What Every Homeowner Needs to Know Before Doing a Short Sale

There are many things to consider when facing the possibility of foreclosure and deciding to short sale your property. Time and space to not allow me to get into every aspect of these transactions and all the possible nuances that might need to be dealt with, but I will do my best to cover, what I feel, are the most costly to over look.

First let me say that I DO think short sales are great and do a lot of good for people who know they are their best option. I do these for people everyday and I’ve seen people’s lives get A LOT better afterward so the purpose of this article is NOT to paint short sale in a bad light, but rather to inform you of the whole picture some people in my industry WON’T tell you. Lets get to the point…

You NEED to know whether a short sale is your best option:

First off, you need to know whether doing a short sale is right for YOUR situation. Don’t listen to what your barber or uncle Frank tells you about what worked for so and so. You NEED to asses the situation YOU’RE in and make that decision. So how do you do that?

Start by realizing that for the most part short sales help people the most if they CAN’T make their mortgage payments anymore due to a long term hardship. Long term doesn’t mean 20 years or anything, but at least 9 months. For instance getting injured and losing employment for an extended period of time, illness, divorce, etc are reasons most lenders will be ready to approve as a hardship.

Next understand that there are other options if you want to keep your home to consider first. Loan modifications, forbearance agreements, loan reinstatements are all options if the hardship is short term and you can then afford the home again. These should be first on the list if keeping your home is your goal. Don’t let someone tell you the short sale is your ONLY option when you want to keep the home and only have a short term hardship.

You NEED to know about the possible tax consequences after the short sale is completed:

Secondly, you need to sit down with your CPA or tax advisor to discuss possible tax liability for any amount the bank writes off after the short sale. This could be considered a “taxable event” for you and you’ll hopefully be issued a 1099-C from the lender (more on that later) for the amount of the loss.

This means you could have a HUGE tax bill depending on the loss. In December 2007 President Bush passed the Mortgage Debt Forgiveness Relief Act of 2007 which protected certain homeowners from having to pay tax as a result of a short sale so thats where speaking to a knowledgeable tax professional can help you understand your possible liability.

Realistically, the tax bill you get will be small potatoes compared to what the bank would get if they tried to come after you for the whole amount of the loss. Remember you would probably be paying your tax bracket on the 1099 NOT the whole balance so it would be a smaller amount if you were stuck paying the tax.

That brings me to the most important thing to know…

You NEED to understand the terms of the short sale approval letter:

This is KEY and I mean numero uno when it comes to short sales. You need to know HOW the lender is dealing with the loss they are taking and any further liability on your part. This is where you need someone that knows what their doing and that you can trust to be honest with you.

Like I mentioned above regarding the tax consequences, the bank is taking a large loss and will usually do one of 3 things. They will (1) Give you a 1099-C for the loss and take a tax write off for themselves (2) They will reserve the right to seek a “deficiency judgement” against you and come after you for the total balance lost or (3) Ask you to take back a promissory note for some of the balance.

The worst situation is having them reserve the right to get a deficiency judgement against you and have at least 10 years to collect (in FL this is the timeline). These lenders will go so far as having wages garnished, repo your vehicles, seizing assets in bank accounts, or whatever else they are legally able to do. This is your worst nightmare in my opinion.

So how do you avoid this? READ THE SHORT SALE APPROVAL LETTER. If you have a trusted lawyer let them read it too. Understand what it says and make a decision with ALL the facts. Also BEWARE of real estate agents who just want to get paid and tell you NOT to worry about what it says or this its a “standard” approval letter. It may be standard for your lender, but you still need to be aware of the liability you face.

I hope this will help you understand a little more about these transactions and allow you to make a decision that is best for YOU…

Dustin Miller is a Realtor who specializes in helping homeowners avoid foreclosure by doing short sales. He works in the Coral Springs / Coconut Creek, FL area as a Short Sale Realtor and resident. If you have any questions regarding your specific situation visit his site for his contact info and feel free to contact him anytime.

His site can be found at Coral Springs Short Sale Realtor or at Coconut Creek Short Sale Realtor.