Short sale in the context of property management means selling property at any price lower than the amount owed to the bank. This happens when the lender and borrower agree that selling the property at lower price is a better option as compared to the borrower’s default on the loan.
For example, a homeowner cannot pay back the loan and is facing foreclosure on $400,000 mortgage. He sells the property for $350,000 and he still owes $50,000 to the bank. Of course, the transaction can be done only with the bank’s approval.visit http://portal.hud.gov/hudportal/HUD?src=/topics/avoiding_foreclosure to read more information about how to avoid foreclosure.
- After learning that he cannot pay back the loan, the homeowner should contact the bank and corroborate the claim by presenting the necessary documents. When it comes to the documents, every bank has its own requirements. In any event, the homeowner has to prove that cannot pay back the loan.
- When the homeowner shows that he is unable to pay, the real estate prices in the area which would indicate approximate price of the property and other required documents, the bank can approve the short sale.read more information about short sale by clicking here
- The property may not be sold right away; it can take some time given that people generally need more time to make the purchase decision and the real estate market place situation changes from time to time. This means that the homeowner can live in the home rent-free (for several months) until his home gets sold.
How About Your Credit Score?
- Short sale will lower the homeowner’s credit score. However, this is not a point “con” as the homeowner’s credit will not be lower than if he opted for foreclosure. In the worst case scenario, the credit score will be about the same.
- Nevertheless, the impact of the short sale as a property management tool on the homeowner’s credit score will depend on how the lender (the bank) reports the short sale to consumer reporting agency. Most banks use the term “settled” in case of short sale. If the homeowner can negotiate with the bank to use the term “paid” instead, the homeowner’s credit will not be that badly damaged. Besides, if the homeowner had multiple non-payments, late payments or partial payments it will influence the credit score.
- Once the short sale is completed, if the lender forgives the deficiency the homeowner can owe taxes on this amount. The reason behind this is that the forgiven amount is considered as revenue by the Internal Revenue Service (IRS). According to IRS, the homeowner who did not pay off the whole amount owed, received income.
- However, it is possible to exclude part or the whole forgiven amount under the Federal Mortgage Forgiveness Debt Relief Act of 2007, if certain conditions are met. For example, it can happen so that the homeowner tapped into his home equity and used money for purchase unrelated to the home. This amount will be considered as taxable income since it was not used for upgrading the home. One of the conditions incorporated in the Federal Mortgage Forgiveness Debt Relief Act is that the forgiven debt was used for upgrading or improving the property. Therefore, the homeowner can avoid this by using the forgiven amount exclusively for upgrading his home, and there will be no tax liability.
Short sale can be a good solution when it comes to property management, but the homeowners should take into account the aforementioned factors if they decided to do it.Visit http://columbiapropertymanagementpro.com/services/single-family-property-management/ for property management services.