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Short Sales Set Sail
Again
by
Broderick Perkins
The last
time this rickety life boat set sail to bail out home
owners, crashing waves of failed tech companies had left
home owners submerged in a sea of mortgage debt and
those flimsy unemployment paychecks just couldn't keep
them afloat.
This time
around, sink-or-swim mortgages are taking on water,
forcing home owners to jump ship before the swell of
adjustable mortgage rates crash dreams into rocky reefs
stripped bare by receding rates of appreciation.
The short
sale is churning through choppy waters in the housing
market again and while the motion of the ocean has
changed the risk remains the same.
Grabbing
hold of a short sale to save your home is a lot like
taking on Moby Dick -- it could be your salvation or it
could really take you under.
A short
sale occurs when a lender agrees to write off the
portion of a mortgage that is higher than the value of
your home (an "upside down" mortgage), provided a buyer
is willing to purchase the property.
For
example, your mortgage and all pay off costs are
$500,000, but your home, should you attempt to sell it
will only bring in $450,000.
Some home
owners are taking a hard look at short sales because,
well, their mortgages have capsized.
This time
around upended mortgages are the result of a variety of
factors from risky, high-leverage, little- or
nothing-down mortgages that don't begin with any equity
to interest-only or optional-payment mortgages that
don't build cash equity as well as appreciation that
balks, or a combination of all of the above.
The short
sale strategy can sometimes ease you into dry dock
better than a bankruptcy or foreclosure, but only if you
survive the trip to shore.
A short
sale is a difficult consumer real estate transaction to
approve and involves as much, if not more paperwork than
an original mortgage application.
That's
because, instead of proving your credit worthiness and
financial stability, you must prove you are broke. You
must be without cash flow, including savings,
investments, trusts, liquid retirement funds or other
finances to tap.
Ironically,
while you are proving insolvency you also may reveal the
dark under side of your original application. Insolvency
today could be rooted in financial trouble that began
before you purchased your home -- trouble you didn't
reveal to your lender who could now consider your tight
lip fraud from the past.
That might
attract the attention of federal authorities who've been
cracking down on mortgage fraud, a federal crime
punishable by up to 30 years in a federal pen or up to
$1 million in fines -- or both.
According
to the FBI's "Financial Crimes
Report To The Public Fiscal Year 2006," 20
percent of today's mortgage fraud stems from a home
buyer lying about income, debt or other information in
order to buy a home.
Much of
the remaining 80 percent of mortgage fraud also involves
deceit, deception and misinformation, according to the
FBI.
In
addition to reopening your application, the short sale
will look at other liens against the home.
Property
encumbered by a second mortgage will likely kill a short
sale deal, because the second lender typically won't
remove its lien and risk losing its investment position.
A private mortgage insurance holder will also want to
protect its interests.
Second
mortgages and mortgage insurance were instrumental in
helping home buyers obtain buoyancy during the housing
market's boom years of fast appreciation and sinking
affordability.
And
there's more.
Before you
can even approach the lender you typically must have a
firm market-value offer from a qualified buyer and a
broker who can negotiate the deal. Or you'll have to
negotiate the lender into accepting the deal.
And when
you can least afford it, you'll need a squad of
professionals -- an attorney to negotiate what the
lender will report to the credit agency and other
issues; a real estate agent to get comparable sales
information; perhaps an appraiser to cinch the value;
and a tax professional.
The deal
isn't over until the tax collector sings.
The
difference between your home's value and the balance on
your mortgage is considered a forgiveness of debt and
unless you work out a deal with the lender to repay the
difference over time, the amount will be considered
taxable income.
Miami real
estate agent Izzy Buholzer who offers a seven-step short sale process,
says it's imperative to get qualified real estate, tax
and accounting professionals in your court for the
process.
"If a
property is sold under a short sale, the lender may
require the buyer to make up the difference, either
through a personal obligation or a collection," says
Buholzer.
He warns
that "the IRS often gets involved with short sales,"
because they are seen as a relief of debt and may be
treated as income.
"Check
with your accountant," he concludes.
Published:
April 9, 2007
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