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Selling in a Short Sale? Sales Price Should Concern You Greatly.

By
Real Estate Agent with Long and Foster Real Estate VA License # 0225089470

Selling in a Short Sale? Sales Price Should Concern You Greatly.

Sometimes you hear someone in the real estate industry say something and your jaw may drop and hit the floor.  I heard someone the other day say, "Why would a Seller try to get more than the bank is willing to accept?"  There is one MAJOR reason I can think of.

Sellers are taxed on forgiven mortgage debt.  The more that is forgiven the more they are taxed.

Let me repeat that, Sellers are taxed on forgiven mortgage debt.  The more that is forgiven the more they are taxed.

Just because a bank is willing to accept a certain amount of loss, and your Seller doesn't have to bring any money to settlement, doesn't mean you stand there and dust your hands off and think you have done a wonderful thing.  If you put your Seller at risk of a higher tax penalty because the bank was willing to accept it, though the market may have paid more, you have done your Seller a HUGE disservice.

This year I represented a Seller where foreclosure was looking like a better option for just this reason.  Why?  The amount buyers in the market wanted to offer way below list price.  Lower than I advise she accept.  And if she let the house go to foreclosure, the market would no doubt still be climbing while the bank prepared to put the home on the market.  She may very well NOT have an amount of debt forgiven if the timing was right.  Of course, during the several days of thinking this over, a Buyer who saw that even at the list price, this was a great deal in the neighborhood, wrote an offer and the bank accepted it.  And my Seller's tax liability was lower than it would have been had she accepted a lower offer that the bank would have likely accepted.

If you are considering a Short Sale, and would like an agent that knows enough to realize that it isn't game over once the bank approves a Short Sale, give me a call.  

 

Comments (23)

Chris Ann Cleland
Long and Foster Real Estate - Gainesville, VA
Associate Broker, Bristow, VA

Bill:  Everyone still wants a steal, but are far less likely to get it.  Banks aren't giving up market value in a rising market.

Aug 02, 2014 12:33 PM
Liz and Bill Spear
Transaction Alliance 513.520.5305 www.LizTour.com - Mason, OH
Transaction Alliance Cincinnati & Dayton suburbs

Chris Ann, Unless Congress reinstates that debt forgiveness, sellers definitely need to be concerned about getting as much for the bank as they can

Aug 02, 2014 12:37 PM
Kristin Hamilton CA REALTOR
Berkshire Hathaway California Realty - Beaumont, CA
(909) 557-6966- Specialize 55+ Communties Banning

Hi Chris Ann,

In California, there is no residual tax debt as the debt is wiped clean and they do not tax the client later for the SHORT funds.

Aug 02, 2014 12:37 PM
Jeff Provines
Jeff Provines Real Estate, REMAX Gold - El Dorado Hills, CA

I agree with your point regarding the tax consequences, and the highest offer improves chances of acceptance and reduces foregiven debt. On the flip side, depending on the property condition, the buyer with the highest offer may not be willing to take on additional repairs costs, higher bank counters, etc. Whereas a buyer with a lower offer who feels they are getting a deal is more likely to stay the course and contribute for repairs, HOA delinquencies, etc. 

Aug 02, 2014 12:51 PM
Jeff Provines
Jeff Provines Real Estate, REMAX Gold - El Dorado Hills, CA

Kristin, the last time I checked, the debt forgiveness act has not been extended at the federal level. In order to be free of tax liability, the seller would have to show insolvency at the time of sale.

Aug 02, 2014 12:54 PM
Chris Ann Cleland
Long and Foster Real Estate - Gainesville, VA
Associate Broker, Bristow, VA

BLiz:  And since Congress has let this lapse since last December, I am not thinking it will be reinstated.  

Kristin:  That's the state, but about the Feds?  The Federal tax is the one you have to worry about.

Jeff:  That is true.  However, in my experience in selling Short Sales, the HOA delinquencies go with the person, not the property.

 

Aug 03, 2014 01:51 AM
Robert Bob Gilbert
Berkshire Hathaway HomeServices Anderson Properties - Katy, TX
Your Katy TX ( West of Houston) Real Estate Expert

Chris, excellent blog with tremendous advice. Folks in your area who need a Realtor need to contact you that is for sure

Aug 03, 2014 04:36 AM
Ron Marshall
Marshall Enterprises - Saint Michael, MN
Birdhouse Builder Extraordinaire

You definitely know your short sale market and expertise, Chris Ann.  Very well done.  And, I know she will be back when she needs another home!

Aug 03, 2014 04:52 AM
Don Sabinske
Don Sabinske, Sabinske & Associates Inc. - Zimmerman, MN
Sabinske & Associates Inc.

In my experience, too many short sale agents had/have no clue as to how to counsel a client.  But, I always insist that a short sale seller consult with a tax advisor prior to listing their home so they understand for themselves what the possible outcomes and tax implications can be.  I can't be a tax adviser for them, too, or I would be overstepping my knowledge and expertise.

Aug 03, 2014 05:51 AM
Chris Ann Cleland
Long and Foster Real Estate - Gainesville, VA
Associate Broker, Bristow, VA

Bob:  Federal and sometimes state taxes are a huge issue after a Short Sale.

Ron:  I know she will too.

Don:  But knowing the potential for tax ramifications, as a Short Sale Listing Agent, you should never underprice the homes.

Aug 03, 2014 11:55 AM
Elizabeth Weintraub Sacramento Broker
Elizabeth Anne Weintraub, Broker - Sacramento, CA
Put 40 years of experience to work for you

Short sales are multi-layered and so many people don't even see what's right in front of them much less what lies deeper. That's why sellers can count on you, Chris Ann, to give them the straight scoop and keep them out of trouble, even when others around them are doing the wrong thing that might look so right.

Aug 03, 2014 12:07 PM
Dagny Eason
Dagny's Real Estate - Wilton, CT
Fairfield County CT, CDPE Homes For Sale and Condo

Chris Ann,   Such fabulous advice!     How many buyers think that it doesn't matter for the seller as long as the house gets sold?  

Aug 03, 2014 12:08 PM
Chris Ann Cleland
Long and Foster Real Estate - Gainesville, VA
Associate Broker, Bristow, VA

Elizabeth:  Knowing the ins and outs are critical.  And like you, I make it my business to know all the layers.

Dagny:  It's more the Listing Agents who don't fight for more money for their own clients that scare me.

Aug 03, 2014 12:14 PM
Ed Silva, 203-206-0754
Mapleridge Realty, CT 203-206-0754 - Waterbury, CT
Central CT Real Estate Broker Serving all equally

Chris Ann, the closer to market value the house carries on a contract to the bank, the more likely the bank will grant the short sale and the liability of the seller is minimized. Far too many agents doing short sales just want a low price so the house can close which results in rejections by the banks and a lot of wasted time.

Aug 03, 2014 02:46 PM
William Feela
WHISPERING PINES REALTY - North Branch, MN
Realtor, Whispering Pines Realty 651-674-5999 No.

The house needs to be marketed at a fair markeet price.  It saves time in the long run and maybe money for the seller.

Aug 03, 2014 02:52 PM
Chris Ann Cleland
Long and Foster Real Estate - Gainesville, VA
Associate Broker, Bristow, VA

Ed:  I see it a lot in my market too.  It's sad the underpricing that goes on.

William:  Agreed.

Aug 04, 2014 04:07 AM
Jeff Dowler, CRS
eXp Realty of California, Inc. - Carlsbad, CA
The Southern California Relocation Dude

Seems to me that most banks dealing with a short sale are going to want fair market value. And what about the fiduciary responsibility of the L.A. to the client (who is NOT the bank)

Aug 04, 2014 01:45 PM
Chris Ann Cleland
Long and Foster Real Estate - Gainesville, VA
Associate Broker, Bristow, VA

Jeff:  This is one of those topics that drives me mad.

Aug 05, 2014 03:09 AM
Sara Chris
Absolute Consultant Group - Toluca Lake, CA

Yes, You are right about short sale issuse, but thanks for the advise. The home should be sold out at a fair market price. That could be benefical to the seller.

Aug 05, 2014 06:16 PM
Chris Ann Cleland
Long and Foster Real Estate - Gainesville, VA
Associate Broker, Bristow, VA

Sara:  Unfortunately, too many agents dipping their toes in the Short Sale pool don't realize this, or think because they aren't a tax expert they have no blame for a higher tax liability.  Our job is to be informed of the many pitfalls that could occur as a result of our advice, including list price.

Aug 06, 2014 03:37 AM