We, as a country, have gotten better over the past few years at getting back to treating our personal finances like a business. We’ve made decisions for the betterment of our family based on needs, not wants, and we have strategically maneuvered ourselves through the most difficult financial crisis since the Great Depression of the 1930′s.
When you look at how businesses operate, you often wonder how (and why) they declare bankruptcy with such ease. It seems like a nonchalant statement on CNBC to hear of a company filing for bankruptcy protection. Many people, however, don’t have the cut throat business mindset in their personal life to file without the guilt of not fulfilling obligations they agreed to. Those that know me well know that I am one that believes in accountability, and never giving up – as a wrestling coach, it’s pretty much the only way I know. As a real estate broker, I see short sales as a necessity at times, in order for the mere survival of a family. This year, the decision to proceed with a short sale on your home should be in the forefront of your financial discussions, as waiting may bury your further, financially and emotionally.
The issue that’s presented before the American public today is that of the expiration of the Mortgage Forgiveness Debt Relief Act of 2007. What is the act all about? Basically, in many (most) situations, it will allow you to sell your home (with the bank’s approval) for less than you owe on it, and not be penalized by the IRS. This act is scheduled to expire at the end of 2012. What does this mean for those of you treading water financially? It means that should you proceed with a short sale on your home after this year (settlement occurring in 2013), the Internal Revenue Service can tax you on the amount of the loan you come up short!
New construction in Morgantown, PA is the epitome of the “Real Estate Bubble” that burst in 2008. I worked for a builder that had a stronghold on this area, and we built upwards of 200 homes in the Morgantown, PA area. One community alone currently has nearly 10% of the homes in the development actively pursuing a short sale. We are not talk $10,000 dollars (which I think we’d all agree is a significant sum in itself). I currently have a listing that is nearly $150,000 short. The expiration of this act, to put it simply, could require the sellers of the property to pay income tax on $150,000! Put that into perspective with the fact that less than 1% of all Americans gross six figures in income annually.
Now, how do you know if you qualify for a short sale? No one can really tell you for sure that you can sell your home for less than it’s worth; however, there are several factors that come into play. First and foremost, you have to demonstrate that you cannot make the sale whole. In other words, based on the example above, you can’t pursue a short sale with $150,000 sitting in your savings account. The bank will want that money. Secondly, you must demonstrate a hardship that is ongoing, seemingly never-ending. Examples of approved hardships are:
- Loss of Job
- Reduced Income
- Failed Business
- Job Relocation
- Death of Spouse or Co-Borrower
- Marital Separation
- Military Duty
- Medical Bills
- Damage to Property
In a short sale, it is also important to note that the seller is not permitted to walk with any proceeds from the sale – therefore, do not include items in the sale that aren’t necessary. Sell them on Craigslist, eBay, or in a yard sale.
Short Sales are a viable alternative to foreclosure. In the eyes of creditors, they acknowledge that you’ve done your best to meet your commitments, and you’re trying to work in their better (hard to say “best”) interest. In most cases, you’ll be able to purchase a home, with substantial down payment (20%), within 2 years of a short sale. With a foreclosure, you’ll be waiting a minimum of 3 years, and in most situations 7 years.
As a broker holding the SFR (Short Sale, Foreclosure Resource) designation from the National Association of Realtors, I am experienced in discussing and advising sellers on their options.
Please, contact me if you think you could be in this position.