Short Sale Deadline Looming

The Mortgage Forgiveness Debt Relief Act is scheduled to expire on Dec. 31. Without the act in place, debt forgiveness results in taxable income — meaning that when someone short sells a home, the forgiven debt is considered income to the homeowner.

Many REALTORS (R) like myself feel the act has encouraged more people to short sell their homes as opposed to foreclosing or declaring bankruptcy — resulting in less blight in the neighborhood. If the act expires as scheduled we may see more foreclosed properties and bankruptcies because there will be no incentive to short sell the home.

Lenders issued notices of default, which initiate the foreclosure process, to 1,432 borrowers in April, according to the San Diego County Assessor’s Office.   Those homeowners considering a short sale should speak with an experienced short sale agent and also consult with a real estate attorney prior to listing the property. There are many factors to consider, including the application of the MFDRA, time and difficulty of the short sale transaction, and the potential for liability or failure of the process.

In California, the average price of a pre-foreclosure home — which is often sold via short sale — was 31.11 percent below the average price of a non-foreclosure home in the first quarter, according to RealtyTrac’s Q1 2012 U.S. Foreclosure Sales Report.  Short sales give homeowners a way to take responsibility for their debt and also turn over faster than foreclosures. Short sellers also must disclose more information on the property through the Transfer Disclosure Statement, which banks do not have to fill out.

The San Diego-Carlsbad-San Marcos area accounted for 8,840 completed foreclosures over the year ending in April, or one in every 52 mortgaged homes, according to the CoreLogic (NYSE: CLGX) National Foreclosure Report for April. About 2.1 percent of all homes with a mortgage were in San Diego’s foreclosure inventory as of April 2012, down 0.2 percent from one year ago.

If the Mortgage Forgiveness Debt Relief Act doesn’t apply to the homeowner, they need to see a certified public accountant or tax attorney to try to find an exception or exemption from paying some or all of the taxes.   The MFDRA simplifies everything and protects many homeowners, including those who didn’t educate themselves or seek counsel before incurring the debt relief.   It is likely more bankruptcies, not foreclosures, would probably result from the expiration of the act, because of people attempting to avoid the taxable event.

Sometimes foreclosure is the best option, but homeowners have many options to avoid foreclosure. There is bankruptcy, which can sometimes help keep a home, but does not always avoid foreclosure. There is debt settlement that can assist borrowers to keep a home if they can afford the property with the primary loan by getting rid of the second loan. Options to avoid foreclosure require balancing the needs of the homeowner with the impact that the decision has on their wherewithal, personal liability, credit and tax liability.

If you or someone you know is upside down on their home, or you are interested in purchasing a  distressed property, please contact me.  I am very experienced in successfully completing short sales from both the buying and selling side and work with an experienced team of short sale negotiation experts.