Article published 01.09.08
By David van den Berg
Thanks to recently passed federal legislation, getting out from under mortgages with a short sale is a bit less painful in the troubled real-estate market.
In short sales, homeowners are able to sell their houses for less than they owe and avoid foreclosure. But struggling homeowners must be able to show that they can’t make the payments, get lender approval and the necessary appraisal
A lender may forgive the difference because it would get more from a short sale than a foreclosure, said Randy Kutz, co-owner of Phoenix Heritage Real Estate Group and Arizona Short Sale Experts.
Avoiding foreclosures helps homeowners, too.
Short sales do less harm to the seller’s credit than a foreclosure. Short-sellers can face an 80- to 100-point hit on their credit scores, while people who lose their homes in foreclosure can see their credit docked 250 to 280 points. Other circumstances like late payments also can damage credit scores, Kutz said.
Before the recent passage of Mortgage Forgiveness Debt Relief Act, the amount forgiven in a short sell was considered taxable income for the seller.
“It’s going to help a lot of people,” said Travis Hamel Olsen, president and principal of the National Short Sale Center in Scottsdale. “A lot of people were not doing a short sale because they were afraid they were going to get taxed on it.”
Investors aren’t exempt from the tax, said Julie Bieganski of First USA Realty.
Nick Martini, 28, of Mesa, may be one homeowner who gets a break from the new law. In 2005, Martini and his wife bought a house and owe $315,000 on it now. The couple have completely remodeled the home’s interior, but right now it would probably sell for $280,000, Martini said.
The couple have an 80/20 mortgage, with the 20 percent portion adjusting each year, Martini said. In November, he was laid off and said he is now working a lower-paying job.
His wife is five months’ pregnant with the couple’s second child. They struggle to make their house payments now, he said.
“Come April, we’re going to fall on our face,” he said. “Basically, we need to make more money.”
If the Martinis short-sell their house, they won’t be alone.
“I think the short-sale situation is going to be with us for five-plus years,” Kutz said.
Even if the Valley’s housing inventory is reduced, Kutz said, many portions of the region are down to 2004 prices.
Kutz said his team rarely sees short sales resulting from subprime-mortgage problems. The sales can result from events including divorce, job losses, deportation and incarceration.
But Kutz said the majority of short sales he deals with result from people who bought or refinanced houses at the peak of the real-estate market and now have to sell.
“It’s a very tedious process. It’s a very calculated process,” Kutz said. “It’s the brain surgery of real estate.”
Short sales became an active part of the Valley’s real-estate market in late 2006 and early in 2007, said Jay Butler, director of Realty Studies at Arizona State University. The sales can’t be tracked.
Homeowners may have a difficult time evaluating people to work through a short sale with them, Butler said.
“Most of these short-sale companies don’t have much of a track record,” he said.
When properties go into foreclosure, that information is public, said Brent Larsen, owner and operator of First Class Realty and National Short Sale Negotiators in Tempe. That means investors may knock on doors of homeowners facing foreclosure. Those homeowners need to be careful, Larsen said. “There are investors who want to help and those who don’t.”