Bratton Day – April 25, the day when appraiser Dana Bratton said the Bend real estate market would start its rebound – has come and gone with no discernible sign of an upswing. But The EYE is prepared to be patient. Meanwhile, “short sales” are becoming epidemic around here – not an encouraging development.
A quick search of craigslist for Bend this morning turned up 56 homes advertised as short sales – and, of course, that only counts the ones on craigslist, not those being sold through other channels.
A short sale in real estate isn’t the same thing as selling short in the stock market. A short sale on a house simply means you sell it for less money than you owe the bank. Sometimes the bank will agree to a short sale to avoid foreclosing and maybe losing even more money.
A short sale might look like the easy way out for homeowners who are in a deep hole, negative-equity-wise. But there are some serious pitfalls.
The worst is that if you sell short, the IRS treats the difference between what you owe the bank and what you actually repay as income. In other words, if you owe $300,000 on your mortgage, your bank agrees to a short sale and you only pay back $200,000, when tax time rolls around the IRS will say that $100,000 was income and tax you on it – even though you didn’t get one cent of actual cash in your hand.
One source who’s prominent in the local real estate industry said many short-sellers aren’t aware of this trap and will be surprised when they owe a big chunk of taxes next year.
A number of local realtors have jumped on the short-sale bandwagon, even advertising themselves as “short-sale specialists,” evidently figuring it’s better to get some commission money than nothing. But The EYE’s source said the rash of short-selling is helping to keep the local market depressed.
“It hurts the lender, it hurts the seller, and it hurts other people who are trying to sell,” the source said. “The only person it helps is the realtor who gets the commission.”
This source warned owners who’re thinking about a short sale to get some advice from a good accountant first – in the long run they might be better off going through foreclosure, even though that will damage their credit rating.
This article appears in May 1-7, 2008.
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Well, your source is correct about this point: homeowners contemplating a short sale should absolutely consult their accountant. However, your source seems to hold some of the same misconceptions about short sales as many others in the industry.
First, the statement about a deficiency judgment against the seller needs more clarification. As of December 2007, Congress passed a bill which exempts owners short selling their primary residence from a deficiency judgment. Also, homeowners of investment properties can avoid a deficiency judgment if they are found to be financially insolvent. Lenders in Oregon have to go through a judicial foreclosure if they want to get a deficiency judgment, and are unlikely to do so because they have to hold the home for an additional six months to allow the owners to redeem their property. In this declining market, the lenders take a bath if they end up holding the property.
Second, the premise that it is only the realtors that benefit from short sales is incorrect. If the lenders are not willing to renegotiate or do a forbearance with the homeowner, a short sale is the last option for the homeowner to avoid foreclosure. This option is much better for the homeowner’s credit, and is therefore in his or her best interest. As for the lenders, they lose much more money in taking back a property than in a short sale. They may have to do major repairs, and hold on to the property for as long as a year before they are able to get it off their balance sheet. So here again, you can see a benefit for someone other than realtors, for whom short sales are actually more complicated and time consuming than other types of sales. They are by no means easy money, and can take months to close. Therefore, the idea that short sales hurt the lenders and sellers while only benefitting realtors simply isn’t backed by the facts.
I suggest that you take multiple sources into consideration before writing such a cut-and-dried article. Folks are having a hard enough time trying to figure out what to do about their difficult situations without being misinformed.
If you or anyone else would like more facts about short sales, please feel free to contact Kip or George Lohr at George E. Lohr Real Estate. Thank you.
Kip Lohr
541-306-1557
I think your statement that a short sale only helps the agent is not true. It also helps the buyer from paying too much for this product. it is a two way street you know
Regarding Mr. Lohr’s e-mail: Congress’s action had to do with whether the forgiven debt from a short sale is considered income to the borrower. Before the new law, if the lender agreed to a sale for less than the amount of the loan and forgave the difference, the lender would send the borrower a Form 1099 and report the forgiven amount as income to the IRS. Though it sounds a bit harsh, it makes sense – if I lend you money, that’s not income because you have to pay it back. If you don’t have to pay it back, then it’s just money flowing from me to you and it’s hard not to see how that’s income. Anyway a 1099 is NOT a deficiency judgment and that is not what Congress’s action covered.
Forgiveness of debt and a deficiency judgment are two different things – in fact, they’re mutually exclusive.
A deficiency judgment is where the lender goes after the borrower PERSONALLY for house debt after the house has been foreclosed but the sale amount was less than the debt – the lender then sues the borrower to recover the “deficiency,” and the judgment is a “deficiency judgment.” In this case the debt is NOT forgiven. A first mortgage is typically “non-recourse” debt–meaning the lender can’t go after the borrower personally, but has to look only to the property–so no deficiency judgment is possible. However, if you have a HELOC or second mortgage (incl. refinancing), in the fine print it’s probably “recourse” debt, meaning that the lender has the right to go after you personally if the lender can’t recover the full amount in foreclosure.
Your article is misleading and simply not true. Please get your facts straight before posting information that can have serious financial implications for people that are already in a bad situation.
First, in December of 2007, President Bush signed HB 3648, also known as The Mortgage Forgiveness Debt Relief Act of 2007. This act enables homeowners that are pursing a short sale to avoid incomes taxes on the difference between the original purchase price of the property and the sales price. Here is a link to the article: http://www.whitehouse.gov/news/releases/2007/12/20071220-3.html
Second, a short sale can be one of the only ways for a homeowner to avoid foreclosure. The first step for someone in foreclosure should always be to contact his/her lender. Often, lenders will work with homeowners to create a payment plan or otherwise postpone the foreclosure date, especially in cases where another party may submit a short sale offer. Ultimately, the lender makes the decision as to when the foreclosure happens, and often times a phone call to discuss options helps tremendously.
Finally, no matter what your plan of action, it’s critical to contact your CPA and/or attorney when considering your options. Short sales can be a good and legitimate choice for avoiding foreclosure for some.
So, let me get this straight… basically, you’re saying that the artificially inflated home prices in Bend should remain as high as they were in 2006, right? Short sales are deflating the Bend housing market?
I don’t know about everyone else, but the idea of paying $500K for a 2 bedroom shack off 14th doesn’t sound too great to me, a first time home buyer. Personally, I am glad to see the prices fall a little bit, as this means that I can finally begin to consider purchasing a home in Bend. I’ve been kicking myself for not buying one sooner and I thought that I had lost my chance – until recently.
The fact that the housing market is correcting itself should be viewed as a positive and healthy market reaction. It may be uncomfortable for the short-term, but in the long run it will be mean more accessibility to housing in Central Oregon, and a more stable market overall.
“First, in December of 2007, President Bush signed HB 3648, also known as The Mortgage Forgiveness Debt Relief Act of 2007.”
That act applies only to short sales of one’s principal residence, so if you short-sell an investment property you can still get screwed.
“So, let me get this straight… basically, you’re saying that the artificially inflated home prices in Bend should remain as high as they were in 2006, right?”
Not at all — the prices Bend real estate reached during the bubble were ridiculous and unsustainable. This is just saying that short sales are a factor helping to push down the market. For one thing they have an impact on the appraisal value of nearby properties.
I find all this rather amusing. I can’t tell you how many people that I spoke with that actually thought there was no risk in the Bend market and that it was somehow magical. The builders who were buying helicopters and houses in Cabo. The realtors who were popping up at a ridiculous rate. Mortgage guys making way too much money without the faintest hint of risk. Well, what is happening now is perfect. It is perfect because the “market” is perfect. It always corrects to common sense when there in an inequity for any length of time. You should have put some of that money in the bank! Welcome to a market CYCLE. They happen everywhere. Now those of us that are pragmatic and prudent can buy the properties on shorts and make money in the next cycle while all the other overnight real estate tycoons here in Bend go back to thier day jobs.
No bitter just justified for shaking my head from 2002-2006!
SoCal…