Profile picture for kbaltimore

Should I wait or should I short sale?

I have a home that I purchased in 2007 as an investment property that was estimated at $320K. I purchased it for $220K and then put $70K into it for repairs that were needed to make it liveable.  I have a 1st and 2nd mortgage on this property.  However I took out a HELOC on my primary residence in order to purchase the property mentioned and to make the needed repairs.  The HELOC is on my primary residence.  The 1st and 2nd on this investment property are both interest only. The 1st loan is approx. $217K and the 2nd loan is approx. $32K.  I owe $50K on my HELOC on my primary residence.  I use this property that I want to sell as a rental property and would really like to get out of it as soon as possible and was hoping to take advantage of the Mortgage Forgiveness Act to not be penalized.  According to this site my property is work $136K but it's been totally renovated and upgraded inside so I'm guessing its current market value is $150K or slightly better but still not enough to pay off the loans.

Should I try to sell it as a short sale if the mortgage company agrees or should I try to wait?  It sounds like the housing market will be struggling for many more years to come and I'd like to sell this property and my primary residence to get a fresh start and buy something new at today's prices but I don't know how a short sale will affect me tax wise or credit wise.
  • May 31 2011 - Oxon Hill
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Answers (14)

A 1099 from the IRS for the shortage owed on the investment home AND the HELOC on the primary will be WAY more expensive then the cost of the roof! I would much rather pay off the roofer than owe the IRS! Even on the primary residences IF the 2 nd loan was taken out AFTER the actual day of closing ( in other words it was not an 80/20 that some buyers did instead of 100% financing) it WILL qualify for a 1099. Stay the course the best you can, as long as you can cover most of the bills hang in there. I know how hard it is to stay the course when there is no equity in the home, I tell everyone to avoid the short sales if at all possible. I can tell you many banks did NOT care that the sellers had money,had assets and had income. I had seen so many that we're NOT in distress and they passed a short sale for them . I can only assume , the bank is not stupid..and it is easier to come after them later as they know they HAVE money, assets and reserves. Then what is the first thing these buyers will do when they purged all their debt??? They will buy another home and have a new asset. We still do not know the long terms ramifications of the short sales and the banks rights. We are no longer dealing with Mom and Pop entities. The Gov' t owns the majority of the banks and who knows until it is to late what they can and cannot do in the next decade. Best wishes and good luck,
  • June 13 2012
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Senate Bill 458 and Senate Bill 931 should be carefully studied.  If the homes are in California, you will be protected against deficiency judgements.  

In regards to your tax consequence, read the Mortgage Relief Act of 2007 (modified in 2010).  
  • May 03 2012
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In Arizona, if you short sale an investment property, I would expect a deficiency judgement to be pursued. Loans on investment properties are recourse loans, the lenders have the right to pursue a deficiency judgement. This right would have to be waived by the lender in writing. Consult an attorney.
  • April 18 2012
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Worth to spend on an real estate account and attorney on a big decision like this
  • February 14 2012
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Profile picture for kbaltimore
This is all great advice.  My combined monthly mortgage payment for the two loans on the rental property is $1,580.  I'm also paying $500 a month for the HELOC I took out to buy the property and fix it up.  Since then I've spent thousands on repairs and now to learn the house needs a new roof which I cannot afford.  The monthly rent I'm collecting is $1,500 which is less than the roughly $2,000 I pay out for it.
I've learned recently that houses in this neighborhood are selling but have been selling to investors for as low as $25,000 - $40,000 who are then fixing them up and reselling them.  Even with the refurbished units selling for as little as $60,000 they are sitting on the market.  With this new information, is there any way I can short sale the property and not owe taxes on that amount?  I plan to get a CMA done this week if I can find a Realtor to help me.  I reached out to a mortgage broker to refinance both of the loans on this property and even offered to live in it for a couple of months to sell it and I was told that lenders would not believe I was living in it and would not offer me a lower interest rate because the house I own in Virginia is too nice. I just want to get rid of this rental property and start over but I don't want the mortgage company or IRS coming to collect anything from me once it's sold.
  • February 04 2012
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Good feedback. Pay close attention, however if you plan to short sale the lenders may agree to the lower price but can then turn the balance over to another company who will have up to 5 years to re coupe that loan from you. A good way to avoid this is if you sell make certain it states in the contract that the lenders agree to forgive any unpaid balance. My opinion is if rental fees are covering costs things may be best left alone. Again I can't agree more with Peggy: get a CMA done, or have a professional appraiser come out so you can make an educated decision.
Best of luck.
  • February 01 2012
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Short sale opportunities are growing rapidly in this market. In some markets I have heard up to 80% of all sales are short sale.
  • January 30 2012
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Because of the tax reason I would look at other options, unless you can pay that bill.
  • January 04 2012
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WetDawgs is right.  Even if your bank allowed a short sale, you would owe taxes on the debt forgiven - because this is not your primary residence..

As to your statement, "According to this site my property is worth $136K ..."   Please don't use Zestimates as a basis for determining the value of your property.   Zestimates can be WAY off.  They say an average error rate of 12%, but that is an average.   Yours could be off by much more.  Get a professional opinion.   Either have an appraisal or have a Real Estate Agent do a comparative market analysis.  If your home is worth $250,000 you could just about pay off the 1st and 2nd.   Best to clarify the value first.

My question would be to clarify why you "really like to get out of it as soon as possible ".  You may need to take a hit if you really want to sell now.
  • December 31 2011
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Profile picture for sunnyview
Amen Debroah and thumbs to you.
  • June 01 2011
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A short sale of real estate happens when the owner of the property owes more on the property than what it sells for. This can happen when a home owner chooses to sell when property values have dropped drastically or when an owner has taken out equity loans on that property on top of the mortgage loan and the loans equal more than the value of the home.
Your property can only be considered for a "short sale" if there is not enough equity in the sale to pay off the existing mortgage holder.  With total loans against the property in question being $249,000, you need an accurate, current, valuation to determine whether the property is in fact "underwater".  Do not rely simply on online guess-timates of value; contact a local agent.
In addition, as "wetdawgs" says, "In order to qualify for a short sale, you have submit documentation of hardship.   Simply being underwater is not considered hardship.  Other assets and the fact that it is an investment property will make it much much harder to qualify. "  factors to consider are diminished income, changes in heath or marital status, etc.  Again, you must speak with professionals regading all factors.
Most importantly, your credit may be affected if you miss payments, or if you attempt a "cash for keys" scenario.  Are you a good short sale candidate?  It is best to contact your Realtor, your attorney, and your accountant to get details as they pertain to your personal situation.
I completely disagree with Shawn, who tells us that "short sales statistically are most likely to end up being sold as a foreclosure, more than 85% of the time, depending on the market." (where did that statistic come from???).  Be proactive, work with your lender.  In Los Angeles, short sales are closing daily, faster and easier than ever before, in spite of Shawn's "statistic".
  • June 01 2011
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Profile picture for sunnyview
"This decision has many factors and local market conditions are best understood by a local Realtor..."

I can't agree with that. While I agree that anyone considering doing a short sale should have a qualified agent on their side, I think they should also consult an attorney and a CPA to fully understand their options before they decide what is best for them.

Short sales can have tax, legal and financial effects long after the house itself is dealt with. It is best to explore all the options and seek a team of professionals for input.
  • June 01 2011
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kbaltimore,

This decision has many factors and local market conditions are best understood by a local Realtor, who would be my choice to pose this question.  That being said, short sales statistically are most likely to end up being sold as a foreclosure, more than 85% of the time, depending on the market.  There is more "luck" involved than anything else.  (I say this and I am living in a great short sale purchased two years ago.)  Good Luck!

Shawn
  • June 01 2011
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Profile picture for wetdawgs
The mortgage forgiveness act only covers one's principal residence, and as you describe an investment property and not a residence, it won't qualify.  Therefore, there is no hurry to sell to meet the deadline.

here is the IRS website on the subject.

In order to qualify for a short sale, you have submit documentation of hardship.   Simply being underwater is not considered hardship.  Other assets and the fact that it is an investment property will make it much much harder to qualify.

Once you have had a short sale, it is likely to be at least two years until you qualify for another mortgage.



  • May 31 2011
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