Short sales have become the financial fix of choice for homeowners facing foreclosure or other circumstances that has left them owing more on their homes than the house is worth.
Bargain-hunting buyers are equally enticed by the attractive listing prices for short sale homes. In January, short sales accounted for 15.9 of all home purchases.
But buyer — and seller — beware. There are some risks and liabilities that come with a short sale.
“It’s important that you talk with an accountant and an attorney to learn all the possible repercussions,” said Ginny Ferguson, secretary of the board of directors for the National Association of Mortgage Brokers. “You want to be sure you don’t end up with an ugly surprise after the fact.”
While lenders allow struggling borrowers to sell their homes at a price that is less than the mortgage balance, that doesn’t preclude the lender from later suing for the "deficiency," or the amount not paid on the loan.
There’s another troubling financial consequence that can come with short sales. The Internal Revenue Service could consider the debt forgiveness as income, leaving the seller on the hook for additional taxes.
On the upside, a property owner who sells his house through a short sale can apply for another home loan in two to three years, compared with five to seven years with a foreclosure. In addition, if you weren’t late with any mortgage payments, the impact on your credit score will be much less for a short sale than a foreclosure.
Buyers have their own issues to consider when purchasing a short sale home.
“There’s a misconception that you’re getting a deal because you’re paying less for the house than what the owner bought it for,” Ferguson said. “But the house is selling for whatever the market value is at the time in that particular area.”
However, if the buyer is planning to hold onto the home for at least five years, the house will most likely appreciate in value.
With a short sale, lenders typically refuse to help buyers pay for closing costs or inspections. The house is sold “as is,” so all repairs will have to be made by the buyer.
“Have the inspections done even if the seller is not willing to pay for any work,” Ferguson said. “Otherwise you could end up buying a very big mistake.”
Should you buy or sell with a short sale? Following are the advantages and disadvantages:
For the seller:
• You will be eligible to get a loan for new home in 2 years instead of 5 to 7 years.
• If you haven’t been late with mortgage payments, the impact on your credit score will be less than with a foreclosure.
For the buyer:
• You may not get a bargain, but the property will most likely increase in value over time.
For the seller
• The bank could sue you for the unpaid portion of the mortgage.
• You may owe taxes on the amount of the forgiven debt.
For the buyer:
• Short sales can take three months or more to close.
• Homes sell “as is”.
• Most lenders will not make concessions on closing costs.