Mortgage Short Sales

The economy is in a slump and foreclosures are at an all time high. Can short selling work for you?

Andrew Horowitz
4-minute read
Episode #72


Today on “Money Girl” I will be discussing a term that unfortunately, many of us will need to know…. mortgage short sales.

Having trouble making your mortgage payments or know someone who is? Close to foreclosure but hope to avoid it and looking for another way out?

Well, you are not alone. Today with the housing market plunge, a slowing economy, gas at $4 a gallon and massive job layoffs, many people are on the brink of losing their homes. Every day, hundreds of honest, hard working people who have always paid their bills on time and were living the American Dream decide to just pack up and walk away. The proof is in the pudding, as we know that foreclosures are at an all time high. And what’s worse is that in a year or two when the housing market begins to even out, those who foreclosed on their homes will be stuck with bad credit and unable to qualify for a loan to purchase a new home.

The Mortgage Short Sale Alternative

But, there may be a better alternative. It is what is now being termed the mortgage short sale. Basically, a short sale is when a financially distraught homeowner who still owes quite a bit of principal on their loan, agrees with their lender to sell the house for less than the balance of the loan outstanding. The proceeds from the sale are then used to repay the lender. The benefit is that the borrower gets to walk away and owes nothing more and the lender is satisfied because they would probably stand to lose more money if the house had gone to foreclosure status. Short sales are often a last ditch effort before an impending foreclosure. At that point, everything is happening quite rapidly and in effect the debt has been erased. A good deal …maybe…

Remember, the lender must agree to take the sale. You cannot just sell your home for less that the outstanding mortgage and make the lender accept less than is due to them. The short-sale transaction needs to be agreed to BEFORE the house is actually sold.

Now, be aware that there are times that the mortgage lender won’t accept the proposition of a short sale. If there is a co-signer on the loan that might be able to repay the balance, the lender may wish to attempt to have them repay before considering a short-sale. If the lender assesses the property and believes that it would be cheaper to repossess, repair and resell it -they may take that route. If the lender has too many other properties in default they may not feel they can afford to take a hit on that particular property. In these cases the property will likely be turned down for a short sale and then you will have to either find an outside buyer or if you cannot make the monthly payment, you will be in default and have the property foreclosed.

Mortgage Short Sales and Your Income Taxes

There is one important GOTCHA that you need to be aware of if considering the mortgage short-sale. The difference in the amount that was originally due to the amount that is actually paid back will be considered a gain for tax purposes. So, if you owe $200,000 on your mortgage and you short-sale for $100,000, you will receive a 1099 at the end of the year for $100,000 (the difference) which will be taxed as ordinary income. You effectively turned part of your debt due to the bank, to a tax due to the federal government.

Short Sales for Real Estate Investors

There are always two sides to any equation… So, on the opposite end and if you’re looking to invest in real estate, short sales may be right up your alley. They’re quick, you can get a property for below market value and many of these homes are in good condition. There are several ways to find out about short sale properties. You can look in the classified ads for “must sell,” “motivated seller,” and “vacant” postings. You can even consider driving around look for “For sale by owner” signs in the front yards. Sometimes there are signs posted along freeway onramps, near shopping centers and other areas that say “I buy houses” and a phone number. You can post these with your phone number in the areas you are looking to buy.

Down on their luck and distraught home owners will potentially call you for more information about what you’re willing to offer. Use any professional contacts you have such as mortgage brokers, accountants, insurance agents and attorneys. Lastly, you can offer a referral fee to your friends, family, neighbors, and any service people (gardener, handyman, pest control, plumber, etc.) but you never know who may have a successful leads.

The Final Word On Mortgage Short Sales

Short sales are creating opportunities for people to get out of financial hardship or take advantage of a weak market. Whatever your financial goals, a short sale is a possible option with a lot of benefits on either side.

In a later episode, Money Girl will compare foreclosures and bankruptcy, to see which option might be the lesser of two evils for anyone having a hard time making mortgage payments.

Cha-Ching …and that’s all for now. Courtesy of Andrew Horowitz, The Winning Investor, and your guest host of Money Girl’s Tips for a Richer Life. Thanks for tuning in to “Money Girl”. Pick up a copy of my book, The Disciplined Investor – Essential Strategies for Success, now available on audiobook at audible.com and on iTunes.

As always, everyone’s situation is different, so be sure to consult a tax or financial advisor before making important financial decisions. This podcast is for educational purposes only and is not intended to be a substitute for seeking personalized, professional advice.

Thanks for listening!

Mortgage Image courtesy of Shutterstock