5 Reasons to Short Sale NOW Instead of Waiting

3 Feb

Take action

It is time to take action!

I should really have this post written by a neutral third party because many of you reading this will think….

“What else would a Realtor advise?  Doing short sales is how you get paid….”

I can certainly understand that frame of mind, but read on to understand why NOW is the time to short sale your property if you are upside down in equity and are having trouble paying your mortgage.

1. Protection Against Deficiency Judgements

Since the passing of California SB 931 in September 2010 (effective as of January 31st 2011) it is now illegal for any lender who holds a first trust deed (first mortgage) to seek a deficiency after a short sale.

There is also some case law in California that can protect you from deficiencies brought by junior lienholders IF your first and second liens are owned by the same bank (George V. Simon et al vs. Bank of America).

There is no time limit on this law, but as you will read later I do believe lenders will start to become more punitive after 2012 and just as laws are passed, laws can be changed or repealed…..

2. Protection from Tax Liabilities

Now this is a biggie….  Back in 2007 our then president, the eminent George W. Bush, passed the Mortgage Debt Relief Act (MDRA) which allowed homeowners who had a foreclosure or short sale on their primary residence to not be taxed on the amount of debt that was “forgiven” by their lender.

Lets take a look at what this can really mean to your bottom line, in the Sacramento area we have had home prices decline by as much as 55% in some of the hardest hit areas and this can translate to a huge amount of forgiven debt, which would then be counted as income and would be taxed if it were not for the MDRA.

For example, if you bought a home back in 2006 for $400,000 and now the property is worth $200,000, if your property forecloses your lender will issue a 1099-A for the entire amount of the unpaid principal balance.  If you choose to do a short sale your lender would issue a 1099-C for the difference between the amount owed on your loan and the amount you short sold the property for.   As you can see, depending on the situation, you would have a tax liability of between $200k – $400k, that is nothing to sneeze at.

Here’s the kicker…. The Mortgage Debt Relief Act is set to EXPIRE…. As it stands right now the MDRA will expire on December 31st 2012.  They may extend it, no one can say at this point, but you certainly don’t want to leave having a giant tax liability to chance, especially when you know if you TAKE ACTION now your tax liability will be ZERO.

3. Home Prices and Mortgage Rates at Historical Lows

Right now home prices in the area and mortgage rates are at historical lows, it is a good time to buy and it will not stay like this forever.  The sooner you short sale your home the sooner you will be back in the market as a home buyer again and perhaps have a chance to benefit from these super affordable home prices and mortgage rates.

4. Be Back in the Market as a Home Buyer Years Sooner

When you choose to do a short sale versus just walking away and letting your home foreclose you can be back in the housing market by as much as 5 years earlier.  To read a more in depth post about just how much sooner head over HERE.

5. After 2012 Lenders Will be More Punitive Towards Homeowners who did a Short Sale

Now let me state up front this is just my opinion and not FACT, however, it is my feeling that after this “last” wave of foreclosures is worked through, lenders and the government will become more punitive when it comes to dealing with homeowners when it comes to foreclosures, deed-in-lieu, and short sales.  I have heard rumblings of Fannie Mae not allowing a homeowner, who did a short sale or had a foreclosure, to EVER get a conventional loan again.  This may never come to pass, however, do you really want to leave that up to chance?


I understand that you will take all this with a grain of salt because I am one of those “Realtors”, but I genuinely want to help people understand that the route they choose to go over the next couple of years can drastically affect their lives for years to come.  And while this market can make for some trying times for many of my clients I do feel like my expertise in short sales and foreclosures will really HELP to steer people in the right direction.  Is a short sale always the right option?  Absolutely not, sometimes foreclosure can limit liability (not many times, but yes, sometimes)…  sometimes a loan modification really is the right choice for a client who is not upside down by $100k+ and they have just a brief hiccup in their employment…. Sometimes the attorneys are correct and a bankruptcy is the way to go…. However, nine times out of ten a Short Sale is your best possible option to get out of an untenable situation.

If you would like to talk about your unique situation in  person in a free, no obligation consultation please call me today, 916.585.3636… or you can always email me, Peter@PeterParkerTeam.com

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