Short Sales More Hope Than Reality
I've had a lot of failed real estate investors come to me seeking asset protection planning, way too late of course, but one of their own plans/hopes is to do what is known as a "short sale".
With a "short sale", the borrower finds a buyer who is willing to pay something for the property even though it is less that the amount owed on the loan. The borrower goes to the bank and seeks the bank's approval, since the bank will lose its collateral. The theory goes that the bank should always accept the short sale because at least then it will get something rather than the borrower just going into default.
The problem with short sales is that (1) by and large the banks are not cooperating very well, and (2) even when the banks do approve a short sale, they usually take so long to do it that the buyer loses interest and just buys some other property (and usually a better property, cheaper, via foreclosure).
There are three other problems with short sales.
First, even if the bank approves the short sale it may (and usually will) reserve its right to chase the borrower for the deficiency.
Second, a short sale will leave a very nasty credit mark that will not come off for seven years.
Third, if the bank forgives the difference, the borrower is liable for the taxes between the original amount of the loan and the short sale price. This means that the following April 15 may be very unpleasant.
But, again, the biggest problem with short sales is that they simply aren't getting done! The banks are dragging their feet, and after a few weeks the buyers simply throw up their hands and take their money to the nearest foreclosure auction, where plenty of prime properties now abound.
So if your hope is in a short sale, it could be more hope than reality. A few short sales are being completed, but not nearly enough for a distressed borrower to count on.
For information on the taxation of short sales, click here
Labels: asset protection, borrower, buyer, default, foreclosure, lender, short sale
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1 Comments:
Good post on Short Sale pitfalls but point #3 regarding the taxation of the amount of cancelled debt is only partially true.
Under The Mortgage Forgiveness Debt Relief Act of 2007, up to $2 million of the cancelled debt on a principal mortgage is now tax free. The new law does not apply to investment property.
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