Author Topic: How bad are the consequences of short sale?  (Read 4160 times)

Capsu78

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How bad are the consequences of short sale?
« on: February 15, 2014, 08:44:11 AM »
DD called my wife last night in tears and said they are frustrated enough with their condo that they have begun taking steps to sell it short:
They are $35,000 underwater on condo purchased in 2006.  In 2012 they found a renter at a monthly rate that covered the condo, taxes and fees... but not  by much.  They were able to purchase a short sale house themselves and after living with us for 5 months moved in to a better home for a growing family.   
Replaced the first "family" of problematic renters with a renter they like- single girl with a cat and they work in the same school district so nice and low maintenence.  Rent is still too close to break even.
Maintenence crept up on them and they had a $1000 plumbing bill last month which was not in the budget so they will be in the red this year. 
They are reluctant landlords in the first place and do not have the time or skills to DIY beyond the most basic tasks.  I have been involved the best I can, but they chose not to involve me last month out of... "love" for our relationship.  I understand where her heart is.

So, they have a stable renter who wants to be involved in the short sale, have already started with a realter and have talked to the professional tax guy the family shares.  2 offers came in and the current renter outbid it, so the fact that we have a legitimate buyer in the wings is a positive factor.

So I want to be a good dad with my advice.  My words are : A mistake was made in 2006, and I don't want to you to make another in
2014.   I am concerned with the unintended consequences, and I don't know what I don't know.  They are sufficently stable, are current with all the bills on both there own and the condo.  They think they can live with a lower credit score for a while and rebuilt it over time.   My concern is I can understand that sometimes it is best to get out from under a transaction if they were $200,000 down, but is finding a short sale remedy for $35,000 worth the ding to thier credit.

Any thoughts appreciated-  Mom and I could help in theory, but we are 10 years out from retirement, with a plan that we prefer not to disrupt.  I do not think the condos value will get back to purchase price in the next 5 years.
« Last Edit: February 15, 2014, 08:46:09 AM by Capsu78 »

davisgang90

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Re: How bad are the consequences of short sale?
« Reply #1 on: February 15, 2014, 10:47:19 AM »
We short sold our house in Jax.  We used an attorney who specialized in SS recommended by our friend and realtor.  He was the interface with the mortgage holder and we were very satisfied with the process.  Our credit score took a hit, but started improving about a year later. 

La Bibliotecaria Feroz

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Re: How bad are the consequences of short sale?
« Reply #2 on: February 15, 2014, 12:41:58 PM »
We short sold back in 2010. Our credit took a hit, but seems to be getting better--we've both been approved for credit cards since then. I would be more cautious if she had immediate need of more credit, like if she were planning to rent a new place soon or take out a car loan (not that she should, of course!).

The thing is, you said she had been renting it, which means that it is no longer her residence. It's an investment property, technically. That means the lender is much less likely to approve the short sale--some friends of ours could not short sale because they had rented and wound up in foreclosure. Even if the lender approves the short sale, it might mean that they will have to pay taxes on any amount forgiven. Traditionally, forgiven debt (e.g, the amount of the mortgage that the lender writes off in a short sale or even in a foreclosure) is counted as income on your taxes. When we short-sold, there was a temporary forgiveness of that; we didn't have to pay taxes on the difference. HOWEVER, that exemption was only good if the property had been your primary residence.

Cassie

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Re: How bad are the consequences of short sale?
« Reply #3 on: February 15, 2014, 12:52:34 PM »
We did a short sale on 2 rentals & had no problem getting the lenders to approve them.  It did not hurt our credit horribly. But we did it a few years ago and did not owe taxes on them. now she will on the forgiven debt so need to figure out how much that will be.

SwordGuy

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Re: How bad are the consequences of short sale?
« Reply #4 on: February 15, 2014, 01:16:27 PM »
If their budget is so tight that they really sweat over a $1000 plumbing bill, they have SERIOUS PROBLEMS.

The condo mostly breaking even is not really the problem, then.

It is the fact that too much of their income is already committed to expenses.

I would wager that this is just a symptom of a much greater issue and it will be back to bite them in the ass over and over again until they increase income, reduce routine expenditures, and build up a savings buffer.

If they have a regular size family and median family income or better, then it's certainly a symptom of overspending their income.  Barring medical or other act of God reasons for that, they need MMM or Ramsey style help.

Capsu78

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Re: How bad are the consequences of short sale?
« Reply #5 on: February 15, 2014, 04:31:56 PM »
Thanks for the comments and please keep them coming.  My checklist is building and I know more now about what I didn't know I didn't know than when I posted this morning.
CHECK to investigating the tax implications.
CHECK to knowing that they need to realize they won't be using credit or financing in the mid term (and they won't- they are pretty much past the big set up costs of marrying and having a family)
Check to knowing the bank may or may not be interested in being a participant and that specific professional advice is worth it moving forward...

Sword- Your nose is good and comments are valid for many.  My  DD and SIL actually rezigged their finances a few years back with the help of Dave Ramsey and realized they made some mistakes- a leased auto here, a credit card balance there.  We parents are blessed to live close by and have regular contact with their lifestyle- Sunday family dinners are on the permanent schedule unless canceled.  They are not mustachian, but they do get schooled regularly by me that they need to be saving for college, retirement and an emergency fund in addition to being young parents... They know The Bank of Mom is open for them if they need it, but they don't like to and for that I consider them adults I am proud to say I raised. 

The biggest hit to their budget is a 4 year old and an infant in daycare full time at the same time with no help from Uncle Sugar, unlike some 40% of the other parents in the same center, but that is another story.   I think they are frustrated most by being reluctant landlords.  We have other landlords in our extended family and they have different skill sets.  Their emergency fund isn't large enough to cover 2 homes IMHO.

Numbers Man

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Re: How bad are the consequences of short sale?
« Reply #6 on: February 19, 2014, 02:00:15 PM »
I agree, $35k is not an insurmountable amount and $200k is a different story. Keep paying down the principle to this condo and eventually sell when they have enough cash to bring to closing when they sell the property as a regular sale. It looks like they found a really good tenant to help them pay off the property. They could turn into "accidental mustachians" with a cashflow from the rental. But if they are freaking out over a $1,000 plumbing repair then their problems are deeper than you thought and they need to tighten up their spending.


My concern is I can understand that sometimes it is best to get out from under a transaction if they were $200,000 down, but is finding a short sale remedy for $35,000 worth the ding to thier credit.



Fishingmn

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Re: How bad are the consequences of short sale?
« Reply #7 on: February 20, 2014, 06:44:11 AM »
Keep in mind that the lender(s) won't just approve a short sale because you are underwater.  You must be able to prove a hardship.

A hardship is something like loss of job, medical bills, divorce - something that will preclude you from being about to pay the mortgage any longer.  They aren't just going to bail someone out just because they made a bad purchase.

Sure, many people over the past 5-6 years have come up with "hardship" cases that have been approved when they shouldn't have.  As a Realtor, I've seen cases of that first hand.  Doesn't make it right. 

If your daughter is having a hard time paying the mortgage over a $1k plumbing bill she may be able to make a hardship case.  Just be aware that a short sale will "generally" lead to a 150 point drop in your credit score and preclude you from buying another home for 3-5 years (but that may be getting more lenient lately).

Cassie

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Re: How bad are the consequences of short sale?
« Reply #8 on: February 20, 2014, 01:11:04 PM »
I know from personal experience that even if you have not had any loss of income that if the rent is not paying the mortgage and you have exhausted your savings and the bank can see that you can not afford it they will approve it.

DirtBoy

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Re: How bad are the consequences of short sale?
« Reply #9 on: February 21, 2014, 09:50:36 AM »
Let me share a few tips from my short sale experience over 5 years ago on an "investment" home that we didn't get out of quick enough before the market changed.  In my case I lost about 250 points from my FICO credit score (780 into the 500s). That was and remains quite painful.  My parent's handled all the negotiations with the lender, which was very helpful, since I was basically doing this as a tax mule for them it seemed appropriate.

We did have to demonstrate "hardship" to the lender to approve the short sale.  This consisted of a ledger of my monthly budget which included income, debts, and expenses including the mortgage on the investment property that we couldn't pay.  My folks used the national averages for items like restaurant expenses, which my expenditures were far below.  This along with several phone calls to the lender got them to approve a short sale.  My parent's being RE agents also listed the property for me and showed the house.  After several months of listing the home finally sold (we almost went into foreclosure) at a loss.

I don't remember the exact amount that the property was shorted, but in the neighborhood of $30k, which presented a bit of a tax issue for me.  Since debt forgiveness counts as income I had my parent's CPA buddy review all my taxes for the last 5 years and look for any increase additional returns he could find.  For the taxes of the year of the short sale we needed to demonstrate insolvency, which was prepared by the CPA to demonstrate that my debts exceeded my assets ( this might be helpful: https://turbotax.intuit.com/tax-tools/tax-tips/Home-Ownership/Tax-Relief-for-Cancelled-Mortgage-Debt/INF12033.html ).  Had I not done this I would have been in some deep yogurt.  In the end I actually ended up getting money back from the IRS.

In your daughter's situation I'd say they don't have much of a choice.  A short sale is better than a foreclosure and inaction will result in a foreclosure.

Hope this helps

Cassie

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Re: How bad are the consequences of short sale?
« Reply #10 on: February 21, 2014, 10:12:50 PM »
We ended up doing 3 shorts sales (investment properties) within a 2 year period and our FICO only took a 100 point hit.   

sassy1234

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Re: How bad are the consequences of short sale?
« Reply #11 on: February 22, 2014, 07:59:10 AM »
I am a landlord, not by choice.  We bought in 2008, and then moved for a great job opportunity.  We are just starting our family. 

At this point, we have had 3 different tenants, 1 that was terrible and caused tons of damage (the stress almost put me in therapy), 1 that were jerks, and we now have the most wonderful family there that signed a 3 year lease.  Once they leave, we are going to sell.  Also, the property is out of state and we manage everything.  We basically break even, and are just buying ourselves some time while building a bit of equity.  Our property only lost $8,000 to $10,000 in value.

I think they should stick it out.  I never thought I would be doing this in life, but it has taught me a lot.  As I look back, I am so happy that we did not sell for a loss.  Hope this helps.