Do You Need to Do a Short Sale?
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It is very important to know if a short sale is the best answer for your situation. A short sale becomes a viable option when you cannot get what you are owed on the property because of changes in the market. You may be thinking why would the lender allow a short sale and why would the seller want to do a short sale? Both answers to those questions depend on the market and economics. Why economics, you say?
Well, let’s examine. If the homeowner has a mortgage and the pays off of the mortgage is $100,000, but in the present condition of the home; the home is only worth $87,900. The homeowner still owes $12,100, true enough; however, if the homeowner allows the home to go into foreclosure, then they stand to lose more. Why? One reason is it will take 7 to 10 years to recover credit wise and/or financially from the credit damage of a foreclosure. Another reason for the homeowner to consider a short sale over a foreclosure is the homeowner may not have a deficiency judgment or if they do have a deficiency judgment it will be less than what they would have if they allowed the home to go into foreclosure. Still yet another reason to avoid foreclosure is the homeowner keeps their integrity and avoids the embarrassment of the public sale. The best reason of all to avoid the foreclosure is the smaller tax liability on the homeowner. With the latter statement being made the homeowner needs to consult a tax advisor about the tax liability if any from the short sale or foreclosure. And remember, that if you are insolvent file form 982 with the IRS.
In the above scenario, we discuss the homeowner has a deficiency of only $12,100 instead of $100,000 making a short sale a viable option for their situation.
Let’s examine what would happen if the property went into foreclosure. First, let’s examine the cost for the lender. Once again, the home is worth $100,000, but the mortgage this time is $110,000. It will take nine months to foreclose and resale a home. There is a minimum cost in legal fees of $1,500, lost of interest to the lender of $4,500, not to mention the lost of taxes, insurance, maintenance, utilities of the property in the amount of $3,000, then the additional cost of the commission and closing costs of the sale nine months later of $8,000 for a total loss to the lender of $27,000. The latter cost is call holding cost. This cost is the amount that the lender has to pay out before it receives anything on the sale of the home after the foreclosure.
As you can see for the lender and homeowner a short sale is a better option.
During a short sale, the lender for the same home in the previous scenario gets a win scenario instead of a lose scenario. Let’s examine. The lender lists the home with an agent for $100,000 and sells the home for the same amount. After commission and closing the lender is left with a gain of $92,000 to satisfy the mortgage whereas under a foreclosure they have nothing to satisfy the mortgage for nine months, and the lender has additional holding cost of $27,000. The lender has another advantage by allowing the short sale they get their money sooner, and they only discount the mortgage by $18,000. The homeowner once again wins as well because they can buy another home in as little as two years whereas with the foreclosure they will not be able to do anything for seven to ten years.
Originally posted 2008-11-30 08:01:08. Republished by Blog Post Promoter
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