Need to Sell Your Home Immediately? Think About a Short Sale

By Rebecca Giacobba

Today, many homeowners are faced with tough decisions. Due to divorce, loss of a job, illness, growing mortgage payments or just plain tight budgets, people who need to sell their home for financial reasons are learning that they owe more than their house is worth.
This was a common occurrence in years past, when home sellers would come to the settlement table not expecting a check, but would have to bring one with them to complete the sale of their home.
But in the recent years of unparalleled home appreciation, home sellers seem to have forgotten about those leaner times. Now that appreciation has leveled off and many areas have increased inventory, home prices have decreased and homeowners can't sell their home for what they paid and pay off their mortgage.

Easier Way Out
One common solution for homeowners is what is known as the short sale. This has become a common buzz phrase today, yet few home sellers (or even many real estate agents) understand how it works and what penalties the home seller will incur.
In brief, a short sale is when the bank agrees to accept less than what is owed on the loan in order for the homeowner to sell the property. This can work with just a first mortgage or with a first and second mortgage - and sometimes banks will agree to go this route, even if the seller is current on payments.
The banks are accepting these arrangements because of the higher number of foreclosures today. Though they are still taking a loss, it is much less than they would incur if they had to take the property back and resell it.
The best way to negotiate a short sale is through the services of an experienced agent. The seller has to give the agent written permission to speak with a bank concerning their loan for the bank to agree to pay the agents involved a fair, negotiated fee. The agent then tries to get an idea from the mortgage companies about how much money they will likely accept, so they can place the home on the market within a certain range.
It's interesting to note that the seller getting an offer doesn't always mean the bank will accept it. They bank will analyze the offer carefully and, because it is taking a loss and want to get as much for the property as it thinks it can, will often present a counter offer. They bank may even agree to offer some closing help for the buyers, but that is usually limited to 3% of the original loan amount.
The home seller will need to prepare a hardship letter and should also document any home repairs needed, with photos. The agent then sends this package on to the bank so it will understand that it will be in its best interest to forgive a portion of the loan. The homeowner may also be asked to prepare some financial information with details concerning the hardship.

The Taxman's View
Short sales are forgivable reductions and do not require repayment by the homeowner, but the homeowner cannot make any money from the transaction.
In the recent past, these forgivable payments were looked at by the IRS as a taxable gain. But now new legislation, the Mortgage Forgiveness Debt Relief Act of 2007, allows homeowners to dismiss such a transaction as a gain.
The new law allows home sellers to report prior short sales dating back to 2006, so the possibility of amending a return exists. A form 982 needs to be filed, but it's always best to review the document with a tax adviser before agreeing to the sale.
This tax relief is only given to principle residences and does not work for invest-ment properties. Investors should analyze this information carefully with a tax adviser to see if this solution in their best interests.

Rebecca Giacobba is a Realtor with W.F. Chesley Real Estate in Crofton. She can be contacted at 410-451-2200 and rgiacobba@hotmail.com.