New York City is not immune to the real estate downturn. A recent article by the Real Deal put a spot light on troubled condos in Manhattan. These homes are in foreclosure. To quote the writer, Sarah Riley, she says: “This predicament isn't playing out in some outer-borough neighborhood. It's happening in Manhattan.” In fact, on April 5, 2010, the US Treasury Department is launching a program in an effort to streamline and reduce the delays for approving short sales. The plan requires a short sale approval or denial within ten (10) days and it forgives the borrower from the entire debt. (forgiven debt can be considered taxable income).
A Short Sale is a good strategy for a property that is “upside down”. In other words the outstanding mortgage balance is greater than the value of the property. While there is a focus on homeowner's primary residence, a short sale is a viable strategy for investment and commercial properties.
What Is A Short Sale?
There are some lenders willing to accept less than the full amount due on a mortgage loan. This is commonly referred to as a “short sale.” Generally, a buyer will be willing to purchase the property from a seller at a "short sale" amount. The benefit to the seller is that it ends the foreclosure process. It also keeps further derogatory information from being placed on the credit report. A lender must approve a short sale in writing before a property can be sold. A lender benefits from a short sale because it can minimize its losses in a falling market.
The lender will want financial information from the owner/borrower, information about the property, and the exact terms of any short sale deal. The lender needs to see a written contract between the owner and the buyer to make sure the owner isn’t walking away with any cash from the deal. However some lenders may allow a payment of moving expenses to a seller. The lender will appraise the property. They may also request a listing agreement from a licensed broker. A listing agreement tells the bank that the owner tried to sell the property.
Keep in mind that if a lender agrees to accept less than what is owed there can be a tax on the difference or it can become a deficiency judgment. For example, if a property owner owes the lender $400,000 and the lender agrees to let the property owner sell the property for $350,000, the property owner can be taxed on the $50,000 difference or face a judgment.
It is important to consult with a qualified tax professional when it comes to the financial and legal impact of using a short sale. I work with several trusted attorneys and accountants.
If you have any questions email me at: Gordon@luxornyc.com.
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