Temecula Valley short sales are most often mistaken as foreclosures or reside in that unknown area between knowing and understanding for quite a few agents, homebuyers, and homeowners. To begin this post I am going to provide a definition of what a short sale is:

Definition - A short sale is when the total loan or debt burdens on a real estate property are greater than the overall total value of the home as measured by the direct market comparables.

A lot of people think foreclosures and short sales as the same thing but they are actually very different. Foreclosures are when loan payments are not being made and consequently the bank sends out a Notice of Default. The notice is the first step of the financial institute’s foundation for a foreclosure process. Foreclosures usually take between 4-6 months with the owner of the home losing possession and taking a tough credit hit.

However, this circumstance can often be worked out in that 4-6 month time period. This is often why there has been confusion separating the two since they are frequently intertwined. Once a financial institution has started a foreclosure process, the current homeowner has a limited time to either bring the payments current or leave the property.

The other way to go is a short sale if the banks agree and thereby mortgage forgiveness. When taking this route, the seller lists the Temecula or Murrieta house, makes an deal with the bank or banks and sells the encumbered property before the complete foreclosure process. The financial agreement the homeowner makes with the banks is for the financial lien holder to take a smaller amount than is owed on the property but grant full debt forgiveness for the owner.

Now, why would a bank take less money that is owed? Because, that is all they are going to if they foreclose. The banks often receive more money via a short sale since the homeowner is maintaining the Murrieta or Temecula property and it sells for a higher price. The financial institute also sidesteps the expensive foreclosure process while worrying about one less property in its portfolio. Financial institutions have a tough challenge monitoring all their properties. And, homes that have been foreclosed on often get abused and vandalized losing the lending company even more money.

So in quite a few cases the short sale a solution that works out for the current owner of the home who gets debt forgiveness versus a foreclosure and the financial institute who usually takes less of a loss financially. It also often works for the new home buyer as well because they get a home that is in nice shape many times at or below foreclosure pricing.

It isn’t always a walk in the park though and there are two issues to short sales. The first hurdle is time. Financial institutes often take a long time to the file in order and submit it to a closer and unfortunately a lot of buyers will not wait. As an buyer’s advocate, it is much easier for me to sell a banked owned home or a traditional seller owned home over a short sale.

The second worry is possible tax liability. In the event a bank grant debt forgiveness it is obligatged to report that financial forgiveness as income via a 1099 IRS form. What most of sellers won’t check into is the real situation of their taxes.

Many homesellers are thought of as financially destitute and are thereby relieved of these tax burdens. Sellers in this circumstance need to have a CPA calculate their net worth utilizing the proper IRS form and very well could be pleasantly relieved.

Wrapping up, there is some good news on the horizon. The House of Representatives just overwhelmingly passed a recent bill to reduce the tax negatives on bank forgiven debt. This action further augments the benefits of a short sale over a foreclosure and really reducing the long term financial shock for someone caught in what has become a very normal situation.