Expert: Steele V. Propp - 5/30/2009

Question
QUESTION: We have a property in CA that was our only home for 8 years.  We refinanced that home in 2007 to take out equity to purchase a retirement home in another state.  We attempted to sell the CA property but were not able to do so with the depressed market.  We have since retired and live outside of CA.  We have been renting the CA property but are losing our renter, cannot re-rent for enough to cover the mortgage and expenses, and can no longer afford the CA property.  We owe approximately $125,000 more than we could sell the property for.  The bank suggested a short sale and we have been advised by an attorney that short sale is preferable to foreclosure.  We do not understand how a short sale will benefit us.  Because we took cash from the loan, we will owe taxes on the cancelled debt regardless of whether it is through a short sale or foreclosure.  Are we missing something here?

ANSWER: There are definite advantages to a short sale vs. a full blown foreclosure.  

First of all, while your immediate credit hit is about the same for either the "recovery time" is dramatically less for a short sale.  Usually 2-3 years vs 7 years for a foreclosure.  While you may not realize the difference right away, future borrowing on anything will be effected.  From credits cards to car loans to whatever.  

Second, and probably most important, the losses of a short sale vs a foreclosures are usually dramatically less.  That mean less potential taxes on the cancelled debt.  In many cases we see a difference of 40-50% less in monies forgiven and then taxed.

Lastly, and this is my personal opinion, it is the right thing to do.  Trying to limit the losses of the lender who gave you money in good faith is the honest, ethical thing to do.

If the lender is open to a short sale I would do it.  It may not be successful, but you will have at least tried.  And it is not a big use of your time.  Find an area agent who specializes in short sales.  He/she will do 99% of the work.

As always, it is also a good idea to review this with an attorney versed in local foreclosure law.

Best of luck.  Feel free to keep me in the loop should you go forward on this.

Steele V. Propp
Foreclosure Specialist

---------- FOLLOW-UP ----------

QUESTION: "Not a big use of your time"?  Our lender requires a "hardship" packet which includes a hardship letter, loan application, all sorts of financial income/expense information, tax returns for two years, etc. etc.  Why is all that necessary to save them money?  We borrowed the money in good faith, honestly expecting to be able to sell the home, have no tax consequences, and retire in peace.  Seems wrong we should be left with a huge tax bill when we would have been tax free if the market had held and we could have sold.  Who is trying to limit our losses?

Answer
What I meant was the marketing part of things are not a huge time user.  Yes, you have to do the shortsale package, but most people do that in a day or two.  Your agent does much of the rest.

Why all the paperwork?  Because you are asking them to potentially lose tens of thousands of dollars.  They have to show their investors why they are willing to do this for you.  And if you think you have paperwork, you should see what they will generate for your file.

The market that we had was ultimately unsustainable.  Appreciation rose too quickly.  And whose fault?  Everyone, from banks to government to borrowers.  It doesn't do any good to look for someone to blame.  Harsh reality is that this is the way it is.

As to who is trying to limit your losses (and their own at the same time)?  If you are being considered for a shortsale package, your lender is with some minor treaks from the government.

Remember that the loss on this property is what any tax bill will be based on.  A full foreclosure will likely be the most expensive.  A short sale will almost always be less.  The tax bill (if it comes to that) will be about half to 2/3 on a shortsale.

One other option that the bank might consider is a Deed In Lieu.  Have you looked into that?

Steele