If you’re a regular reader of this column, you’ve read about short sales and the short sale process here before. Mostly, though, it’s been from the perspective of a potential buyer. I get a lot of questions from homeowners who are considering short selling their own home but know very little about the process. This isn’t surprising, as there’s a lot to know, and it’s not something most people want to think about everyday.
This week I thought I’d bring in a short sale specialist who can help answer some of the more common questions sellers have about the process. Ian Rhodes and Robert Rodriguez are short sale specialists who have been involved in over 150 short sale transactions since 2007.
First, explain a little bit about how a short sale works.
A short sale occurs when the market value of a property is less than the outstanding balance on the mortgage. The lender (or lenders) agree to accept less than what is owed on the property in order to avoid a possible foreclosure situation.
The thing to remember is, lenders are in the business of lending money. They don’t want to be in the business of owning and managing real estate. Whether the lender chooses to go through with a foreclosure or agrees to a short sale, they are taking a loss either way—but in most cases they lose less in a short sale than they would if they foreclosed on the owner.
Ian, let’s say a seller owes more on their home than it’s worth. Can they still sell their home? Is a short sale always the best solution?
Well, the first thing I’d say is, you’re not alone. However, there’s not really a one-size-fits-all solution, so it’s important to get to the truth of exactly what your options are and how each will affect you. Who you choose to work with matters most. While a short sale may be your best option, it’s important to talk to professionals to see if there are other viable options.
What criteria does a homeowner have to meet to qualify?
It depends. In order to be eligible for short sale and have us represent you, we have to be able to prove to the lender that you are experiencing a financial hardship. A hardship situation is one that may be the result of some extenuating circumstance that forces the borrower into a position where they will or can no longer afford their mortgage payments.
Should a homeowner stop making payments if they hope to short sell?
Not always. Just because you called your particular lender and they told you that you couldn’t do a short sale unless you miss some payments, it may not be true. Every borrower’s situation is different, and a short sale may be done while staying current on payments. We’ve closed many short sales successfully where the borrower never missed a payment, but again, every situation with every lender is different.
How long does a short sale usually take, start to finish?
That depends on a lot of different factors, like who the lender is, how long it takes to get an offer, how many loans there are on the property, whether you’re behind on your payments—the list goes on. With an agent who hasn’t done short sales before, it can take as long as six to eight months. We have a system and contacts with each lender, though, so we average about a two to three-month turnaround for approval. We’ve done it in as little as nine business days, but that’s definitely not the case for everyone. Every scenario is different.
Talk a little bit about the tax consequences of a short sale, especially as opposed to foreclosure.
Well, again, every situation is different, so I always stress that people consult with a tax professional, CPA or tax attorney—someone who is qualified to make this determination for you. When you do a short sale or a foreclosure, the lender is allowed to write off the loss and pass it on to you as income in the form of a 1099-C. The IRS considers this taxable income for you. For example, let’s say you borrowed $200,000 to purchase a home, but only were able to repay $150,000 in the short sale. You’ll receive a 1099-C for that $50,000 and will possibly be taxed on that according to your tax bracket.
Now, the Home Mortgage Forgiveness Debt Relief Act of 2007 states that if the property is your primary residence and the debt discharged was from your original purchase money loan, then you will not have to pay taxes on that amount. Also, if you did a refinance and used the money only to improve your home, then you may be eligible for exclusion of the taxes as well. This act has been extended until the end of 2012.
Does every Realtor do short sales? Do you recommend an “area specialist” for the job?
Obviously, who you work with matters most in any real estate transaction, but especially in a short sale situation. We have in-depth experience, knowledge and a proven track record while understanding the emotional and financial complexities of a short sale. That’s why most of our clients come to us. The challenge many overlook is having an effective Realtor who can market and service the property in finding a qualified, patient buyer to close the short sale.
If you’re considering a short sale or want more information, contact Ian Rhodes at (310) 623-1312 or Robert Rodriguez at (310) 623-1317.
Jefferson Hendrick is an L.A.-based Realtor with Keller Williams. Contact him with questions, concerns and real estate inquiries at [email protected] or facebook.com/jeffersonhendrickrealtor.