The Realities of Buying a Short Sale
There are still plenty of distressed homes on the market, and that means that you can get some great deals — if you know where to look. However, you need to be prepared for the realities of buying a distressed property, especially if you are looking to purchase a short sale.
What is a Short Sale?
A short sale is a real estate transaction in which the seller offers the home for less than he or she owes on the mortgage. The first thing you should realize is that the mortgage lender needs to approve the short sale before it can happen (and many lenders want you to have tried to sell the home for the price of the mortgage for at least three months before agreeing). In a short sale, the mortgage lender basically “forgives” the difference between the mortgage amount owed, and what the home is sold for. In some cases, though, mortgage lenders realize that they can still get more by agreeing to allow a short sale than going through the foreclosure process.
Realities of Short Sales — For Buyers
If you are looking for a good deal, a short sale may seem like a good option. Buying a distressed property can mean that you save quite a bit. However, you do have to be prepared for some realities. You will need to make sure that you are ready for the ups and downs of a short sale. You are likely to be drained emotionally, and of time. It is also a good idea to get a listing agent who is experienced with short sales. There are a lot of twists and turns, and it can be hard to navigate these on your own.
You should also be ready for the bank to back out on occasion. Additionally, it is possible that the seller decides (and qualifies for) a mortgage modification, changing the game. You could go through most of the process and be disappointed.
Paying Taxes on the Loan Forgiveness: Harsh Reality for Sellers
The biggest harsh reality of a short sale for sellers is that you will have to pay income tax on the amount of the loan forgiveness. If you do a short sale, the bank will forgive you the amount, and it will be seen as income by the IRS. So, if you owe $170,000 on your home, and you sell it for $150,000, you will see an “increase” in your income of $20,000. You will have to pay taxes on that amount — and it could bump you into the next tax bracket.
While a short sale can seem like a good solution, it is important to consider your options and think things through; short sales also come with unpleasant realities.
Image Source: nwirealtors.com
I have several friends who are involved in the home building business that had to short sell their over-sized homes that they could no longer afford when the housing market tanked. They're hurting really bad right now (and are the first to admit their mistake), renting, and looking to get back on their feet.
Miranda... interesting post. I just wrote something on the topic of short selling stocks, as it relates to the markets. Thanks for the food for thought.
Hey Miranda,
Great tips about short sales. We're in the process of buying a home right now and chose to avoid them altogether. But, there were some really good deals out there for anyone who is not in a hurry and doesn't mind the constant highs and lows.
Also, for sellers who have sold their home short through this year: The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence.
http://www.irs.gov/individuals/article/0,,id=179414,00.html
Which I'm sure will be a major relief to some. But time is running out...
[...] background-position: 50% 0px; background-color:#222222; background-repeat : no-repeat; } everythingfinanceblog.com – Today, 8:01 [...]