When you consider the fact that whether or not you are able to sell
your home before the bank forecloses, the bank will eventually
foreclose if you don't pay your mortgage, it would be beneficial to you
to at least attempt to sell the home before that happens.
It's really not Foreclosure vs. Short Sale
There's no competition here.Â There's no "one way is the right way"
scenario.Â The bottom line is, once a homeowner stops paying their
mortgage, they are headed for foreclosure.Â A short sale can be
conducted at any time prior to foreclosure. You do NOT
have to be behind on your mortgage payment for a competent real estate
agent to negotiate with the bank to allow you to sell your home for
less than you owe.Â If you are headed for foreclosure, there's
absolutely NO disadvantage to attempting a short sale.Â In fact, there
is a benefit.
Banks Pay Big Bucks to Foreclose
That's right.Â When the bank reposesses your home, they spend money
to do so.Â The hire attorneys to handle mountains of paperwork and they
have costs associated with conducting a trustee sale.Â Then, when all
is said and done, they have to hire a real estate broker to list the
home for sale, which will cost them additional fees.
Who Makes Up The Difference
Let's say you purchased your home for $150,000 and over a year's
time it increased in value to $200,000 and you decided to take out a
$50,000 equity loan based on the current value.Â The market values fall
and now you find that the house is worth $160,000 and you're upside
down by $40,000.00.Â You fall on hard times and can no longer afford
payments on your combined mortgages of $200,000.
When you owe $200,000 on your home, and the bank forecloses and
sells the home for $160,000 it is you who are responsible for the
difference.Â Since Arizona is a non-deficiency state, the bank will
probably write it off.Â However, and keep in mind that I am not a tax
expert, if the $50,000 you pulled out of your house was not used to
invest in that house, and instead it was used to invest in something
else, like another house, or a vacation, or a car, then you're in a
sticky situation.Â The bank may come after you, because that loan was
probably tied to you with a personal guarantee.
Whenever a bank writes off a deficiency from a foreclosure or a
short sale, they issue a 1099-C so they can show the IRS that they have
a loss.Â This 1099-C is an income statement for you and it must be
reported to the IRS.Â If your financial situation meets certain
criteria, then you may be able to deduct that same amount from your tax
return and thus not owe any taxes on it.Â If, however, you do NOT
qualify, you may find yourself paying income tax on the deficiency.Â So it would make sense to reduce the liability as much as possible.
Sell It Short
The best way to reduce your potential liability is to give your
local real estate expert an opportunity to sell your property BEFORE it
forecloses.Â Look, the property is headed for foreclosure anyway.Â The
banks know that it costs them a fortune to reposess homes and sell them
at auction, so they are much more likely in economic times such as
these, to allow you to sell it BEFORE they incur those expenses.Â
Rather than pay the attorneys, the bank agrees to pay the real estate
expert, and saves a bunch of money.Â Bank owned properties sell for
less than properties that are selling short, and that translates to a
smaller deficiency, and less reported income, saving you potential tax
Don't simply walk away without giving your local real estate
expert the opportunity to help both you and the bank save some money.Â
And guess what, it helps them out too, because that's how they feed