Risks Associated With a Short Sale
Many problems can arise in a short sale. In some cases, other options, including a mortgage foreclosure, may be a better solution. Some of the more common risks include:
- Tax consequences: Generally, when real estate debt is forgiven, the amount that is forgiven is considered taxable income. President Bush in 2007 signed a law that directed the IRS to not consider a forgiven mortgage debt taxable income. While this law is certainly an added measure of protection against being taxed, there are several exceptions which act to disqualify certain debts. Additionally, many sellers will still be issued a 1099 to report debt forgiven in a short sale. Therefore it becomes very important to determine whether future tax liability is applicable in your particular situation prior to pursuing a short sale of your real estate. Platt & Westby, P.C., highly recommend consulting with a tax adviser when considering the option of a short sale. If you do not already have an experienced tax adviser, Platt & Westby, P.C., can make some suggestions for you.
- Debt forgiveness: Debt forgiveness is the most important consideration for a seller. It is not a given that the lender will forgive the unpaid balance of the mortgage—and often the lender does not. If debt forgiveness does not occur, the seller, who no longer owns the home but still owes the debt, is placed in a very bad position. The problem usually arises with a second deed of trust. Often the holder of a second deed of trust will accept a small payment to release its deed of trust and allow a short sale to proceed. However, release of the deed of trust is not a forgiveness of the debt itself. Unless a written release of the debt is obtained by the lender, the seller may remain responsible for the full amount of debt and can be sued for the collection of that debt. The key here is in the drafting of the sales contract and a careful review of all subsequent documents including the short sale agreement with the lender(s). Key documents often appear to release a debt, but they may not. The wording is technical and critical. Again, Platt & Westby, P.C., strongly recommends having all of your contract documents carefully reviewed by a skilled real estate attorney.
- Anti-deficiency treatment: Arizona has fortunately adopted an anti-deficiency statute which aids in protecting the debtor. While there are many exceptions to the statute, as long as you fall within its parameters you qualify for the protection the statute provides. Part of this protection includes you having the option of allowing a property to be foreclosed and escape financial responsibility for any deficiency that might exist after the foreclosure. If you are a homeowner who does fall within the anti-deficiency protection, a foreclosure then may be preferable to the lengthy and uncertain process of short selling your property. Short sale protection is a bargained for matter and must be well documented with the seller who bears the risk if the documentation is lacking or insufficient. Consultation with a qualified real estate attorney before taking action is necessary to become educated in your available options in order to make the best decision.
We serve clients from six locations in the Phoenix area on all matters concerning real estate. Contact us or call 602-277-4441 to schedule an appointment with one of our Phoenix short sale attorneys at Platt & Westby, P.C. Our attorneys are also experienced at advising clients who are in financial distress regarding bankruptcy and loan modifications.