Short Sales

Short sales played an integral part of the Metro Phoenix/Scottsdale housing market from about 2007 -2013, but since fewer homeowners owe more on their homes than they are worth on the market, they have a much smaller role in the real estate market than they did in recent years. Sometimes homeowners have no choice but to initiate a short sale—for one reason (or hardship) or another like: job loss/change, expansion of a family, divorce or death.

Today, short sales make up only about 10-11% our market, for both active and pending sales (that figure is under 2% of active listings in Maricopa County). It used to be that short sales were the greatest value because lenders frequently accepted large losses on their loans. That’s not necessarily the case anymore with the upward shift in values within our market place. Short sales now sell frequently at or over asking price and may attract multiple offers. There are benefits to both buyers and sellers to pursue a short sale. The main benefit is that instead of having a distressed borrower succumb to foreclosure and potentially blight the neighborhood and its values, the home is more likely to be maintained until the time that ownership changes. Banks were forced to realize that there are benefits to completing a short sale, instead of a foreclosure. Here are the benefits for both sellers and buyers.

Short Sales for Sellers

If you are like millions of homeowners in the US and here in Phoenix or Scottsdale, who are considering a short sale, you need the facts to help you decide whether it is the right choice for you. There are lots of things to consider and each scenario is like a snowflake – no two (homeowners or houses) are alike.

What is a short sale?

A Short Sale is when a seller owes more on their mortgage than the home’s worth. Their lender(s) agree to accept a short payment to consider the loan “satisfied”, though not paid in full. It’s an alternative option to letting the house foreclose. Don’t be fooled though- short sales aren’t short. They take a LONG time to close, anywhere from 30 days to a year, but generally take anywhere from 60-120 days.

Should I initiate a short sale now or wait for later?

The 2007 Mortgage Forgiveness Debt Relief Act (MFDRA), expired on 12/31/13.  Before this date, that act changed the tax code and exempted the deficiency amount from becoming taxable income. Because Arizona is an “anti-deficiency state”, some attorneys dispute that the bank has no right to do so even after the end of the MFDRA, so it’s wise to seek legal and tax counsel. Additionally, as values rose over the last few years, many borrowers had hope their properties would regain the values they lost, putting them back above water. this is generally the case.

However, many homeowners who acquired their existing loans between 2007-2009 have not been able to recover all the ground they lost. That period of time was the height of the market for the luxury home segment. Whether the homes were primary residences, investments or vacation homes, many sellers are still under water on their loans. After years of being “reluctant landlords” and hanging on, continuing payments on a 2nd home or being unable to maintain financial stability long-term, many sellers have decided it’s time to move on. The abundance  of luxury homes listed in our market within the last few years has caused some values to stay flat or head downward slightly. As a result, the recovery to some market segments has stalled.

What is a “Deficiency” and how is it calculated?

The Deficiency is the difference between what you owe on your mortgage(s) and what your home is actually worth. If you owe $400,000 and subtract the price the house is currently worth, i.e., 200,000, the difference, $200,000, is the “deficiency”. When the MFDRA expired, the deficiency amount became taxable income for all property owners who completed a short sale.

What is the process to do a short sale?

The process (starting contacts, forms, etc.) varies depending on bank, and the individual seller/borrower’s current situation. Call me for more info, and I’ll be happy to go into detail based on your particular case. I make it as easy as I can for you with checklists and referrals to both tax and legal professionals to make sure you know all your options.

Do I qualify to do a short sale?

To qualify for a short sale, a borrower must meet some basic criteria- there must be a deficiency (negative net difference) between the mortgage balance and the value of the home & the borrower must have experienced a hardship. Each type of short sale (and there are several) requires different criteria. For instance, there are four basic criteria a borrower must have to qualify for a HAFA Short Sale.

1. This home must be your primary residence.
2. The property must be less than 2 acres.
3. The loan used to acquire the home must be purchase money, or money you obtained purely with the purpose of buying the home. This means that you can’t use a home equity line of credit that you took out to buy a boat or go on a big vacation for example.
4. and most important thing that qualifies you for a short sale, is that you must have a hardship. Something must have happened in your life that is preventing you from working at the level you were previously working; a severe injury, having your hours cut, or a death in the family, or divorce.

These four things will allow you to qualify for a short sale.

If I complete a short sale, will it impact my credit?

Though every seller’s situation is different and the way each lien holder reports your short sale to the credit bureaus, it’s generally perceived that your credit will be affected less by a short sale than by a foreclosure. Nonetheless, your credit will be impacted, especially if you are late on mortgage payments. In most cases, your credit will still fare better, with a short sale than. a foreclosure. How your payments are reported by your lien holder (especially the late payments) really affect your credit report, and how the actual short sale is reported will too.

What are the alternatives to a short sale?

• Do nothing– You could continue to make payments and stay current on your home, because the median home price in our local Phoenix/Scottsdale Metro Area market has appreciated about 91% from January 2012 to August 2016. There is a chance that instead of being in debt, you would break even or maybe have some equity. A CMA (comparative market analysis) is the place to start to determine if there is any deficiency at all and I can do this for you.
• Loan Modification– If you want to stay in your home, you don’t want to move to a new home but you owe more than your home is worth, you could refinance or modify your loan (rate, terms, etc.), via HARP or HAMP.
• Deed in Lieu of Foreclosure– The homeowner gives the keys back to the bank without the usual foreclosure process. The homeowner relieves their obligation to the bank. However, this can does not give you much more benefit than than losing the home to foreclosure.
• Foreclosure is probably your least desirable option. Try to avoid one if you can, because your FICO score/credit report will show the foreclosure for 7 years after the date you foreclose.

Will I ever be able to buy another home after completing a short sale?

Yes. The rules changed a few years ago, but most borrowers can now qualify to buy a loan with a conventional loan within 4 years and an FHA loan within 2.  However, there are exceptions (discuss them with a lender to see if you qualify). Learn more about that here.

Why initiate a short sale now?

• If you bought within between 2007-2009, your home still hasn’t recovered to the price you paid for it and you are a luxury seller who is struggling to or can’t meet their financial obligations, you might benefit from a short sale. The writing should be “on the wall” that you can’t afford your debt obligation, otherwise the bank may not agree to cooperate and deny your request to accept a short payoff on your mortgage.
• When a seller completes a short sale, the difference between the loan amount and the sale price of the home, or deficiency, is considered ordinary income and is added to their overall income tax consequence.
• As I mentioned earlier, Arizona is an “Anti-Deficiency State” by way of an Anti-Deficiency Statutes (A.R.S. Section 33-729(A) & A.R.S. Section 33-814(G)). This means a homeowner is absolved of the personal liability of defaulting on a home as long as the residence meets the following qualifications:
  • It is a primary residence
  • The property is smaller than 2.5AC
  • The structure is either a single-family or a two-family home
  • The loan used to secure the note is considered “Purchase Money”, or was used solely for the purpose of acquiring the home
  • The note must be secured with a deed of trust; therefore the state is an anti-judicial foreclosure state

***There are exceptions to anti-deficiency qualifications, please contact me for more info.

• In December 2007, Congress passed H.R. 3648: the Mortgage Forgiveness Debt Relief Act of 2007. This law amended the IRS tax code and gave sellers who participated in the a short sale of a primary residence (where you reside) the ability to exclude the deficiency amount from their taxes for amounts up to $2MM ($1MM for married filing separately). This law allowed the exclusion of the deficiency from 2007 through 2013, but is no longer in effect.
• Some banks also offer monetary incentives to keep their home in good condition (by keeping utilities on & the interior & exterior maintained) during and up to the end of a short sale. I’ve seen incentives of up to $20,000 from some banks, but each one differs and you have to confirm with your lender what they are willing to offer.

**Occasionally, the lender/servicing company has released the lien and waived the deficiency balance for a borrower on an investment property.

Short Sales for Buyers

Short sales make great options for buyers too! As a Buyer, there are many things to know about participating in a short sale. Unlike their name, they aren’t short to complete. So if you need a home which you can own and occupy quickly, they aren’t going to be beneficial to you. If you have time to spare (maybe an investment or if you have an alternate place to live until the sale closes), if you can get the price substantially under market value, it might be worth the wait.