Is a Short Sale a Good Choice for the Seller?
When a property owner must liquidate real estate due to financial setbacks or a job transfer out of the area, it may be difficult to sell the property for enough to pay off the mortgage on the home, especially if property values have dropped in the area. To avoid foreclosure, some property owners consider short sales. In a short sale, the lender agrees to accept an amount short of the balance due and release the property lien. While a short sale may be a less embarrassing solution for the seller than a foreclosure, it is not always the best choice.
Other People Are Reading
-
Benefits
-
When compared to a foreclosure property, a short sale tends to be less detrimental to the neighborhood. Foreclosures are typically vacant, while short sales are usually occupied and maintained properties. In some situations, the short sale is better financially for the lender. For the seller, the short sale requires more effort and time than the foreclosure. The seller, must go through a negation process with the lender, list the property, and negotiate with prospective buyers and the lender. Instead of just walking away from the property, as in a foreclosure, the seller is responsible for the condition of the property as it conveys to the new buyer.
Deficiency Judgments
-
When the lender agrees to a short sale, this does not necessarily mean it is agreeing to forgive the unpaid balance of the loan. Some states have laws protecting the seller from deficiency judgments, and some do not. Consult with an attorney before entering into a short sale. Secure in writing from the lender a promise to forgive the unpaid balance before proceeding with a short sale. State laws and the written agreements between the seller and lender will ultimately dictate the possibility of a deficiency judgment. A seller surprised with a deficiency judgment may find himself faced with the necessity to file bankruptcy.
-
Income Tax
-
When a lender agrees to forgive an unpaid loan amount, the Internal Revenue Service can view that forgiven amount as income. This makes the borrower responsible for additional income tax. Bankruptcy is one way to discharge debt and not be liable for taxes on unpaid loans. Under the federal Mortgage Debt Relief Act of 2007, the IRS offers some tax exemptions for short sales, but not in all instances. Depending on the type of property, the date of the short sale and the forgiven amount, the seller may be subject to income tax on all or a portion of the forgiven amount. Before entering into a short sale, consult with your accountant.
Credit Scores
-
Some sellers opt for short sales, assuming short sales are less detrimental to their credit scores. According to Experian, one of the major credit reporting agencies, if the lender reports the loan settled and not paid in full, it lowers credit scores. While some real estate gurus believe it is less damaging that foreclosure, others wonder if the amount of difference is significant considering the other negative factors associated with the transaction, such as possible deficiency judgments, tax implications and the seller's time and effort. Consult with an attorney and accountant and weigh these factors before proceeding with a short sale.
-
References
- Photo Credit House for sale image by Heng kong Chen from Fotolia.com
