There is speculation across the industry when it comes to the real effects of a short sale. The truth be told, there is no one right answer to the question, “What are the effects of a short sale.”
So, you say, “What are the effects of a short sale?”
Firstly, as a REALTOR it is my responsibility to understand as much about the legal implications as I can, but I can assure you that I am not an expert in legal issues, and I am not a CPA, so take what I write with a grain of salt and come to your own conclusion between your attorney and your tax advisor before making any extreme financial decisions relating to your real estate.
My job is to effectively market your home and successfully negotiate with the lender’s and/or lien holders on your property to work towards selling it in a timely manner to help you avoid foreclosure.
What are the effects of a Short Sale?
The list could go on, but basically, at the core, the first and most obvious effect of a short sale is that you’ll be selling your house for less than you owe, which leaves a deficiency. Your income taxes can be affected, the neighborhood values will be affected, etc., etc. For now, I’ll just answer some common personal questions regarding the results of a short sale.
What is a Deficiency?
That’s how much more you still owe the bank when you sell your home. For example, if you sell your home for $100,000 and you owe $150,000 then you have a $50,000 deficiency.
Can the Bank pursue that Deficiency?
Yes. The bank can do whatever they want. Whether or not they succeed will depend on the governing laws in your state. Be sure that you check with a qualified attorney to determine if the bank can successfully pursue a judgment against you. Contrary to what people have told you, this is not a black and white issue and each situation, each lender, and each transaction is unique.
Whether or not the bank can pursue a judgment against you involves many different factors. For example, if you borrowed against your home on a HELOC, you probably didn’t know that you personally guaranteed that loan. So, when you sell short, or when you walk away and foreclose, the bank will pursue you, and they’ll probably win. If, however, you took out cash to upgrade the kitchen, you may not have that liability on your hands. Again, it depends on each situation.
How does a Short Sale affect my credit?
I’ve heard so many responses to this question. The easiest answer is, negatively. Prior to selling your home short of what you owe, if you have kept up your payments on time, you will probably not have affected your credit score. If you think your score has been affected, please refer to AnnualCreditReport.com, where you can truly obtain your free credit report (unlike the misrepresented freecreditreport.com which I will not link to.)
How does a Foreclosure affect my credit?
Again, the easiest answer is, negatively. The difference between a short sale and a foreclosure is the verbiage that is used by the bank on your credit report. Each lender reports differently. Basically, on average, someone who has a foreclosure will expect to wait from 5 to 7 years before they will qualify for conventional financing under Fannie Mae guidelines. Someone who sells short will be more likely to qualify sooner than someone who forecloses.
How does a Short Sale benefit me vs. a Foreclosure?
When you have a deficiency, the bank will write it off as a loss. They do this with a 1099-C. On your end, a 1099-C is considered income. Depending on the nature of your financial situation (whether it was a HELOC, refinance, non-purchase money, etc.) it is possible that this deficiency will be recognized as income by the IRS when you file your taxes, and that you’ll owe income tax on it. If this is the case, whether you walked away or sold short, reducing the deficiency is the best way to go, because it means that you will have a smaller deficiency and therefore, less reported income, and thus, a lower tax bill. Some people are protected for a limited time under the Tax Relief Act of 2007. Please research this topic if it is of concern.
Why does credit matter?
In my opinion, credit is the financial worlds way of scoring how successfully you’ve carried debt, and we all trust the financial world, right? We know they’re working towards our best interest, right? Credit scores are pointless. In fact, someone with a zero credit score can just as easily obtain financing as someone with a stellar credit score. It’s the middle score that screws you. Besides, the only reason a credit score is of any value is to become slave to your lender. I personally don’t give a rip about my credit score. Does that mean I don’t follow through with my obligations? Absolutely not. It just means that I prefer not to borrow money, so a credit score holds no value for me, whatsoever.
Lenders who base their decision solely on a credit score are to be avoided. Find a good lender who will weigh your situation, look at all of the pieces of the puzzle, and make a lending decision based on that information. Not a blanket score.
So Why Should I Sell Short?
Maybe you shouldn’t. But, if you are considering foreclosure, at least afford the opportunity to your local REALTOR to feed his family instead of you feeding the IRS and the banks attorneys. We do work hard to get these deals done for you.
If you have any questions about the effects of a short sale on you and your property, please feel free to comment here or contact me directly so we can discuss your situation.