telling you what they know. They are not buying and selling experts like we are here at Common Ground Properties. And we don’t charge anything for giving our opinion. We believe in giving back. We don’t have to buy every house and sometimes we can’t help. But at least after you’ve spoken with one of us, you’ll truly know all your options.
Wishing you all the best.
