My husband and I have a new rival when it comes to selling our home. It isn’t the priced-to-move neighbor down the street who just got transferred out of state; it isn’t the tract home development across the street either, even though they’re building 3,000 square foot homes for $134,900 (no, I’m not joking about that figure). No, our latest competition in the housing market is something that wasn’t even on the radar five years ago: the short sale.
What Is A Short Sale?
Unless you live under a rock, you’re probably familiar with the term short sale. It is exactly what it sounds like: selling your home, yet coming up short on what you owe the bank.
I was surprised to learn that a short sale is a relatively new concept in the housing market. During my research, I came across a March 2007 article in Bloomberg Businessweek, explaining that a short sale – a brand new term back then – was the latest alternative for owners coping with underwater mortgages. Over the past five years, thanks to the tandem affect of the mortgage meltdown and Great Recession, the term short sale has become as ubiquitous in the housing market as an open house, closing costs, or points.
But although we’ve grown used to hearing this term, not everyone knows what it means. “Isn’t it the same thing as a foreclosure?” my husband asked me one night last week as we were viewing our home’s local real estate competition online. Not exactly. When you lose your house to foreclosure, the bank takes possession of it; once that happens, the bank may choose to put the property up for sale. By then, you’re out of the picture. With a short sale, you sell your house for less than you owe on it – with your lender’s consent, of course – and the bank agrees to “forgive” the difference. So, say you were a distressed homeowner who had an underwater mortgage – for example, you owed $150,000, but the property was only worth $125,000. The bank may let you sell for $120,000, and forgive you the $30,000 difference. Because many underwater mortgages are on track to face foreclosure, a short sale is sometimes called a pre-foreclosure.
The Short Sale Market
I’m not the only one facing stiff competition from short sales. According to the realty-data website RealtyTrac, the number of homes sold via short sale hit a three-year high through the first quarter of 2012. In all, buyers purchased more than 109,000 homes using this method. Even more troubling? The average property on these short sales – $175,461 – was an all-time low.
Why So Many Short Sales Now?
The growing number of short sales isn’t merely a coincidence. As with just about everything else these days, there’s a political reason behind the surge.
When the housing market started heading downhill – and an increasing number of homeowners found themselves with underwater mortgages – the government realized it had to act. Initially, the government had been taxing mortgage forgiveness – that difference between what you owe on your mortgage and its sale price. But with unemployment rampant and foreclosure rates soaring, the IRS sprang into action. In 2007, they passed the Mortgage Debt Relief Act, which allows Uncle Sam to exercise the same forgiveness as your lender in the event of a short sale. In other words, that hypothetical $30,000 the bank forgave the troubled homeowner in our above example? It’s completely erased, both by your lender as well as by the government (although it can still impact your credit, just not as harshly as a foreclosure).
But the government’s generosity only goes so far. The Mortgage Debt Relief Act expires when the clock strikes midnight on January 1, 2013. After that, the IRS will resume taxing any mortgage debt forgiveness extended to you by your lender; that is, unless Congress and the President extend the measure, which is unlikely.
My Street, Main Street
We have three short sales in our immediate area; these are properties that will be considered comps to any prospective buyer.
- Short Sale #1: Currently on the market for $150,000; tax records show the current owner bought it for $186,500 in 2009.
- Short Sale #2: Currently on the market for $144,900; tax records show the current owner bought it for $170,000 in 2010.
- Short Sale #3: Currently on the market for $156,500; tax records show the current owner bought it for $190,001 in 2008.
By comparison, my house is currently on the market for $159,900. We bought it for $146,000 in 2006, and put on a sunroom addition in 2008, paying cash for the project. We currently owe $136,000. If we were to sell it for the asking price (which we’ve already cut by $4,000 since putting it up for sale), we’d walk away with about $13,000 in our pocket after paying Realtor fees and certain closing costs. However, selling it for that price is unlikely, given the proliferation of short sales; of the three short sale comps listed above, only #2 is significantly smaller than our home, while the other two are roughly the same size or slightly larger.
Reader, have you seen a lot of short sales in your area?