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Four issues homeowners should weigh when considering a short sale

To decide whether a short sale is the right option, homeowners should assess the financial implications, the timeframe for selling and the potential risks.

For many homeowners who are facing the prospect of foreclosure, a short sale may seem like the most desirable alternative. In theory, negotiating a short sale – in which a home is sold for less than the outstanding mortgage – allows a homeowner to avoid the foreclosure process as well as liability for the deficit that remains after the sale. However, before deciding that a short sale is the right option, it is critical for homeowners in Arizona to carefully weigh the following factors.

1. Time constraints

While some short sales can be wrapped up quickly, others may take several months to complete. Once a buyer has been found and a tentative deal has been negotiated, the lender must review and approve the short sale. This often requires an appraisal of the seller’s finances, the value of the property and various other relevant factors.

Unfortunately, foreclosure proceedings may begin while a short sale is still being reviewed. If this occurs, the sale may not be able to proceed, since the seller is no longer the owner of the property. Therefore, anyone who is considering a short sale should first ensure that there will be adequate time to complete the process.

2. Tax implications

When deciding whether a short sale is a viable option, property owners should also evaluate whether they are prepared to deal with any associated taxes. The Internal Revenue Service generally considers canceled debt to be taxable income, although there are some exemptions. Homeowners should accept that they might face significant tax liability if a lender allows a short sale that leaves a large deficit.

3. Continued liability

Homeowners should never assume that completing a lender-approved short sale will fully relieve them of liability for the remainder of the mortgage debt. Arizona’s anti-deficiency statute prohibits lenders from collecting deficiencies after foreclosure, but the statute does not apply to short sales. To avoid unwanted liability, homeowners should be prepared to hire a qualified professional, such as a real estate attorney, to thoroughly review the short sale contract.

4. Potential scams

People who are considering completing a short sale should also be aware of the potential for scams. Common examples of short sale scams include:

· Paying a “short sale negotiator” to reach a settlement with the bank. Some negotiators may be unqualified or may fail to do any work after collecting an upfront fee.

· Selling the house at an artificially low price to a buyer who then profits by selling the property at market value. In these cases, the first sale may result in a high deficiency, increasing the risk of the seller being held liable for the leftover mortgage debt.

· Making payments to real estate agents or other parties outside of the short sale settlement. Sellers may be tempted to do this to close a deal, but undisclosed payments can constitute loan fraud.

Fortunately, in many cases, sellers may be able to mitigate these risks by seeking legal advice before making any binding decisions.

Seek qualified help

Considering the potential pitfalls involved in short sales, it is imperative for anyone who is seriously considering this option to consult with an attorney. An attorney may be able to help a homeowner evaluate the potential benefits and drawbacks of a short sale. If this approach is the most suitable option, an attorney may also help prevent harmful oversights or mistakes during this complex process.