There continues to be a substantial number of distressed properties available in the real estate market. Consequently, if you know where to inspect, you can stumble upon some excellent bargains. However, it’s important to be aware of the particularities that come with purchasing a distressed property, particularly if you’re considering acquiring a property via a short sale.
WHAT IS A SHORT SALE?
A short sale is a property transaction where the house owner sells it for a sum less than what they owe on their mortgage. It’s crucial to understand that the mortgage lender must give consent for a short sale to take place – and many want to see proof of unsuccessful attempts to sell the property at mortgage price for a minimum of three months before agreeing. In a short sale setting, the mortgage lender practically “waives” the disparity between the owed mortgage amount and the final selling price of the house. In certain scenarios, lenders realize a short sale can generate more income than proceeding with a foreclosure process.
REALITIES OF SHORT SALES – FOR PURCHASERS
For those eager to find a decent bargain, a short sale may appear a viable option. Pocketing a distressed property can often mean substantial savings. However, readiness for the unpredictability of a short sale is essential. Be prepared for an emotional rollercoaster and significant time investment. It could be beneficial to engage a real estate agent experienced in dealing with short sales. The process can be convoluted and your journey easier with professional guidance.
Be prepared for unexpected changes, such as the bank reneging on its decision or the house owner qualifying for a mortgage modification. You might encounter disappointments after spending a considerable amount of time in the process.
TAX IMPLICATIONS OF FORGIVEN LOANS: HARSH REALITY FOR SELLERS
For the seller, the primary downside of a short sale is the potential income tax levied on the loan forgiveness amount. When a short sale occurs, the bank forgives the loan discrepancy which the IRS treats as income. For instance, if you owe $170,000 on your property and sell it for $150,000, the IRS will consider the $20,000 difference as income and tax will be payable – potentially pushing you into a higher tax bracket.
While a short sale may seem a suitable alternative, negative aspects abound. It’s important to thoroughly consider your options and implications.
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