Taking the Plunge.
Often times I am asked, “Should I consider a home that is a short sale or simply walk away?"
That ultimatum often leads to buyers feeling stuck- debating whether they should take the plunge or not. In order to best understand a short sale, I want to illustrate this as simply as possible
So imagine a man named Mike. Mike purchases a home with the assistance of a loan from Sarah.
After two years, Mike realizes he cannot make payments towards his loan. This results in a lien on the property- giving Sarah a right to keep possession of the property until the debt owed by him is discharged.
Since he is financially unable to pay, Sarah agrees to accept a mortgage payoff from Mike that is LESS than what he initially owed in order to enable the sell of his home.
This is called a short sale.
A bank may or may not approve the short sale since it brings less money than owed, which results in the sale to typically have some contingencies that must be removed prior to beginning escrow.
However, when the home is sold, Mike is not ecstatic like a typical seller would be. This is because he does not walk away with any money, as it goes directly towards paying off his mortgage.
Also, Mike’s credit is impaired for up to 4 years now and may have difficulty qualifying for another loan for that length of time. A mortgage relief can be classified as taxable as Sarah (the lender) can issue a 1099, writing off her loss. Mike should consult his tax adviser for possibly doing the same.
Fortunately for the buyer of Mike’s home- they got his property at a reduced price.
If you or your friend need further expertise on this topic, my team and I are very adept in providing solutions. We will advise you of the advantages and disadvantages so you can avoid legal and financial issues when deciding if you should take the leap.