What is a short sale? – When an owner owes more on the property than what the property is currently worth, the bank (who holds the loan) may agree to allow the seller to “short-sale.” Note: “Short sale agreements do not necessarily release borrowers from their obligations to repay any deficiencies of the loans, unless specifically agreed to between the parties.” (1)
“In 2007, Congress sought a way to provide tax relief for struggling taxpayers. A record number of homeowners turned to short sales to avoid foreclosure. Congress amended the tax code by passing the Mortgage Forgiveness Debt Relief Act. Under the new rules, debts forgiven between 2007 and 2012 are excluded from federal income tax requirements under certain conditions. First, the home must be the seller’s principal residence. Second, the mortgage loan must have been used to buy, build or make substantial improvements to the home. If sellers meet those requirements, they are excluded from paying tax on the forgiven debt. According to the “Los Angeles Times,” California passed legislation that waived short sale income tax requirements for approximately 34,000 California taxpayers. The new law is effective for 2009 through 2012. California’s law provides an exclusion for the first $800,000 of debt relief for single taxpayers and couples who file joint returns. The limit is $400,000 for couples who file separate returns.” (2)
Short sales can be tricky for a number of reasons. Smart listing agents will hire a Negotiator to handle the transaction. The Negotiator’s job is basically to sit on the phone with banks all day and try to negotiate a price they will accept for a property. Most short-sale listings are NOT APPROVED. This means that the bank has NOT agreed to a price. The listing agent will generally list a short sale based on ‘comps’- which are comparable properties that are on the market, pending sale, or have sold within the last 90 days generally within 1/4 mile radius. Sometimes a listing agent will list the property below market value to try to generate buzz and multiple offers. The bank however, may require an offer much higher than what is listed.
What does this mean for you? Just because you see a great deal on a property, you still need to be educated by your agent as to that particular market (area) in order to make a competitive offer to avoid being beaten out by other offers. Generally – not always – the bank will require the “highest and best” offer be submitted. Cash offers are very competitive in this market, especially for price points under $400k (in the LA Area) and generally always beat out the offers with financing. (I’ll discuss this more in my next segment on REOs).
SHORT-SALE BUMMERS! – Short-sales can take MONTHS to close. You might even be waiting months for an answer or counter on your offer. Generally sellers who are short-selling their property have not been making payments on their mortgage and therefore are at risk of going to auction. Some short-sales can only be postponed for a certain amount of time before the listing agent loses control and the bank feels they will fare better at auction. If you are working with a listing agent who isn’t prepared, educated or working with a negotiator, the chances of the property going to auction is very high. When this happens, all parties lose and you’re back to square one!
Another common problem you may run into with the purchase of a short-sale, are back HOA Dues (Homeowner Association Dues). This usually applies to condos and other gated communities. If a seller is not paying their mortgage, the chances are high they are not paying their HOA dues either. If you are lucky enough to be working with a decent lien holder, the bank may agree to pay a portion of these back dues to get this property sold and off their books. Most of the time though, they won’t and this now becomes the buyer’s responsibility. This amount could be anywhere from a few thousand dollars to tens of thousands of dollars and because of this, you will end up paying more than you ever intended for the property or being forced to back out of the deal.
One other common problem people will face when dealing with short-sales: Multiple liens or judgments. I warn you to stay away from short-sale listing that have a first and second loan or have judgments against them. Examples would be a HELOC (Home Equity Line of Credit), credit-card judgment, or any other type of liability in which the property was used as collateral to secure a loan. These almost NEVER go though. One bank alone is hard to negotiate with- nonetheless 2 or more.
One last thing: Most short sales are sold “As Is” meaning the seller will make no repairs or warranties to the property. Unlike most standard sales where after inspections you can ask for credit or certain things to be repaired – on short sales 99% of the time, you are unable to do this. It’s sort of a ‘buy at your own risk’ type deal. So watch out for this.
These are not the only problems you will run into – just the most common. I get buyers constantly saying “We want a deal!” deals are out there and they are to be had, but they are few and far between if you don’t have the cash to purchase. Most buyers don’t realize all the setbacks and complications that come along with a short sale.
After mentioning all the negatives I have to say, successful short sales are possible! If you have the time to invest in a property and are not in a hurry to buy, short sales offer a great option!
If you would like more information or have any other questions, feel free to contact me at 310.956.9385 or email me personally at BrittanySellsLA@gmail.com.