To short sell or not, that is one of the questions

Short Sale
More and more I hear, “Just sell it short and your troubles will be gone.” Nothing could be further from the truth.

I am not an accountant or a lawyer but here’s my experience.

First, a short sale is when a seller owes more on a home than the home will fetch on the open market and the seller LACKS the resources to make up the gap. This is very important to understand. If owner or seller has retirement/401K/savings/stocks/bonds etc. that can make up the gap, they are NOT short sellers and typically their mortgage holder will not allow their petition for short sale.

Petition for short sale? Yes! Banks at their whim may or may not grant short sale status. Oh, and granting short sale status can in some instances take UP TO… ONE YEAR. Six months is the standard though. Also, if one is making payments on time, adding extra to principal, you can most likely forget being granted a short sale.

So let’s say you or a family member or friend; get granted a short sale. The bank may be forgiving tens of thousands of dollars in mortgage debt, oh, but they’re not. Once the home is sold as a short sale, the bank may simultaneously obtain a deficiency judgment against the former owner of the sold home. That owner is then on the hook, liable, for the amount of deficiency…they owe the bank the money that was granted and this is a matter of record and it is reported to the credit agencies.

The bank may also 1099 the former owner of the home and the deficiency will then be viewed as income or even capital gain by the state of residence and the IRS.

The role of the attorney advising a home seller to short sale can be complicated too. I’ll just say billable hours and leave it at that; consider that the process can take up to a year and may require countless hours of work and countless dollars too.

So do I advise short selling; no, and I look at it this way, when the real estate market was booming and our property values were appreciating, did the banks come asking for more money on our mortgage payments? They didn’t, so why when the market depreciates do we expect the opposite? There are alternatives to short selling; rent the home, live with it and stay put, or find additional income to pay down mortgage principal.

Finally, based on what I see in the market, I don’t see any real estate market appreciation for the next five to seven years minimum.
This said, we must change our ways of thinking about real estate.