Rising home prices have been in the news. The upside: It’s a solid sign of a recovering economy. The downside: It is creating unrealistic optimism among underwater homeowners, causing many of them to think, “I’ll just hold off on a short sale and see what happens.” That decision could be a very costly mistake for homeowners. Here’s why.
1) While home prices are rising, they’re not rising fast enough.
Most home price projections for 2013 indicate an increase. But it’s a moderate increase. CoreLogic says 6%. Forbes says 5%. In fact, many neighborhoods in the Puget Sound area may see a decrease in appreciation through 2013.
According to the latest Zillow Negative Equity Report, of the homeowners in the Seattle area who are underwater, the average negative equity is 38.5%. The average negative equity amount is $91,084. With the predicted moderate increase in home values, underwater homes will remain underwater for years.
2) Banks are moving more quickly on foreclosure.
In the past, homeowners often had the luxury of time. Lenders caught unprepared for the onslaught of distressed properties often took nine months or more to begin foreclosure proceedings. That is no longer the case. With systems and resources now in place, the foreclosure process now is moving quickly. And as soon as a homeowner receives a Notice of Default from the lender, their options are limited. While a short sale may still be an option, it’s a race against the clock. If the homeowner can’t execute a short sale in time, they face foreclosure. When they go to buy a home again in a few years, homeowners will have fewer options after a foreclosure vs a short sale.
3) Waiting too long may cost homeowners thousands of dollars in taxes.
As part of the fiscal cliff resolution, Congress extended the Mortgage Forgiveness Debt Relief Act …but only through December 31, 2014.
The extension prevents many homeowners who go through a short sale from being taxed on the amount of their mortgage debt that has been forgiven. Normally, debt that has been forgiven by a lender counts as taxable income.
If a homeowner wants to make sure their debt forgiveness is not counted as taxable income, their short sale must close by December 31, 2014. That means they need to get their house on the market now.
Are you working with a seller on a short sale? If you have any questions, I’d be happy to provide you with advice free of charge. My name is Richard Eastern, and I’m a Windermere real estate broker and a partner in Washington Property Solutions, a short sale solution provider. Our goal is to help brokers like you provide the best possible service to their clients in the short sale process. We pay a 30% referral fee. If I can be of any help, please give me a call at (206) 612-5541.