Eagle i: Real Estate - The skinny on short sales

In this article, Popick puts short sales under the microscope

If you own real estate in this economy, it is important to have a basic understanding of short sales and some of their ramifications.

As it relates to real estate, a short sale is the sale of property from which the proceeds are insufficient to pay off that property’s mortgage(s).

In a typical short sale transaction, the lender can agree to accept something less than what was originally owed to them.

Here’s a simple scenario: Let’s say you bought a property for $1 million and put in a 20 percent down payment ($200,000). That means you needed a loan for $800,000.

But now, because many properties are worth only half what they once were, when you go to sell yours, you might only be able to sell it for $500,000, which creates a shortfall of $300,000.

It may not be in the bank’s best interests to foreclose on the property since foreclosures can often require even further discounting when it comes to selling them at auction.

So, increasingly, banks are now agreeing to accept these short sales, particularly in cases when the seller has little or no additional funds.

However, if the lender accepts a short sale, it doesn’t automatically mean you’re off the hook for the difference between what you owe them and what the property sells for.

In some cases, the bank will issue a 1099 to you in the amount of the shortfall. This means you will have to deal with this when you file your tax returns.

In the scenario above, you bought the property for $1 million and then sold it via a short sale for $500,000.

You lost $500,000, right? Not necessarily. Logic isn’t always logical.

The bank issues you a 1099 for the $300,000 shortfall; essentially saying that you made $300,000.

You may very well have to pay taxes on this “income” of $300,000.

Bizarre, but true.

From the perspective of the bank (and the IRS), you were loaned $800,000 but you only paid back $500,000. So you have “made” an income of $300,000.

Now, there may be exceptions to this rule, if the property was your primary residence, for example.

So if you find yourself facing, or possibly facing, this type of situation, it is vitally important to consult with a very knowledgeable accountant or tax attorney.

Friends, neighbors and coworkers can be well-meaning, but they don’t necessarily know the law. Be sure you get accurate information.

Short sales are relatively new to the scene, and still have a bit of a “wild west” flavor to them.

By this I mean there are no absolute rules yet when it comes to banks and short sales.

Each bank has their own way of dealing with short sales, and even the rules within one bank can change minute to minute.

If a short sale is possibly in your future, you should also consider retaining the services of a real estate professional who has the skills to help you navigate through the process — or handle the process for you.

Having personally negotiated short sales, I can tell you they can be an intimidating and daunting prospect, and a challenging endeavor.

If you are going to list your property for sale, and there is a possibility of a short sale, you should ask your prospective listing agents if they have short sale experience and if they will handle the process — and even the negotiations — for you.

These are tough times and you should seek out expert assistance, especially when so much is at stake.

Jeff Popick has many years of professional and impeccable service in all things real estate, and is uniquely suited to help people buy, sell, build and finance. He even offers personal and objective consultations and mentoring. He can be reached at Popick@aol.com or 239-394-4000.