Short Sale – Is it for me?
In the past year or so, short selling has become a more manageable process. Government, banks, consumer advocacy groups and other forces have made it easier for people to sell a home when it is worth less than what is owed. Laws regarding how a seller is taxed by the IRS and the recourse banks have against these sellers have seemed to loosen up. Even FHA, Fannie Mae and Freddie Mac have recently made moves to address lending to those who have gone through a short sale.
So how do you know when it is right for you?
Only after careful consideration and review of all of the possible consequences for going through with a short sale can one decide.
Step 1 – Plan
Carefully evaluate your current situation. Do you have a legitimate circumstance or hardship that makes it difficult or impossible to continue to make payments and are things unraveling around the house? Would selling the house to reduce your monthly payments help you to live more comfortably and re-position you and your family for home ownership again in the future? Then you may want to consider a short sale.
Before you even get close to pulling the trigger, it’s time to do some homework. Short selling has its consequences and only after evaluating all of its consequences should one consider moving forward. There are six people you need to call (CPA, Tax Attorney, Mortgage Lender, Credit Expert, Realtor and Negotiator).
CPA – Call your CPA to help you understand how you will be treated by the IRS in the event you short sell your home. When you sell it for less than what you owe, the government considers it unearned income and thus a taxable event. With several new laws, chances are you may be forgiven. Always ask a specialist, a certified public accountant.
Tax Attorney – The next call is to a Tax and or Real Estate attorney who can help determine if a lender has a right to come after you for the difference between what you agreed to pay back and what they receive in the sale. This is commonly referred to as a deficiency judgment and the way the loan documents were written, it stated that the bank could obtain a judgment against you and come after you in the future to recap their loss if you fail to pay the debt back. Several new laws have sided with the consumer eliminating their right, but call an attorney just to be safe.
Mortgage Broker – The third call is to a mortgage lender. None of us have a crystal ball but knowing what it means to your ability to obtain a new home loan in the future or a car loan, is also something to consider. How does a lender treat a short sale now when applying for a new home loan? Is a short sale on the record better than a foreclosure?
Credit Specialist – Next, contact a credit specialist. It may be a good idea to know what the damage may be to your credit and how long it is likely to weigh your ability to obtain future credit. A short sale may result in a triple digit drop in your credit scores. Don’t go into this with blinders on, because the reality is that it could force you to rent longer than you plan to.
Negotiator – While a great Realtor can help you manage the complex process of short selling your home, and even better one will refer you to a full-time negotiator to help process your short sale. I can promise you that very few Realtors can successfully practice Real Estate and negotiate with the banks at the same time. There are simply too many moving parts. The best part about it is it costs you nothing!
Allow the negotiator to qualify you and build the hardship package that goes into the lender. You will need to provide bank statements, income documentation and a hardship letter to explain why you cannot continue the payments. A good negotiator will help you understand what the banks are looking for in a hardship package and how to get them to say yes.
Realtor – Working with the negotiator, a great Realtor can help you with pricing the home low enough to generate an offer, but high enough to get the bank to say yes, and keeps the flow of communication between all parties to keep the deal together. Remember, the legal responsibilities of the seller in a short sale are no different when it comes to disclosure, so you can’t overlook that and go with someone who does not know how to protect you. Protect yourself by working with an agent who has experience!