Weighing the Potential Costs and Benefits of Short Selling Your House

In many cases, a short sale would be a beneficial option to homeowners suffering from too much debt. A short sale is the sale of a home where the bank agrees to allow the sale of the home without getting full payment of the debt on the home. A short sale can have some very large costs to the selling homeowner who usually needs to move because they cannot afford the costs of the home. Many homes in our community are selling for $100,000 to $300,000 less than the debt on the home. While the bank can agree to forgive the entire debt, it is crucial that people considering a short sale on their home consult with an attorney and review any paperwork and terms from the bank very carefully prior to signing anything. Though the bank can, and often will, agree to forgive the debt entirely, in some instances the bank will request the homeowners sign documents making them liable for the debt even after the home is sold. An attorney will help caution you how to avoid this circumstance.

For example a home that was purchased for $500,000 at the height of the market may have debt (mortgage) of $450,000 on the home and have a current sale price at $250,000. For the bank to agree to allow the home to sell for $250,000 they must accept about $200,000.00 less than what is owed. This action is considered a short sale. (This transaction could take place without being a short sale if the selling homeowner paid $200,000 to the bank.)

In the example above, the bank needs to decide what to do about the extra $200,000 owed on the house. The bank can ask the selling homeowners to sign a document that says they will pay the $200,000, the bank can insert language in the closing documents that says the selling homeowner still owes the debt, or the bank can forgive the debt. When there is more than one bank involved (first and second mortgages) each bank decides how to treat their own remaining debt. If the homeowner signs saying that they still owe the debt, then the bank can collect against them after the short sale. If the debt is forgiven there may be tax consequences (although there are many exceptions) as the $200,000 forgiven amount may be counted as ordinary income and taxed, resulting in a very high debt to the IRS.

One other cost to the homeowner may be time. Some homeowners truly cannot afford to pay any rent and need some additional time to get a job or make other arrangements to move. If a short sale is approved and closes quickly (yes this does happen sometimes) the homeowner may become homeless. There are programs to help people for a time to stay in their home, but if none of these programs work and the bank proceeds with a foreclosure, the homeowner will have at least 90 days before they need to move. In some cases the homeowner is able to stay in the home for much longer before they are required to move.

Finally, a short sale will lower a homeowner’s credit rating. In today’s economy, short sales are extremely common. Many people are struggling economically, and most people who are having to consider the option of a short sale have already let their credit score go, or are at the point that they can no longer hold onto a decent credit score.

A qualified attorney can offer guidance to a client to make sure the benefits outweigh the costs associated with a short sale. An attorney will review the legal language of closing document asses the true “costs” for your specific situation, and explain the alternatives to a short sale. If you have more questions, our firm offers 30 minute short sale consultations by telephone for only $100.00 (credit card required), or in-person short sale consultations for $250.00.

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