In the next year or so my wife and I are looking to get a home. We would be first time buyers and have been taking basic steps to educate ourselves in this investment. As such we were talking to a real estate friend of the family and she mentioned something about finding property that a bank is ‘short selling’. She said that you could get fairly good discounts, but there were some tax implications. We didn’t have time to get into it, but I was wondering if anyone could shed some light on this.
To me, it sounds like short sale could be a very good thing - a 300k house reduced to 275k (or possibly more). However I’m worried about hidden costs and taxes and all that.
My understanding is a short sale is the bank agreeing with the current owners to sell the house for less than the outstanding balance on the mortgage. I believe that the tricky tax business is that the government considers the amount of money forgiven by the bank as income for the seller. I don’t think that there are any unusual tax consequences for the buyer. I am also not sure why a short sale would be a better deal for the buyer than a person selling a house where they owed less that the current market value.
Agreed.
In addition, consider that the burden on obtaining approval for the short sale is with the seller. Not only does the bank make a financial decision about accepting less then what they are owed (based on the cost of collecting the debt versus the value of accepting just a portion of the debt), but the bank also requires the seller to submit financial information, in order to verify that the seller can’t make up the difference on what is owed out of their own pocket (it would be weird to bring cash to your own sale, but that’s what the bank assumes a seller should do if their house isn’t worth what is owed). I’m sure there are other considerations, too, like the appraised value of the house (although a foreclosure attorney, I’m not involved in the decision-making with regard to short sales).
Ultimately, remember that the bank does not have to accept anything less than what they are owed; a short sale is their prerogative. Many seller’s get frustrated with the bank’s refusal to accept the offer, but the bank isn’t obligated to do so.
If you are looking for a deal, you might just keep an eye on the property and bid on it at the foreclosure sale. Many banks are not aggressively bidding on these properties, so you could buy it fairly cheaply (bids are for cash, though, so that becomes a consideration).
Or, perhaps even better, wait to see if the bank buys the property at the auction. If so, they are going to turn around and sell the house. They will be eager to sell (since ownership carries certain expenses), and will likely list it pretty cheaply.
Very often a seller is soliciting bids so that they can then go to lender and propose a short sale. As a buyer, you don’t want to be a part of that situation as it places another party in the negotiation. At the very least it will lengthen the proceedings. The seller could also come back to you and say “well, the lender won’t take X, but they will take X+” with you being expected to take up the slack.
My lawyer advised against getting involved in such a situation.
Furthermore, if I were bidding on a house where the mortgage exceeded the sale price, I would make sure that the seller had sufficient funds to cover the difference.
WARNING: If you are going to buy house via a “short sale,” make sure you have a real estate agent who has done some similar transactions. They are very very difficult, and involve a lot of negotiating with the bank and the attorneys.