Is There Shame in a Short Sale?

Short Sale ImageIn the early 90’s  when real estate activity began declining along with home values, I began doing short sales. Lots of them.They were sad, painful, and tough to do. What would shock me was the homeowner’s reaction to being in financial trouble and how they handled it.

At least 50% of the clients who contacted me did so long after they should have. When I asked why they did not deal with the issue sooner, most could not give any answer. Finally they would say “I thought there was a way out”. There was denial, and shame about what had happened.

Most of the shame has been eliminated in today’s market. Plus for one more year the government is giving homeowners a present if they do a short sale. They voted to extend the Debt Forgiveness Act until 01/01/14. What this means is that normally the homeowner would pay tax on the amount of debt that was forgiven in the short sale. So if your loan amount was $600,000 and the bank agreed to be paid $500,000, the $100,000 would be considered income. However, for this year the government is agreeing to forgive those taxes on that income.

Depending on your tax bracket, you might owe $15,000-$30,000. Another reason for doing a short sale is you get rid of an investment that is worth significantly less than what you paid. How long will it take for that value to come back to the price you originally paid? Plus any money you put into that property could be put in another investment that earns you a positive return immediately rather than a negative one.

Once I show sellers what they can save and how much further ahead they will be by doing a short sale, they see the financial sense. Plus get rid of the weight of being harassed by lenders or collection agencies. How could there be shame in that?

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