To Short or Not to Short...that is the question. Part 1

Today's real estate market is a confusing spiral of conflicting information and challenging choices. Short sales, foreclosure, strategic default, waiting it out, or just burying your head in the sand are all options considered by distressed and depressed home owners today.

Perhaps a quick definition of potentially unfamiliar terms would be in order. Short sale: This is when the owner is selling their home for less than is owed to the bank. The bank must agree to accepting less than is owed and allowing the lien to be released from title. While we all understand foreclosures and assume they are caused by the owner's inability to pay, there is another option. Many owners are able to pay, but due to any number of factors choose to not pay. Strategic defaults are much more prevalent in larger cities where values have taken larger hits than we have seen in Lane County. Las Vegas is a perfect example. Some neighborhoods have seen declines of 50% or more in values. In these situations many borrowers look at their home from an investment point of view and wonder how many years it will take to get their value back and weigh that information against the consequences of just walking away. In Oregon, under a basic note and trust deed, there is no deficiency to the owner if they walk away. Enter strategic default. The choice to just walk away even if you can pay the bill.
Waiting it out is another option. Many owners, looking at their home as a home and not an investment choose to continue making their payments and realize having a home is a necessary expense. They know one day the value will return and will choose to sell at that point.
Sticking one's head in the sand is also a choice. Not a good one, and it generally ends in foreclosure, but it is still a choice.

Now back to the original question. Should you consider a short sale? Over the past five years short sales and the processes involved have evolved as fast as rabbits can breed. Home owners in distress hear many reassuring statements leading them to believe a short sale is better than a foreclosure, but as the process evolves, so do the consequences. Some common beliefs are that a short sale is better for your credit than a foreclosure, that the bank won't pursue a deficiency judgment against you, you will not be taxed on the forgiven debt, or that if you are taxed you can just tell the IRS you are insolvent and there will be no tax implications. While all these statements may be true, as with everything in life, it is in the details and certain restrictions will apply. Want to know more....come back in two weeks for part two.

Important legal disclaimer: I am a Realtor with a lot of knowledge and experience on my side. I am not a lawyer or an accountant. As such, for legal or tax advise you should consult a professional in that field. This article is a collection of my opinions and should not be considered legal or tax advice.