Lake Havasu City Real Estate Short Sales

          Ten years ago, “short sale” was not a familiar term in Lake Havasu real estate. Property values were on a steady rise, and there was no reason for a property owner to sell short or for a lender to consider a short sale. Unfortunately, when property values across the country started to drop, Lake Havasu City was not immune.

What is a short sale?

          A short sale seller is typically one who is upside down in his property loan; owing more than what the property is worth.  While the property owner is the listing party in a short sale, the property owner needs his lender’s cooperation; the lender must agree to accept less than the amount needed to pay off the loan balance and release the property lien.

 Consult an Attorney

          Arizona is one of the few states that do not routinely use attorneys in real estate transactions.  In Arizona, a real estate licensee commonly assists the buyer in completing the purchase contract and helps the client navigate the transaction, from the initial offer, through the negotiation and escrow process. Yet, the short sale is one type of real estate transaction that a seller should consult an attorney (even in Arizona), before listing a short sale.

Possible Deficiency Judgment

          Before listing a short sale, the property owner should get his lender’s permission.. Yet, many sellers confuse the lender’s agreement to participate in a short sale, as an agreement to forgive any unpaid balance of the loan. Some lenders issue deficiency judgment to the seller, after the close of escrow, holding the seller responsible for the difference between what the lender received from the buyer, and the loan balance.  A seller needs to obtain the lender’s intention – in writing – as to what they intend to do about the unpaid balance. They may forgive the amount, or hold the seller responsible. For this, the seller needs an attorney to review any agreements with the lender, before proceeding.

Possible Income Tax Liability

          If the lender does forgive the unpaid balance of the loan, the seller may be responsible for income tax on the forgiven amount. While the Mortgage Debt Relief Act of 2007 provides some tax exemption, it does not apply to all short sales. In Lake Havasu City, many short sales are second homes or rental properties, and may not qualify for a tax exemption. The seller should consult with his accountant to clarify any possible tax liability after a short sale.

Seller’s Reasons
for a Short Sale

          Before proceeding with a short sale, the seller should consider the pros and cons; weight foreclosure against short sale. While some financial gurus insist short sales do less damage to credit scores than foreclosure, according to Experian, one of the three major credit-reporting bureaus, a short sale typically lowers a debtor’s credit scores. While short sales are less embarrassing than a foreclosure, they are more work for the property owner. Plus, the property owner is the responsible party conveying title to the new buyer.

Buyer Short Sale
Pros and Cons

          There is no doubt the short sale is better for the neighborhood, in that they aren’t boarded up properties, as are many foreclosures. For the buyer, they tend to be in better shape than foreclosure, yet have a poor reputation when it comes to timely or successful closes.  Before committing to a short sale offer, the buyer should ask if the lender is cooperating. If the seller leaves all negotiations with the lender for after the offer, or has multiple lenders, then the risk of the buyer wasting his time increases.