What Are the Risks Involved with a Short Sale?
Short sales are an option to save your home from foreclosure that many Arizona homeowners are using. The key to success is starting your negotiations with your lender early and hiring an experienced certified short sale Realtor and negotiator to help you before you default on your mortgage and your home goes to foreclosure sale. Doing nothing will only increase your risks of losing your home.
Here are three main risks associated with short sales that Arizona homeowners need to be aware of:
1. Losing Your Home to Foreclosure
If you don’t start the short sale process early enough, and you have received a default notice from your lender, you run the risk of losing your home to foreclosure. A typical Arizona short sale takes at least 3-6 months. If your lender has already instituted foreclosure proceedings against you, you may not have enough time to complete your short sale before your home goes to foreclosure auction.
2. Buyer Walks Away
The problem with short sales is they take a long time to get approved so you run the risk of losing your buyer because they end up walking away and finding another Arizona distressed property. You should work with a certified short sale Realtor and expert negotiator who knows the ins and outs of negotiating a short sale.
We have negotiated many successful short sales recently in the Phoenix, Scottsdale and surrounding cities. The Cameron Team has 2 full time Buyer’s Agents that focus on Buyers only. Our buyer’s agents understand the short sale process and are able to work with your buyer to explain all aspects of the short sale to head off any problems, concerns or questions they may have. Because we are certified short sale experts, we have established long-term relationships with lenders, and we know how to get the results you need and want. Our negotiators have a high rate of success with getting short sales approved.
3. 1099 Income
Your lender may send you a 1099 after the short sale or foreclosure sale which reflects the difference between the loan balance and the sale proceeds. This may be considered taxable income to you. Since I am not a tax adviser, I recommend you check with yours to see if you are subject to any federal income taxes after the close of your short sale.
I do know that the Mortgage Forgiveness Debt Relief Act of 2007 allows taxpayers to exclude income from the discharge of debt on their principal residence as a result of the decline in property value or the taxpayer’s financial hardship if the debt forgiveness is given in tax years 2007 through 2012. The amount of the debt forgiveness allowed is up to $2 million ($1 million if married and filing separately).
No Deficiency Judgments in Arizona
A deficiency judgment is a judgment that the lender may obtain against the borrower for the differenced owed the lender on the loan balance and the sale proceeds after a foreclosure sale, including a short sale. Since Arizona does not allow deficiency judgments with purchase money mortgages, you probably don’t have to worry about the lender coming after you for a deficiency judgment if your mortgage was purchase money. However, it is a good idea to negotiate with the lender that the short sale is the final payment on your loan so that you can simply walk away at the end.
While short sales have risks, going through a foreclosure is much more devastating. A foreclosure ruins your credit and costs you and your lender more money and time. Lenders are happier to work out a solution with you that works for everyone. It is amazing to me that a foreclosure is worse than a bankruptcy on your credit, in many cases.
Before you make any decisions, it is smart to consult with a real estate attorney to explore all your options. We are happy to recommend one to you that will give you a FREE 15 minute consultation.
Just my opinion…Jeff Cameron
480-652-2004