The Real Deal: 2012 - The year of the short sale?

To be clear, a real estate short sale is any sale where the net proceeds are not enough to pay off the mortgage completely. In other words, the bank is paid back “short.” That is where the name comes from. It has nothing to do with the amount of time involved. Short sale is most often used as an option to avoid foreclosure. Foreclosure is expensive for lenders and is often the worst option for borrowers.

Though short sales were almost unheard of 5 years ago, they have become more and more common in recent years. There are several advantages for both lenders and borrowers leading to an increase in short sales both nationally and locally. More and more Watsonville homeowners under financial duress are opting to attempt a short sale. In 2011, 141 homeowners in zip code 95076 successfully completed a short sale compared with only 60 in 2008.

Forecasters are predicting that 2012 may see an even sharper increase in these transactions due to the following factors:

Foreclosure activity in 2012 is predicted to increase 25% over 2011 as banks work through their legal problems associated with the “robo-signing” scandal. An increasing number of homeowners, when faced with foreclosure, will choose a short sale instead.
New laws in 2011 granted greater protections to Californians who complete short sales. It is now illegal for any mortgage holder to pursue a short sale seller for any shortfall in paying off the mortgage.

Many banks, including Chase, CitiBank, and Bank of America are offering cash incentives for delinquent borrowers to do short sales.. These may range from $3,000 to $35,000
Perhaps the biggest motivator for homeowners under financial hardship to complete a short sale in 2012 is for tax reasons. The Mortgage Tax Relief Act, eliminating tax on mortgage debt forgiveness, expires Dec. 31, 2012. Consider this example, if you owe $500,000 on your mortgage, but proceeds from foreclosure or short sale only net your lender $400,000 you may be liable for ordinary income tax on the $100,000 difference. Especially in the Watsonville area, where home values have dropped 60% or more from the peak in 2005 - 2007, this may result in a huge tax consequence, just when you can least afford it.

If you are considering a short sale, it is extremely important to get advice from your lawyer and a qualified tax advisor.

Resources:

California Rural Legal Assistance Watsonville

21 Carr Street
Watsonville, CA 95076
831-724-2253

Government programs

www.FreddieMac.com/singlefamily/avoid_foreclosure.html

http://www.makinghomeaffordable.gov/pages/default.aspx

Fannie Mae Making Home Affordable Program Eligibility Address Check

Freddie Mac Making Home Affordable Program Eligibility Address Check

HAFA Program Information. Home Affordable Foreclosure Alternatives

HAFA Unemployment Program Information.

HAMP Program Information. Home Affordable Modification Program