The role of short sales in a tough housing market
The term "short sale" has virtually become a household word in the last couple of years as home values decrease and countless homeowners face financial difficulties. But, what does the term "short sale" really mean and why is it important to us all – whether we are facing financial difficulties or not?
The Short Sale Addendum to the Arizona Purchase Contract, developed by the Arizona Association of REALTORS states: “The term ‘short sale’ is used to describe a sale in a situation where there is more debt owing against the property than the property’s value.” In other words, the property is "underwater."
It has been widely reported that Tucson has seen a rising number of foreclosure filings – with even more expected in the future. Nearly all Tucson neighborhoods have seen an increase in foreclosures and properties being sold as short sales, and in some areas of the local market, short sales comprise as much as 40 percent of the total housing inventory. Therefore, all inventory may be impacted – even inventory that is not distressed.
It’s important to understand who the players are in a short sale real estate transaction:
First, the primary players are the homeowner and the mortgage company(s), often referred to as the loan ‘servicer’ or lender. The homeowner must talk with the loan servicer about their situation and will be expected to explain and provide documentation of financial distress. Ultimately, the goal of the mortgage company is to keep the homeowner in the home. A short sale is typically the last resort. (Ignoring phone calls or mail from the lender will leave them little choice but to proceed with foreclosure action.)
Once the foreclosure process has started, it becomes more difficult to work out a possible solution with the lender. If the process has advanced to the “Notice of Trustee’s Sale” stage, the amount of time to market the property for sale is reduced making it a challenge to obtain as close to fair market value for the property as possible, particularly in areas of the Tucson market where properties are moving slower. Loan servicers are working on behalf of investors and are expected to negotiate the highest possible sales price for the property.
The second key player in a short sale is the tax professional and/or financial advisor. A short sale where a portion of the debt is "forgiven" is considered relief of debt and may be treated as income for tax purposes. When debt is forgiven, the creditor must submit a Form 1099 to the IRS. It’s important to discuss with a tax professional what the potential tax consequences are and to make sure the tax professional is up to date on current tax law. The Mortgage Forgiveness Debt Relief Act of 2007 provides relief for some homeowners; for more information visit www.irs.gov
When involved in the foreclosure process, is also important for the homeowner to confer with an attorney who can explain Arizona law related to the release of liens or mortgage debt and counsel the homeowner on any potential legal issues. Some government programs currently being offered to homeowners facing foreclosure do not allow the lender to pursue any deficiency balance; however, not all homeowners will qualify for these programs. To find out about eligibility for free or low cost legal assistance, visit www.pimacountybar.org or call (520) 623-4625.
Finally, it is important to work with a real estate professional. Calling a REALTOR® sooner rather than later is imperative whether the goal is to keep the house or sell it. Should it be necessary to proceed with a short sale, the lender will require the property to be listed with a licensed REALTOR®.
When deciding which real estate agent to list the property with, ask what education, training and experience they have listing and closing short sales, which are often very complex transactions. Processes and requirements are routinely changing and it is important for the homeowner to work with an agent who has up to date information. An experienced short sale agent is constantly adapting to various bank policy changes and stays current on the various programs available to distressed homeowners. This will often make a difference in getting the property sold through a short sale as opposed to a foreclosure .
In the next article: Once all other options have been exhausted, is a short sale is the right thing to do? We’ll explore how to get the process started and what programs may or may not work in a given case.
This article was written and submitted by the Long Realty Short Sale Resource Group. For more information, please visit www.LongRealty.com/ShortSales.