Are short sales ruining home values?
REThink Real Estate
By Tara-Nicholle Nelson, Friday, May 1, 2009.
Q: My neighbors bought a home for their mother, who has since passed away. They owed $125,000 on the mortgage. The bank allowed them to do a short sale for $56,000. The three daughters who bought the home for their mother have considerable assets. How can they be forgiven for this debt by the Internal Revenue Service if they are not distressed?
The people who are doing the short sales are ruining the values of our homes, yet we have always made our payments on time, and owe much more than these short sales. Can you please explain this to me?
A: A month ago, I wrote about the Mortgage Debt Forgiveness Act, under which some folks who sell their homes for less than they owe on it (e.g., a short sale) are exempt from being charged income tax on the debt that is forgiven by their lender(s), if the short sale is completed before the end of 2012. Many upside-down homeowners who are staying on time with their payments, like yourself, have cried, "That's just not fair!" This took me back to my childhood, the days when I would say those same exact words -- "it's not fair" -- only to hear my Dad, a former Marine, deadpan, "Life isn't fair."
I won't be so gruff as my Dad, but I submit to you that (a) your diligent on-time payment history has and will be rewarded; (b) life, and the situation are not fair, but fairness is beside the point here; and (c) your interests are better served by this law than they would be without it.
Mindset Management
First things first. The level of detail you have provided isn't sufficient to fully understand your neighbors' situation. Was the property owned by one daughter, all the women, the mother's estate or a trust? That would have a bearing on why a short sale would have been allowed. Also, many people who appear to or once did have "considerable assets" are actually drowning in credit-card debt, upside down on their homes, and taking a bath on the stock market -- looks can be deceiving. My point is that there's a lot about that scenario that may not be as it appears, so don't assume that they are in an enviable position.
On the other hand, don't assume that your position is unenviable, or that you are a sucker for being the nice guy and paying your mortgage and other bills on time. The algorithms used to calculate FICO scores were recently revised to render short sales about equally as damaging to the seller's credit as a foreclosure. In the credit-crunched market we're facing these days, having a stellar credit score is a very valuable currency, which you can obtain only by doing what you are doing and paying your bills on time. Those who have done short sales or lost their homes to foreclosure will simply not have the same access as you do to credit and even certain employment opportunities, which require a strong credit history.
Need-to-Knows
When it gets down to your question of why the IRS would allow this to happen, first let's be clear -- it is a mortgage lender who actually forgives debt; all the IRS is doing right now is refraining from charging income tax on debt that is forgiven by the lender. And let me tell you what -- it may not seem fair, but it is actually somewhat slowing the hemorrhage in your home's value. Let me explain. ...CONTINUED
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Submitted by J Philip Faranda on May 1, 2009 - 3:25am.
Short sales aren't ruining home values, they are reflecting home values. Value is what the buying public is willing to pay. The short sale aspect of the matter is on the seller's side, not the buyer's.
www.jphilip.com
http://WestchesterRealEstateBlog.NET
Submitted by Tim Burrell on May 1, 2009 - 4:11am.
The Mortgage Foregiveness Debt Relief Act does not apply to the situation described in the article. The daughters bought a home for their mother. To qualify for the law, the home has to be a principal residence. Unless one of the daughters lived there, used it as her principal residence and let her mother have a room there, the act would not apply.
One of the problems with all the discussion of short sales is that much of it is done by people who are new to the concept and the field. I have been doing them since 1992, and I teach other Realtors how to do them. If you want accurate information, go to www.ShortSalesR.us (also called www.CreateAShortSale.com to make it easier to remember).
One of the requirements for the vast majority of short sales is financial hardship, as shown in a hardship letter, pay stubs and financial statements. In other words, the seller has to prove that they cannot pay the balance of the mortgage that is being forgiven. The seller also needs to show that they are not solvent, and most lenders require that they show that they have a negative cash flow each month i.e. they are financially going down so that a foreclosure may be in the future.
So, the article is correct when it says the woman who wrote in that thinks that the home should not have had a short sale does not have all the facts. Nearly all lenders do not just let anyone do a short sale, they do it when it is the best of a series of tough choices for the lender.
The article is correct when it explains that the short sale is better for the neighborhood than a foreclosure. On average, the lenders get 30% more for a short sale than a foreclosure, and there is no vacant, vandalized home to bring the neighborhood values down.
Realtors should do short sales to help financial recovery, so please continue the coverage of short sales.
Tim Burrell
www.CreateAShortSale.com
Submitted by Robert A. Hulme on May 1, 2009 - 4:55am.
Very informative, many don't understand the Short Sale process at all. Thank you
Tara-Nicholle, for the article.
Robert A. Hulme
Realtor, GRI, e-PRO
Prudential Utah Real Estate
Loan Officer
Mortgage Xpress
www.DavisCoutyRealEstate.us
www.UtahHomes4Sale.ws
Submitted by Stanley Nichols on May 1, 2009 - 7:03am.
Stanley Nichols
Tara & Tim you are correct in your presentations. Life is getting "tuff" out there.
After 33 years in the RE business, I will retire next month!!
Stanley Nichols, ShortSalesProfessional.com is for sale.
Submitted by SW Stack on May 1, 2009 - 8:58am.
No, I also do not believe short sales are ruining values. The market values now are set by short sales as well as foreclosures. These are the ones that seem to be selling and are the majority of the listings. The only gripe I have with short sales is that the owner is allowed to keep living there free. I have a home on my street that has been on the market for close to 1 1/2 years. They have priced it at a much higher price that the neighborhood. During this time they have dropped the price only 10-15K. I have never seen anyone even look at it. Perhaps if they lowered the price at least 50-80K maybe there would be some action. This is not fair to others who are struggling to make their mortgage payments. They know they have it made and at this rate will be living there scott free for who knows how many years? Now they have the money they need and can buy new vehicles, take trips, and party instead of having to pay rent or mortgage payments. They have been contacted by the city due to their front yard and the tall weeds. Tell me, is this fair?
Their house is listed for $195,000 and the home next door which is a foreclosure is listed at $69,900. Sure it needs a little repair and pool backhoed but that surely can't count for that big of a difference.
No, I am not a big fan of Short sales. Perhaps for a few months but after that they should be foreclosed.
Submitted by Charles Harmon on May 1, 2009 - 9:53am.
I'm one who doesn't fully understand the short sale process because I have never focused on that area of real estate.
I'm grateful for this informative article that gets to the main issues and allows insightful comments.
Charles C Harmon Co
http://www.charlescharmon.com/
http://www.homesforsalelahontan.info/
Submitted by Mott Marvin Kornicki on May 1, 2009 - 2:59pm.
It seems like the short-sales asking prices are swaying the market and setting value.
The question; Are short sales ruining home values? They are setting the new values in many cases. My opinion is that as long as the properties are being sold and the new owners are making payments- eventually values will improve. The short-sales are but a relatively small percentage of the total inventory- the low, low prices do attract attention.
Lenders need to get these non-performing loans off their books- allowing the shart sale is the lesser of two evils.
Mott Marvin Kornicki, Broker | Associate
http://waterwayrealty.sef.mlxchange.com
www.WaterwayRealty.com
305.935.3533 Main Line