Short Sales – Who Really Benefits?

Since early 2008, the concept known as short selling has really taken off. As more financially strapped owners see how the process works, this trend will likely continue. But who really gains, and what are the risks? The blogs are filled with debated questions about tax repercussions, lawsuits and other scary consequences. Many debate whether to hire lawyers or count on accountants that specialize in this area. Before taking these leaps, consider what we do know and how the process works.

Banks Want These Deals to Happen…

Before requesting a short sale arrangement, you may want to consider a loan modification. It’s really when this option is not accepted by the bank that you should consider a short sale arrangement. The latter will create short-term damage to your credit score and potentially lead to income tax problems you did not expect. But many banks in Palm Beach are quite willing to entertain a short sale. They get some tax relief from the write-off and are typically compensated with mortgage insurance.

So how low will they go? Most mortgage companies will entertain short sale offers in cash for values up to the appraised market value conducted by the bank. Sound good? Well not if the property is in a high HOA situation. Or the unit is run down. But most seem to accept offers at this level. Surprisingly, second lien holders will settle for pennies as they too are anxious to collect write-off benefits. Dealing with the banks, however, could be quite a nightmare. As assigned negotiators are overworked with floods of inquiries, response time can be scary in light of the time limit placed by banks to consummate a short sale.

Risks Seem Manageable…

So far so good, but now comes the tricky tax issues. If the property is your place of residence, you should be okay. But if it represents an investment, the IRS will claim the debt cancellation as though it were revenue. Your back-up here is to demonstrate insolvency but showing negative net worth (i.e., your total assets are less than your total debt). This is where your accountant can help. In fact, some cases left short sellers with a surprise tax refund as the difference between the original purchase price and the short sell price qualified for a tax loss carry forward.

Regarding credit damage from a short sale, it is dramatically less than that incurred from an outright foreclosure. A number of blogs claimed the damage was minimal and lasted for two to three years. Some sources contend that damage may be less than credit card delinquencies due to the growing acceptance of short sale transactions.

Keep Your Realtor Involved…

Keeping your realtor involved throughout the short sale process is paramount. Their primary role is to ensure cooperation between the potential buyers, mortgage companies, secondary lending institutions, title companies and the seller. The latter is often overwhelmed with numerous pages of hardship evidence and financial related documentation.

Realtors experienced in short sales should get the seller prepared in advance so as not to allow an unfortunate time lapse. They are also better positioned to consult with the banks in light of their prior experience and rapport. In effect, they serve as an agent of negotiation that keeps emotions out of the equation.

But not all realtors have protected the interests of their sellers. Some lack the experience to expedite transactions. Others seem more motivated to protect their commissions often at the expense of losing a bank offer to settle.

A criterion to consider in selecting a realtor is the following:

1. How many transactions do they have under their belt?
2. Did all or most of them result in a payout with no or minimal loss to the seller?
3. Have they managed short sales with the seller’s primary and secondary lending institutions?
4. What was the average time spent from initial promotion to bank settlement?
5. Can they back their claims with testimonies of success?

The bottom line is that the team of supporters including realtors ( www.westpalmproperty.com ), accountants and perhaps legal counsel can make all the difference in a timely short sale closure and a lost opportunity.

Dr. Jim Barry is an experienced marketing professor specializing in South Florida professional services. He works closely with prominent realtors in the Palm Beach and Broward County areas.