Fort Meade Real Estate - The Reality of Short Sales

Short Sales are the latest real estate buzz words in the Fort Meade area.   I've come across a lot of consumers who have heard this term but don't really understand what it means.  The Maryland Association of Realtors has issued a Consumer Resource Guide for foreclosures and short sales that summarizes it pretty well.  Short sales may seem like a great solution for homeowners whose properties have lost value.  But they can be very complicated and require professional guidance.

A short sale can benefit both the lender and the buyer if done properly.

From the buyer's point of view
You own a home that you bought in 2005 for                                       $100,000
It's now 2008 and the current market value of your home is only           $  90,000
The cost to sell your home (commission, transfer taxes, etc.) is         $  10,000
So all you have to offfer the bank on your $100k mortgage is                $  80,000

From the lender's point of view
If the lender takes the house back they have no guarantee that it will be in saleable condition
They have no protection against further declining values (will it still be worth $90k?)
They have to pay legal fees to foreclose, turn on the utilities and insure the property
They need to hire an agent and pay customary commission fees
They have to pay the same closing costs and transfer taxes (in most cases)
They lose any monthly income on that loan for the duration they "own" it
They need to manage that asset until it is sold

The costs above could easily exceed the $20k you are asking them to forgive

So, they agree to a short sale.   What's next?

You have some additional restrictions on the handling of the sale.  Most can be handled by an experienced real estate agent.  The bank will need to approve the contract terms and the buyer's qualifications.  You and the bank will need to decide on how to handle the $20,000 shortage between what you promised to pay when they gave you the mortgage and what you paid them at the sale of the home.

The options on handling that loss include:
1.  The bank may forgive the debt completely and call it quits
2.  The bank may require you to sign an unsecured $20k note which you must continue to pay in full
3.  The bank may issue you a 1099 for the $20k in which case it counts as TAXABLE INCOME to you

If you are issued a 1099 from your bank for the shortfall in the mortgage pay off there could be serious tax implications.  Enter the Federal government and the Mortgage Forgiveness Debt Relief Act of 2007.   This temporary measure  went in to effect for debts cancelled by the lender (the amount of mortgage owed less the amount of funds accepted on the short sale) between 1/1/2007 and 12/31/2009.  As with all Federal goodies there are lots of strings attached to this one so read carefully!

The information above is a very brief overview of a very complicated process.  If you are considering a short sale or are facing foreclosure educate yourself by seeking out qualified Attorneys, financial advisors and if a sale is necessary a qualified Realtor with short sale expertise.

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