Short sales are not typical sales by any stretch of the imagination. In a short sale, the seller asks the bank to allow a sale even though they owe more on the mortgage than the property is worth. Accordingly, the seller is not permitted to take any proceeds from a short sale. In a “normal” sale, sellers have a vested interest in getting the highest price for their home. A higher offer means a bigger net for the seller.
In a short sale situation, sellers tend to be more concerned with relieving their financial pressure by finishing the short sale, rather than obtaining the highest possible offer. Indeed, since some banks take 2 -4 months to process a short sale, just getting to the finish line with any interested buyer is quite an accomplishment. However, short sale sellers should still be concerned with obtaining the highest price for their property for the following reasons:
1. The bank may not accept a low offer. Presenting a low offer may delay the short sale’s completion, If you submit too low of an offer to the bank for consideration, they may simply reject that offer, close the file and require you to start the process all over again with a new offer. That may mean beginning a 3 month process all over again. Or, if you are close to the auction date, they may choose to simply foreclose. The bank will order a broker price opinion and/or an appraisal to determine the market value of the property, they will not simply accept the offer you submit. So, it is important that the offer represent the market price for the property.
2. You could be responsible for the deficiency. The deficiency amount is the difference between the amount owed on the mortgage(s) and the amount that lender received in the short sale. So, if $500,000 is owed on the property and only $250,000 can be obtained in a sale, the deficiency amount would be $250,000 plus the transaction costs of selling, including commissions. Sellers should keep in mind that not every bank will forgive the deficiency with a short sale. Indeed, some will explicitly reserve the right to pursue the deficiency amount, leaving the short sale seller to negotiate a settlement with the bank, or in some cases with a collection agency. The bigger the deficiency, the more you will owe and the higher the settlement amount will probably be.
3. Tax debt forgiveness is limited. You may be responsbile for taxes on the amount of the loan that was forgiven. Under the Mortgage Forgiveness Debt Relief Act of 2007, federal tax forgiveness is limited to $250,000 for one person (or $500,000 for married joint filers). Deficiency amounts exceeding those limitations would be subject to federal tax. In addition, if the home you are short selling is not your personal residence, you may be subject tax on the entire deficiency (or forgiven amount). The larger the deficiency, the more tax liability you may have.
I specialize in helping people buy and sell short sale properties. If you are considering a short sale of your property, please feel fee to give me a call at (805) 878-9879 and set up an appointment for a consultation.
Tni LeBlanc, JD, M.A., e-PRO
Broker/Owner, Mint Properties
(805) 878-9879, tni@MintProp.com
* Those considering a short sale are advised to consult with their own attorney for legal advice, and their tax professional for tax advice prior to entering into a short sale listing agreement — this blog does not offer legal and tax advice.