Buyers and sellers who choose the short-sale option need to understand the choppy waters they're entering, lenders and agents say.
Buyers complain, justifiably, that the wait for bank approvals of short sales -- typically 60 to 90 days, but sometimes considerably longer -- seems endless and the transactions often fall apart.
Sellers, on the other hand, may face tax and credit problems.
Although sellers walk away from short sales without a dime from the transaction, they have, in a manner of speaking, "gained" by not fully paying off the loan. Where there are gains, the tax man is never far behind.
But the devil is in the details: If a bank accepts a lower payoff from the short sale of a principal residence, that debt relief may be considered income by the Internal Revenue Service, said Bill Ahern, a tax partner at Allen Matkins in Irvine.
Under federal legislation recently passed to help distressed sellers in this type of situation, however, certain owners may not be taxed on that debt relief. This legislation applies only to the debt that the homeowner acquired to buy or improve the property, Ahern said. It does not shield taxpayers from income derived from cash-out borrowings.
To avoid such legal action and to complete the short sale, some sellers take out a loan with their lenders -- banks sometimes make it a condition of the sale -- for a part of the amount the bank is owed. The terms often are excellent, including zero interest and 10-year amortization, lenders say.
Mark Shandrow, a Keller Williams Realty agent in Long Beach, is representing a seller with an outstanding home loan of $600,000. A buyer recently offered $430,000 for the home. The lender has agreed to the short sale, on the condition that the seller take an unsecured loan for $50,000 to offset part of the $170,000 the bank is forgiving.
"I think she's going to do it," Shandrow said. "If not, the bank could go after her for the other $170,000. This way, the deal is done. The bank won't touch her."
The credit fallout
But the credit bureaus will take note, and future lenders too. Although many sellers choose short sales instead of foreclosures because they think the credit fallout will be less, that's a fallacy. The effect on their credit scores typically is just as negative, said Maxine Sweet, vice president of public education for Experian, a leading credit-reporting company.
