September 23, 2017

Help Homeowners Facing Foreclosure: Part Three of Three

Short Sale SignIn my first post of this series we covered how foreclosure works, step by step, and defined some basic real estate terms related to distressed sales.

In the second post, we answered questions on preventing foreclosure, negotiating with a mortgage company, and what to do about an adjustable rate mortgage that will soon reset.

This post addresses questions on short sales and sifting through the confusing offers from Realtors and others who claim they want to help distressed homeowners. This  Primer for Distressed Homeowners sums up the series and is easily downloaded and printed for easy reference or to take to a qualified attorney during a bankruptcy counseling session.

Q: My home is on the market but is unlikely to sell for what I owe on it. Should I consider a short sale? My Realtor says she can help with that, which sounds cheaper than hiring an attorney.

Most people don’t understand the shortcomings of short sales:

  • There may be tax consequences to a short sale*
  • The lender may reserve the right to sue the borrower for any deficiency left after crediting the proceeds from the sale against the total liability arising from the mortgage
  • A short sale generally helps the bank, at a great cost to the borrower in terms of at least time and possibly expense (often, borrowers want legal and tax advice pertaining to a short sale, which is given on an hourly basis)
  • Because a short sale is one obvious symptom of financial problems, it is very rare that the mortgage(s) are the borrowers’ only financial concern.

People feel guilty that they can’t repay the debt, and want to help the bank; but the foreclosure process is actually usually shorter, simpler and cheaper to the bank than a short sale. People also want to do everything possible to avoid a bankruptcy, hoping that a short sale will solve their problems or buy them time, but many people in our offices completed a short sale and then file bankruptcy to deal with the credit card debt, car loans, etc. that still remain. People also think that a short sale is less damaging to their credit report than a bankruptcy, but again bankruptcy is often unavoidable even if a short sale is completed.

Some realtors are holding themselves out as foreclosure and short sale specialists, hoping they will get future business and a commission from the sale. Some Realtor firms are using language like “we can help you stop the foreclosure process” and this simply is not true.

Realtors are suffering for commissions and might be a way to replace commission income with fee income. They can call your mortgage company and save you the agony of directly speaking to your creditor. You’re free to spend your money like that, but if you’re in financial distress this seems to be an unnecessary expense for no more than it offers you. Moreover, as covered above, there are several potential problems for homeowners who enter into short sales.

Q: Is it true that I might incur taxable income if I enter a short sale with my mortgage company? You must be kidding!

Yes. This is an extremely complex area and I always tell my clients to consult their accountants regarding the tax implications of a short sale. This post covers a great deal, but a qualified attorney understands densely-worded contracts and are knowledgeable about options that lenders do not have incentive to disclose.

Q: Are mortgage companies telling untruths to get me to agree to a short sale?

I have seen many short sale agreements that specifically include provisions wherein the bank reserves the right to sue the borrower for the deficiency. If your short sale agreement isn’t properly structured you could end up being in no better shape with a short sale than with a foreclosure or in bankruptcy protection.

Q: I have an under-water mortgage (the mortgage balance exceeds the market value) and got a decent offer on the house, all things considered. Can I do a short sale and wash my hands of the excess owed?

As mentioned in an earlier question, the tax treatment of short sales is extremely complex. Believe it or not, some wealthy people call us complaining that they own two properties and wish to get rid of one with no financial consequences.

Hello, it doesn’t work that way. If you have non-exempt assets, those can be used to satisfy a deficiency and there’s nothing you can do about it, bankruptcy or no. A short sale will not help.

 

This post just scratches the surface of considerations for distressed homeowners. There are no one-size-fits-all solutions to this real estate meltdown and there are a frenzy of unscrupulous operators out there hyping so-called solutions that benefit only them.

Keep watching my site for further information on the ever-shifting mortgage landscape. I am available for a bankruptcy counseling session, which will clarify whether bankruptcy is a viable way to resolve your real estate dilemma.

* Unless you file for bankruptcy protection, any time you sell or surrender your home for less than the balance due on the mortgage(s) there may be a price to pay. That price is something called “debt forgiveness income,” and it is considered income for tax purposes. Those taxes are not immediately dischargeable in a bankruptcy (again a very complex issue).