Short sales are very popular right now. In fact, they account for about 1/4
th
of all home sales occurring right now. A short sale can be a good way to buy a house at below market prices but it is not for the impatient or faint of heart (
www.buybelowmarket.com). In case you aren't sure what a short sale is – it is where the owner of
a home sells their home for less than they owe the bank and convinces the bank
to accept that payment to release their lien against the house.
The difference between what the seller owes and the amount
the bank is paid is called a deficiency.
Traditionally, the bank has a couple of things it can do with that
deficiency.
- They can go to court and get a deficiency
judgment against the seller. This
judgment will allow them to attach to other assets the seller has to try to get
their money at a later date.
- They can forgive the deficiency. When they do this, they issue a 1099 to the
home seller. George W. Bush signed legislation which waived the tax
implications to home sellers (not investors) who got a 1099 on a short
sale. Before that, the IRS would then come
after the home seller for taxes on the amount of the deficiency as though they
had received the deficiency in cash.
- They can write it off and eat the loss without
issuing a 1099. This doesn’t happen often and may be illegal.
The legislation that George W. Bush signed in 2007 (the Mortgage Debt Relief Act) was
extended through 2012. It is now about
to expire and although there is support for extending it, there are no
guarantees when common sense meets politics. The law was extended in 2010 but is due to expire at the end of the year unless Congress acts to steer away from the so-called “fiscal cliff.” Separate bills have been introduced in the House and Senate to extend the mortgage relief tax break for another year. The measure would cost about $1.3 billion in uncollected taxes.
Expiration
of the tax treatment would create a major new headache for the one in four
homeowners who owe more than their house is worth. Those "underwater"
sellers would have to come up with a big check for Uncle Sam to pay the tax on
the difference. That “would be a blow to the housing recovery,” said Paul
Diggle, a housing economist at Capital Economics. “The increased use of short
sales, rather than foreclosures, has become an important support to the
recovery.”
Bank
of America Wednesday reported that some 62,000 borrowers have completed short
sales that saved them $7.4 billion in debt, or an average of about $120,000
each.
The
law is credited with helping pull the housing industry out of the worst
recession in nearly a century. Though still deeply depressed, sales of both new
and existing homes have been steadily rising. Home prices appear to have
bottomed out and are rising again in many parts of the country.
Restoring
the tax on debt forgiveness could throw cold water on one in four home sales by
sticking the seller with a large tax bill. “If (homeowners) decide that a short
sale is not the best option, and they just allow (the mortgage) to be foreclosed,
that has a more negative impact on the neighborhood and on home values,” said
Blomquist. That would be bad news for lenders, too.
The
average price of a bank-owned property seized in foreclosure is about $30,000
lower than comparable house transferred in a short sale. Banks also avoid the
legal costs of seizing a home and the extended cost of maintaining it. “(A
short sale) really does work out to both the borrower’s and lender’s benefit in
most cases,” said Michael Fratantoni, a research analyst at the Mortgage
Bankers Association.
As an investor, although I recognize the value of short
sales, I stay away from them. As I mentioned, they are not for anyone who needs to buy a house right now and wants to get a bargain. I have a
connection to a service that will handle short sales for me, but short sales
take a long time and most end up failing.
All too often the bank forecloses even while the short sale is being negotiated. In some cases, they have rejected a short
sale offer only to foreclose and sell the house for less than the short sale
offer.
When working with a potential seller who is underwater on
their mortgage, I will always educate them on the short sale option (along with
other options), although I seldom offer to buy their house on a short sale. In most of those cases, I would rather wait
until the foreclosure happens and all the junior liens are wiped out and the
bank is facing the additional costs of holding the property in the face of a
less than favorable market.
If you know anyone who is looking to buy a house at below market prices, encourage them to go to
www.BuyBelowMarket.com. The Gold Seal Homes Group (
www.theGoldSealHomesGroup.com) buyers are constantly working the Charlotte market (including Mecklenburg, Cabarrus and Rowan counties) and buying houses at below market prices. They make sure the houses have clear title and are in good condition and then sell them at a discount to people who want to own their own homes. In some cases, they can even arrange for seller-financing or rent-to-own programs for those who cannot get a bank loan right now.
If you are wanting to invest in real estate, please contact me at Charlotte Wealth Partners (Tom@CharlotteWealthPartners.com) and I will help you. If you don't know what to do, I can guide you. If you are already familiar with the risks of real estate investing, I can connect you with people who can provide you with a variety of real estate investment opportunities, ranging from totally passive, risk-managed investments, through turn-key rentals and right up to your own fix-and-flip opportunities.
Tom Sheppard is the author of "Fire Yourself: Get the Job You Want" available from XLibris Press.
Tom has been successfully investing in real estate since 2001 while working part time. In 2008 he left a six-figure job as an enterprise project manager with a major national bank to manage his real estate business full-time. His goal is to help 100,000 people find peace of mind by finding quality, affordable homes.
He is currently looking to expand his network of funding partners who are helping him achieve this goal. If you would like to know more about how you can Do Well By Doing Good (TM), go to www.CharlotteWealthPartners.com
