Short Sale FAQ’s

What’s a short sale?
A short sale is the sale of a property when the sales price is less than the amount owed. In order to satisfy the loan obligation additional money has to be brought to the closing to pay off the loan, or the bank has to agree to accept less than the loan amount. If the transaction is handled skillfully, in most cases the bank will accept the lesser amount. If the bank doesn’t agree to the short payoff and loan payments are not made they will be forced to foreclose on the property. It costs the bank much more to foreclose on a property than accept the short payoff. Banks are not in the property management and ownership business and they ultimately have to sell the property themselves, often for less than the short sale amount. While the short sale is a loss for them, it is a better option than foreclosure.

How can we help?
We’ll outline all your options and help you assess if a short sale is right for you. Our tools will accurately run financial scenarios to help you figure out the best choice for you and your family. We bring to the table the skills and experience to maximize your chances of completing a successful short sale.

How do we do a short sale at no cost to you?
Most real estate brokers shy away from short sale transactions because they take up so many resources and might never result in any income. We invest our time, money, and efforts into marketing your property, arranging the sale, and negotiating with the bank to accept the short sale on your terms. There are absolutely no upfront costs to you and you always get final approval… no exceptions. In all my negotiations the lender pays all costs including our commission. We only get paid if your short sale is approved. You will pay nothing throughout the process or at closing.

Can the bank force a borrower to pay for the loss?
Theoretically a bank can do a judicial foreclosure and get a deficiency judgment, but that is more expensive for the bank and their chance of recovering additional money is slim. Typically banks only do this if an investor is strategically walking away from certain properties and keeping equity in others.

What happens to the credit rating of property owner?
An unavoidable consequence of a short sale is that it will negatively impact a borrower’s credit. It is important to recognize that a foreclosure will have a much worse impact on credit scores. One of the key benefits to an owner in doing a short sale is that their credit will recover much sooner.

What are the tax consequences of a short sale?
During a short sale or foreclosure there is often “forgiven debt”, which can be a taxable event very much like income. If you owe the amount of the original purchase you may be exempt from these taxes under the ““Mortgage Forgiveness Debt Relief Act”. Also there may be relief from tax consequences if the owner is insolvent right before the debt is forgiven. Insolvency is when all assets are less than all debts.

For information on debt forgiveness from the IRS website:
http://www.irs.gov/irs/article/0,,id=179073,00.html
http://www.irs.gov/publications/p4681/ch01.html#d0e665 – see ““exclusions” and “insolvency”.

For information on debt forgiveness from the Franchise Tax Board:
http://www.ftb.ca.gov/aboutFTB/newsroom/Mortgage_Debt_Relief_Law.shtml
http://www.ftb.ca.gov/professionals/taxnews/2007/1007/1007_3.shtml

Talk with a CPA or tax attorney to consider options and get tax advice.

There are many nuances to the short sale process. Always work with an experienced short sale Realtor as it will dramatically increase your chances of successfully completing the transaction.

Disclosure: This is not intended to be tax or legal advice. Always contact your lawyer or CPA for advice on these matters.

If you’re considering a short sale contact me today for quality expert advice.

 

Home Price Increases Expected to Slow

Rapid home price growth across California has called for concerns of yet another housing “bubble” on the horizon. According to the latest C.A.R. data, median price of sold homes jumped almost 32 percent over the last year. While CAR’s median home price measure is affected by the mix of sales, other indicators which measure home price changes on the same home show similar increases. The Case-Shiller Index, for example, showed a 25 percent home price increase from the year before in the Los Angeles metropolitan area in April. The San Francisco metropolitan area had a 30 percent increase, while San Diego showed a 21 percent increase.

An increase in prices itself does not equate to a bubble. During the last boom, price appreciation was fueled by sub-prime loans that were packaged as mortgage-backed securities and increases in construction activity which was not supported by demographics. Current price appreciation is driven by the lack of available inventory of homes for sale (see Figure 1). The depletion of inventory is the result of several factors. First, distressed property (foreclosures, short sales, REOs) inventory was absorbed by investors who intend to keep the properties instead of flipping them. Second, there has been an influx of international buyers in the U.S. housing market, and particularly in the California markets. Thirdly, construction activity in California came to a halt following the housing bust. And lastly, nearly one in five homeowners in California is still underwater on their home mortgages.

Going forward however, the pace of house price gains is expected to slow. There are several reasons to expect a slowdown in price growth. If prices continue rising at 12 percent year over year, housing will be overvalued relative to rents within the next few months and relative to incomes in early-2015. In addition to increases in mortgage rates, which have been rising, mortgage servicing costs will rise by two to three percent of income each year. Further, with increased prices and tight inventory, investors are having a harder time finding bargains. With fewer discounts available, investors are seeing their yields disappear. Demand from traditional buyers will need some time to replace investors which will take a little of the steam out of the market. Also, sellers are starting to return to the market and putting their homes up for sale in greater numbers. Price boosts have elevated some previously underwater homeowners and allowed them to gain back a portion of their equity. The inventory of homes available for sale increased about 2 percent between April and May, and has shown increases since the beginning of this year. Also based on the sharp increase in the share of consumers who think that now is a good time to sell, further increases in inventory are underway. Tight inventory has been a key driver of home price increases, but as the balance of supply and demand inches closer to equilibrium, price gains will slow and we expect home price appreciation to flatten to about a four percent annual increase in 2014.