Benefits and draw backs of a short sale.
Hi and welcome to day two of the free test drive of the Short Sale Your Home and Get Paid to do it home study course. Hi I’m Andy Morris and today I want to go over the question: Is a short sale right for you? Today will be a little shorter than yesterday, and I’m not going over so many options. I’m just going to cover pluses and minuses of doing a short sale.
The benefits of a short sale are the following:
- Short sale benefit #1- Credit good faith- You show good faith when you apply for credit in the future. When a potential creditor looks back and sees that that you did a short sale they can see that you took proactive action to get out of a common situation. Although the FICO score is proprietary, evidence shows that in general a short sale will be similar to a 90 day late as to the affect it has on your your credit immediately. It will typically lower your score by 150 points and it will dip down and slowly dissipate in the following months as opposed to say 250 points that would be the typical credit score drop down if your home is actually repossessed. If your home is reposessed not only will your score typically drop more but that notation will typically effect your score negatively for a longer period of time.
- Short sale benefit #2- Future mortgages- Underwriter rules are changing to overwhelmingly favor the person who does a short sale as a opposed to have their house foreclose. When you go to apply for a loan in the future, for instance, Fannie Mae has now made a rule that an otherwise qualified borrower can not get a mortgage with them if he or she has lost his or her home to foreclosure in the last 5 years. However if if a prospective borrower did a short sale he or she will only have to wait 2 years. Fannie Mae is probably the biggest lender in the country, or the biggest mortgage holder in the country.
- Short sale benefit #3- Avoid a defficiency judgement- Also as far as a short sale goes, you have the opportunity to negotiate and avoid a deficiency collection. This gives you the opportunity when you do a short sale to be able to talk with the lender about the outcome of that deficiency judgment that could come against you. Typically you can get that forgiven and move on free of mortgage debt. However if you let it go to foreclosure you don’t have that same negotiation opportunity and why would a lender even want to work with you after you let it go. They may as well come after you for the difference or keep it on your credit.
- Short sale benefit #4- Save your dignity- Doing a short sale is a dignified way to sell your house. It’s much more dignified than just letting it be sold at the auction steps in a public way that is publicly advertised… so it’s a much better way to go.
- Short sale benefit #5- Benefit financially- If you use my method for short selling your house there is a potential to get paid for your efforts in several different ways and possibly get some of your unsecured debt paid off as well. The drawbacks of a short sale are the following because I don’t want to just tell you a positive of doing a short sale so you buy my course.
The following are potential short sale drawbacks:
- Short sale drawback #1- Hard work and lots of follow up- I want you to understand that there’s a lot of hard work and intense follow up to do a short sale.
- Short sale drawback #2- Your credit may still suck- Just because you do a short sale your credit is not necessarily going to be hunky dory and immediately jump back to that pre-foreclosure, “I can go any amount of money for any thing I want at any time I want” credit score. If you missed payments those missed payments are going to be on your credit report unless you can somehow negotiate that out which you may be able to if you ask for it. My Short Sale Your Home and Get Paid home study course includes a section on this. Typically you’re still going to have a hit on your credit from doing a short sale.
- Short sale drawback #3- May not work in your situation- There will be times when because of your requirements a short sale simply will not work for you. It could be that you don’t have enough time to do a short sale and we’ll talk about time frames in the next two video lessons. It could be that for whatever reason a short sale does not end up working for you.
- Short sale drawback #4- Tax consequences- Also something to consider is that any time that there’s a forgiven debt or written off debt that a bank is required to report that to the IRS just as if you had made that money as income. They would report it in a 1099, and this could happen with a short sale deficiency or even if it ends up being a deficiency after it goes to foreclosure. The tax consequences in a foreclosure situation should always be discussed with a knowledgeable advisor and there are many ways to get around this and so you should discuss it with a knowledgeable tax advisor. Just recently in 2007 congress did pass a law that allows you not to have to claim this as income. This law applies to people who actually lived in their home before it was foreclosed or sold on a short sale. If you are insolvent or filed a chapter 7 bankruptcy typically that would allow you not to have to pay taxes on from the forgiven debt as well. Depending on your tax basis and the actual numbers you may be able to write off the loss from selling your house against the 1099 income from debt forgiveness as well. There are other ways to not have to pay taxes on forgiven debt so I can’t emphasize enough the need to work with a competent accountant.
- Another drawback is that you have to disclose to a buyer that this is a short sale for they make an offer, so you won’t be able to completely hide that this is in foreclosure. You probably have gotten a bunch of letters anyways from people if it’s actually gone to the point of foreclosure. So it won’t be completely private anyways. A short sale is something that you can do in a dignified way to get your home sold have the least negative effects.
A bonus benefit to short sales that I didn’t mention is that you can combine a short sale with a lease option, so you can sell a house to somebody and have them lease option it back to you. Now you want to make sure that your letter of acceptance given to you by your bank to do a short sale doesn’t specifically say that you can’t do a lease option back. FHA loans for example have provision that says you can’t sell your house on a short sale to any friend or family member or person with whom you have an outside arrangement with.
I worked with client who was referred to me by a loan officer. She owed $145,000 on a house, which was probably worth $105,000 at the time. I was able to negotiate the price all the way down to $85,000 and her husband was actually going to purchase it. However, she ended up backing out of the transaction at the last second because the lender offered her a loan modification plan that was more certain to her than her husband’s new FHA loan that he was getting. It’s to bad she didn’t complete the transaction because the household debt would have been lowered by over $60,000. Instead she chose to continue making payments on the $140,000 which is admirable.
Your homework question today is to consider the following: Based on these benefits and drawbacks is a short sale something you should pursue?
Please leave your questions and comments regarding this transcript and or video content below and I will do my best to answer or reply! Thanks:)
