Realtor states that about 2% to 3% of all home sales in many parts of the country are distressed sales, which include short sales and REO (foreclosure) sales.
According to short sales lawyer Timothy M. Pletter, short sales are necessary when a homeowner wants to sell his or her home but owes more than it is worth.
You should follow both the state and federal rules when making short deals. Part of that is sticking to mortgage agreements and getting approval from lenders. Still, debt forgiveness, tax issues, and junior lienholders’ rights can all complicate matters.
It’s important to understand the laws to keep the sales aboveboard. This can steer you away from trouble in the future. What you need is guidance from a real estate lawyer who knows the ropes and can help you stay on track to avoid nasty surprises.
Here are some legal problems that can show up during short sales.
Understanding Short Sale Agreements
When you consider conducting a short sale, it is highly important to be conversant with an agreement.
The document should clearly state the obligations and rights of both parties. You need to make sure that the agreement addresses the liens and specify how those are to be discharged.
Familiarize yourself with the language. This can greatly help you avoid surprises later on. Ask questions for security and knowledge. Just bear in mind that the purchase is both a community and financial decision.
Negotiating With Lenders
When doing negotiations, get all needed documents, from your financial records to offers from buyers wafting by in potential purchasing deals. Those papers are what will carry and serve your case before the trustee.
Be honest about your situation; a lender might be more impressed by how much you appealed to them. Start by establishing good communication and taking steps to voice all your concerns.
Remember, you are not the only homeowner experiencing these difficulties. Getting along with the lender will work in your favor. Be patient and persistent: sway and rub your way through the situation. Be agile and straightforward.
Negotiation involves a series of exchanges before reaching a resolution, but if you remain persistent, you will swiftly sense the right outcome.
Potential Tax Implications
When you would sell the property at a lesser price than what was yet to be owed, the IRS unlikely would view that difference as taxable income. Such an event could turn an already tough situation concerning your finances into a tax penalty.
There are exceptions whereby the Mortgage Forgiveness Debt Relief Act protects you from taxes on the discounted amount, but you might need to check. A tax professional will help you make sense and understand the tax implications so that you will not be hit by surprise tax bills.
Dealing With Deficiency Judgments
Though a short sale can be a solution for an underwater mortgage, it also opens the possibility for a deficiency judgment to be passed. This happens when the sale price falls short of the mortgage outstanding. If the lender goes after a judgment, the homeowner may still end up paying the extra amounts after the sale is over.
Negotiation is an imperative part of making decisions for a short sale. Homeowners have the option to waive the deficiency in the short sale agreement. You can discuss these options with the lender to make matters clear.
Impact on Credit Scores
An important aspect of choosing a short sale is the fact that it can smash your credit rating. Not as harmful as facing foreclosure due to any amount of damage that already occurred, though.
Still, a short sale casts a shadow on your credit report. There will be around a 50- to 150-point dip in your credit score, depending on where it once stood. This can prevent you from securing loans or favorable interest rates in the future, leading to a bit of anxiety when you are looking for new financial opportunities.
Many have succeeded in rebuilding and restoring their credit post-short sale. Becoming informed and proactive in managing your finances is a big step to getting back on track and perhaps finding a supportive group in your experience.