What is a Short Sale vs. Foreclosure REO Sale
A short sale occurs when a mortgage servicer agrees to accept less than they are owed for an outstanding loan allowing the home owner to sell the home... vs... A foreclosure occurs when a mortgage servicer takes the property back through foreclosure evicting the current home owner in the process.
What Buyer's Should Know
This can be an excellent time to find a great value in a new home. Working with a real estate agent who is knowledgeable in both the buyer's side and the seller's side of a short sale is to your benefit. The mortgage servicer is not in the business of owning real estate and the cost involved with foreclosure is expected to be more costly than the loss of accepting a short sale on the home. A real estate agent will need to know how to prepare a BPO for the home (brokers price opinion) to determine the value the bank will be placing on the home.
What Seller's Should Know
The bank does not want to own your home, the bank wants you off the mortgage. A short sale is said to be an acceptable and reasonable solution when property owners owe the lender more than the property is worth. Borrowers should talk to their lenders as soon as possible. Don’t be afraid of lenders. The lender is in the lending business, not the real estate business. They do not want the property. They want to work with the borrower to ensure the loan is paid. Be aware that you do have to qualify for a short sale by providing to the bank a reason why you cannot keep up with your mortgage payments. Some examples are a rate increase due to an ARM, loss of job, medical, divorce and bankruptcy. If your situation fits this scenario please contact me for help in facilitating your short sale. At anytime during the process if you are able to negotiate a loan modification and keep your home I will cancel the listing and rejoice with you!
Are There Tax Consequenses for Seller
When I meet with sellers who are considering a short sale knowing the consequences of this decision. Back in December of 2007 a window of time was opened for distressed sellers to help eliminate some of the uncertainity - H.R. 3648 became Public Law on 12/20/2007 (This measure has not been amended since it was passed by the Senate on December 14, 2007. The summary of that version is repeated here.)
Mortgage Forgiveness Debt Relief Act of 2007 - Amends the Internal Revenue Code to exclude from gross income amounts attributable to a discharge, prior to January 1, 2010, of indebtedness incurred to acquire a principal residence. Limits to $2 million the excludable amount of such indebtedness. Reduces the basis of a principal residence by the amount of discharged indebtedness excluded from gross income. Disallows an exclusion for a discharge of indebtedness on account of services performed for the lender or any other factor not directly related to a decline in the value of the residence or to the financial condition of the taxpayer. Sets forth rules for determining the allowable amount of the exclusion for taxpayers with nonqualifying indebtedness and taxpayers who are insolvent.