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March 05, 2007
The new exit strategy: A short sale
For all the homeowners who are upside down and can no longer make their mortgage payment (because of either a job loss, divorce, or an option ARM that's resetting higher), up to now the only option was, well, letting the bank foreclose. That's not a good option since a foreclosure sticks on your credit record for at least 10 years. But some experts are now advocating a "short sale." This is a case of a distinction with a difference: If your bank agrees to a short sale, you then hire an agent to find a buyer for the house, you sell the house for a loss, and with the bank's blessing, they agree to eat the loss (although they could still demand the homeowner make some kind of payment or share the loss).
That's the really short version of how it works. It was this article in the Tucson Citizen that caught my eye and made me aware of short selling. The Tucson Citizen article, in turn, provides links to a couple of other articles that discuss short selling, one on EHow.com and another on a real estate lawyers site.
The experts say you'll probably need to find a real estate agent willing to work for a smaller commission (which makes the bank a little more willing to absorb the loss), and you'll also need to scale back your own spending. Putting expensive jewelry on your credit card will make a bank less inclined to do you any favors on the sale of your home. And be prepared that if your bank does absorb the loss, the IRS might treat that as taxable income and you'll have to come up with the cash to cover the taxes.
Of course, the better option is to find some way to stay in the house--by first, seeing if the lender is willing to restructure the loan, or forgo a couple of monthly payments to help you get back on your feet. Apparently, more and more lenders are willing to make accommodations to avoid taking the property back. Banks hate to take over homes, especially in a declining market, so you shouldn't underestimate the willingness of a bank to make concessions.
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The IRS will treat this as income and tax you on it. Even if you can afford it, short sales and deeds in lieu of also stay on your record. Bankruptcy can clear the slate at least if no workout is possible.
Posted by: Lord at March 8, 2007 04:34 PM
It's interesting to hear your comments, about banks trying to recapture some of their home loans when markets are this weak, because I remember in Alberta in the 80's home forclosures were at an all time high, as house prices fell below morgage values. This resulted in what was refered to as a "Quick Claim". The banks let you walk from the margage and home, if you turned the home ownership over to the banks. This saved the banks the cost of recovery. There was literally pages every week in the newspaper announcing 2nd. morgage forclosures. I wonder if this is about to occur in America. A side note: when home owners find their single most important asset being devalued on a monthly basis, they tend not to be stock market bulls..ab
Posted by: River at March 9, 2007 12:40 PM
Do banks negotiate a reduced realtor fee for sale if that is too much for seller to pay given appropriate means test? If the realtor fee is the only cost issue for seller, will bank work out a deal to pay realtor commissions?
Posted by: Vince at March 29, 2007 01:52 PM
You're obviously quite experienced in general matters of finance (and undoubtedly able to teach me volumes), but I don't know what would lead you to think that short sales are new. I've been negotiating them for years. I don't know their history, but they definitely didn't just appear as an option.
Short sales have been a staple for investors for some time. (The following doesn't pertain to you, but) I'm surprised to see quite a bit of incomplete, or misleading information on short sales in the various media, given that they're straightforward and simple procedures (simple of course, doesn't imply easy). The worst thing about short sales isn't that they're complicated...it's that the buyer rarely has a chance to affect the decision-makers. We make the pitch, and no matter how reasonable it is, no matter how well we argue the merits of the offer, we wait for a response from someone we rarely get to speak to. Then the lender sometimes drops the deal in midstream, to sell to someone else. We can talk until we're blue in the face, but we almost never get to keep a relationship with the people in charge. Good people skills are important, but at some point, the door usually shuts on you, as the decision-making process goes to a closed room with anonymous number-crunchers. That's why the success rate in short sales is 50% 0r less, even when the offers are fair. But, as I'm sure you and many people suspect, the short sale process would seem likely to get a bit more expedient and user-friendly, as bank-owned inventories rise, available lending capital dries up, and the regulatory agencies loom over all these lenders who are going upside-down.
Posted by: Alex Ben-Kori at May 5, 2007 03:52 AM
I negotiate short sales since 1991. It is the best solution for the lender and the borrower in any case which the value is upsite down. It is the best chance for the borrower to save somehow his credit and rebuild it later. For the lender it means cash now vs. long after. Also, if lender forecloses on the property and not willing to work out a solution than it is a very common knowledge that they will net way less once they take back the property.
Posted by: eli tene at May 13, 2007 12:00 AM