30 Oct Bankruptcy In Florida: Short Sales Are A Joke.
As a Bankruptcy attorney in Southwest Florida, I meet with people daily who are interested in the Bankruptcy process and how bankruptcy can help them. I enjoy giving them information on how Bankruptcy can change their lives.
Unfortunately, there is quite a bit of bad information out there about what is really going on in the Southwest Florida real estate market. For instance, I just read an article on Short Sales in the Sunday News-Press. Unfortunately, the writer, Dick Hogan, a gentleman who’s opinion I truly respect and whose articles I enjoy reading, missed the mark on this one.
Let’s start with the current state of the real estate market in Southwest Florida. First, foreclosures are at an all time high. In September 1,220 foreclosures were filed in Lee County. The local economy is terrible and many people are either out of work or have had their hours cut back dramatically. In other words, times are tough. Many residents are just scraping by and making ends meet. The residents being foreclosed upon do not have the best credit ratings because they are, by definition, in default. Yet the News-Press states that one of the advantages of a short sale is that it allows the homeowner to avoid going into foreclosure and thus preserves his credit rating. On the same note, one of the disadvantages of a short sale is that the bank will not go along with a short sale unless the owner is tapped out and in foreclosure or at a minimum behind on the mortgage payments. How can a short sale be advantageous to a seller by saving his credit rating, and yet, be a disadvantage by requiring the seller to be in either default and foreclosure? This is just the beginning of the charade.
Because the real estate market is in the toilet, real estate agents are not selling very many homes. Accordingly, their incomes have plummeted along with home prices. Now, they appear to have found a way to start listing properties which may entice homebuyers back into the market. Unfortunately, what Mr. Hogan does not state is the success rate of short sales. Several weeks ago, President Bush asked the mortgage companies to begin working with distressed properties; however, I have not discovered any mortgage servicers or companies which have really implemented this procedure. Have you heard of any mortgage companies hiring more employees to handle this crisis? No, neither have I. I’m not trying to disparage real estate agents who are trying to make a living; however, I am against providing individual sellers with flase hope and false information. I speak to many people who are interested in short sales who have been sold a bill of goods without being told the whole story.
So, now we have more sellers listing their homes for sale for less money and in order to qualify for the short sale, they actually have to let their credit ratings slip and/or let the home go into foreclosure.
The next part of the charade is the tax consequences associated with a short sale. Mr. Hogan states that homeowners who sell short are usally subject to income tax on the amount of the set-off. Income is defined in the tax code (26 U.S.C. sect. 61)as all income from whatever source derived, including income from the discharge of indebtedness. So, based upon a reasonable interpretation, it appears the seller will have a tax liability as a result of the short sale. Amazingly, Congress appears to be coming to the rescue of homeowners with the Mortgage Forgiveness Debt Relief Act. Let’s face the facts, when has Congress fixed anything? Part II will deal with the players in the short sale game and their real interests in this game.
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