May. 1, 2007 - Short Sale, It's Never A Good Idea

Just because something exists does not mean it is a good thing.  Take the short sale for instance.  The short sale in real estate is something that happens when you have to sell your house but you owe more on it than you can actually sell it for.  Believe it or not that is happening a lot right now.

It's happening because of all of those tricky mortgages that were out there a few years ago.  You know, the boom times, back when it was a sellers market and houses were flying off the market as fast as you could list them.  Those were the good old days for some people, but for others it turned out to be the worst time of their lives.  For the "well qualified buyer" (as the auto industry refers to those who can get the good deal) things turned out not so bad.  For those that needed to get into the market with gimmic loans and took on mortgages with teaser rates or interest only payments in order to buy more house than they could normally afford they might just as well have been the end times.

Any way, for some people things are getting mighty tight.  ARMs (adjustable rate mortgages) have been adjusting up, the interest only period on the interest only loans are over and market values are not sky rocketing any more.  They are having a hard time making ends meet and some are even finding themselves having to make late payments, which is only making their situations worse.  They come to the realization that selling the house might just be their best option.  They even decide to go FSBO because if they can save the commission they will probably be better off.

Enter Swifty.  Swifty may or may not possess a license to practice real estate but one thing he definitely does not possess is a heart.  He probably has taken a Carlton Sheets course, or the equivelant, and he is going to come at you like he is your friend.  "I can help you out of this mess" he says.  "I have money.  I don't have enough to actually pay off your whole debt, but let me talk to the people at the bank and see if I can't get them to accept a short sale, I've done this before and I know how it works.  No more worries for you friend, you'll be out from under your mortgage payments and I might even be able to rent you the house at a price you can afford, you won't even have to move".

Old Swifty is not your friend.  Swifty is not telling you that even though the bank will be willing to give him your house at his price they still might want you to pay them the balance you owe them.  He also hasn't mentioned that even if the bank does forgive you the balance of your debt, the Internal Revenue Service is going to look at that as income and you are going to owe them their pound of flesh and believe me, if you come late with them you will not believe the interest and penalties that they are allowed to tack on.  And that's not to mention that they can just take your pay check one fine day if they get tired of waiting for you to pay them.

The moral of this story is that you should try and avoid the short sale, and people who tell it that it's a good solution, at all costs.  If the burden is getting heavy, talk to somebody who has more to talk about than a short sale.  In fact, don't wait until the you can no longer carry the load, when you can see the writing is on the wall, look for a solution right away.  Don't wait until you have to desperately try to FSBO and bump into Swifty.

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May. 2, 2007 - re: Short Sale, It's Never A Good Idea

May. 2, 2007 - re: Short Sale, It's Never A Good Idea

Of course, Matt.  Working for a firm that deals in short sales you would have to believe in them or you couldn't do your job.  "Swifty" would agree they are good, too.  He believes in them or he couldn't do his job either.  You might have convinced me better, but you blinked.  Allow me to quote you, "a Short Sale is a very good idea for ALMOST all parties involved".

Now to quote myself with the whole point of my posting "don't wait until you can no longer carry the load, when you see the writing is on the wall, look for a solution right away".

Anyway, thanks for dropping by and giving us your opinion Matt.  I would encourage anyone who has read this far to click on Matt's link and see what he has to offer.

Jul. 10, 2007 - re: Short Sale, It's Never A Good Idea

Gene is correct that you may very well owe tax on the forgiven debt.  He is also correct that even though the lender may allow the short sale to go through, they may try to collect on you.  But this is one of the things that can be negotiated at the time of the sale.

Despite these problems for the seller this is usually the best option.  I know these things because I am in this situation Gene has described.  I bought way more house than I could afford and I have spent the last  1 1/2 yrs figuring out what to do about it.

If a payment plan can't be worked out the normal options are: Short sale, deed-in-lieu (lender will usually only offer this, after you've put the place on the market, and foreclosure.  So basically if you don't attempt a short sale, you are left with foreclosure which is even worse for your borrowing future.  Also by not cooperating with the lender, you are less likely to have them forgive the debt.

In regard to the tax liability, there are only 2 ways to avoid it, have the 2nd mortgage holder (or the one who may be forgiving the debt take the house back).  In this case there is no forgiven debt because they got the house.  Its an equal exchange in the eyes of the IRS.   The 2nd option is Chapter 7 bankruptcy.

The problem with these options (as in my case) the 2nd mortgage does not want to take back the house.  It makes no sense for them in many cases.  Also if you have other assets than your house, then you will probably not want to go thru Chapter 7 bankrupctcy and lose those assets.

So if this is the case, a short sale is your best option. 

While Gene is right to point out problems with short sales and investors facilitating them for you, they are often the best option. 

Jul. 10, 2007 - re: Short Sale, It's Never A Good Idea

Dec. 31, 2007 - RE: Short Sale, It's Never A Good Idea

Aug. 21, 2008 - RE: Short Sale, It's Never A Good Idea

I'm kind of in that situation.  I have an ARM and have 2 years left.  I'm in the process of trying to see what our lendor is going to do with the new bill Bush passed.  They are participating, I do know that much, but not sure to what extent.

I haven't missed or been late on a payment, but i'm just very strapped.  I've been doing this with my husband unemployed and receiving unemployment.  I don't want to wait until 2 years, when I know that the market is not going to be anywhere what I need it to be.  I've kind of gotten an estimate on what my house is worth, but naturally thats not the going rate in our area, because of short sales, and foreclosures.  I'm not really sure what to do, I've been pretty stressed out lately.  The only thing I can do is wait until the middle of September to see how things pan out with our lendor.  My husband is very confident that they will reduce it and forget about it.  I DON"T THINK SO.  We owe 344,000 and based on what I see we are about 50-60 in the whole.