By Anerio Altman
I personally hate short sales…But they are here, they are an important consideration in today’s real estate market, and we have to talk about them.
I would prefer not to, but it has to happen.
A Short Sale occurs when the value of a house has declined so that it is no longer worth more than the value of the secured liens (mortgages) against the property. In that special magical moment, the borrower, by way of an agent (usually), finds a buyer and approaches the lender about accepting less than the full value of their lien. The entire process is somewhat reminiscent of the scene in The Wizard of Oz when Dorothy approaches the Wizard for the first time in the Emerald City and scares the heebie jeebies out of the Lion. In much the same way, the lenders particularly enjoy it if the approaching supplicant throws themselves out of a window after speaking to them about the topic.
Wells Fargo Customer Service Line
However in 2013, the line of folk who have come down the Yellow Brick Road to see the lender for permission for a short sale stretches down the hall, around the corner and out the door; Lenders have, (amazingly), started to get a handle on processing short sales such that their initial bluster and equivocation has been devolved down to a bewildered muttering.
If the lender, in their blind idiot-god munificence, approves less than the full amount of the sale, the short sale is now possible. The lender lets the buyer and seller know how low they will allow their loan to become debased. THEN it comes down to the efforts of usually some truly heroic processors willing to take on the saturnine tasks of getting everything together for the sale itself. And, to give a shout out, the only people I recommend for short sale processing are the folk at Short Sale Solutions.
That’s not what they look like, but they are that cool.
As I am not involved in any processes described so far, that isn’t the part I hate.
The part I hate is the decision my client has to make.
Lenders prefer short sales over foreclosure. Because lenders generally make the rules as to how easy or difficult it will be to buy a home in the future, you want to take actions that will at least put you in a position to purchase a property again following any period of great travail. To that end, lenders prefer you short sale a property rather than let it go to foreclosure. (They greet this opportunity much the same way one agrees to amputation over death so you understand how welcome these choices are to them.)
If my client is already out of the property, then they should short sell. Hands down, without question, at that point they should short sell. That one is easy. That rarely happens.
What happens more often is that my client is still living in the property. When they ask about whether they should short sell, this brings up a number of topics with me:
First, “Okay Then Where Are You Going to Live”?: About 30% of the time this question has never occurred to the borrowers. Call me crazy, I don’t think you should go homeless now in order to buy a house five years from now. Finding a rental is NOT guaranteed in today’s market. While you will probably find something, since you are probably not paying the mortgage anyway, why don’t you find a place to move to first BEFORE you move out of the property? Generally I tell my clients not to short sell unless they have someplace to go afterward.
Second, “If You Are On Welfare, Don’t Worry About Buying Another House.”: A short sale is better for you if you want to buy a house within the next five years only because the lenders currently say it is, and this is their game and their rules. However, if the likelihood you will acquire a new house within the next five years is between slim and none, then this is hardly a motivating factor; The effect of a foreclosure, and the effect of a short sale, on your credit score is pretty much the same if you won’t be able to buy a property for the next 5 years anyway; It’s moot.
And remember…there is this thing you have to deal with called a downpayment. Remember those? Back in the old days, the meth addict like days of the real estate boom of 2002, no one had to pay that. We’re all in withdrawal now and those days are done. Downpayments exist. That downpayment is usually equal to 20% of the loan. So in California, where the home price is around $400,000.00, the downpayment would be $80,000.00. Do you HAVE $80,000? Is that something you see in the future? Even if you aren’t paying a full downpayment and can take advantage of any number of programs that allow a lesser downpayment, say 3% down, that is about $20,000.00. Do you have $20,000.00? Do you know when you will?
So don’t get too hyped up about buying another home in the next five years unless you really think you’ll buy a home again within the next five years. And ask someone NOT INVOLVED IN THE SHORT SALE TRANSACTION whether that is a viable scenario because people who have money on the line because…well, sometimes their opinions get distorted.
Third “My Realtor Says it Is A Good Idea”: Maybe they are right. Maybe they are telling the truth. Or….maybe they want that $5K to $30K they’ll get in commission so bad they’ll choke a puppy if they need to to make that sale happen. Real Estate Folk become particularly myopic concerning whether a real estate sale should happen. Not all real estate folk are bad folk…but I’ve filed Bankruptcy for enough Real Estate professionals to know that many of them are on the financial edge too so their opinion may be a tad biased. Get a second opinion.
Fourth “I’ll Lose My Tax Incentive If I Don’t File This Year (2013)”: That part is true IF you have a recourse second that could otherwise come after you AND YOU ARE OTHERWISE SOLVENT. The appropriate laws relieving an individual of the taxes incurred through the forgiveness of debt were extended through 2013. However that only matters if you are solvent, i.e. can pay all of your debts when they come do, when the Debt Cancellation occurs. If you are broke or underwater in your debts when this happens, then there are not going to be tax issues with your forgiven second. I am but a novice on tax issues so for tax advice from a true tax professional give these people a call: Steve Olmsted at Olmsted and Associates. Ask for Steve and tell him you read that he was awesome on my website. Really. It will be funny.