Short sales are heating up thanks in large part to major lenders getting their systems up to snuff and a looming Mortgage Forgiveness Debt Relief Act deadline (Dec. 31, 2012) , which cancels/erases taxable debt on the difference owed on the mortgage.
For example, if a homeowner owes $300,000 on his or her mortgage, but the property is only worth $225,000, a $75,000 difference exists for which he or she is financially responsible. Rather than selling the home for a loss and cutting a $75,000 check to the bank, the homeowner, lender and buyer can negotiate a “short sale” that ensures the seller can avoid foreclosure, as well as a huge $75,000 tax liability (for now), while the seller gets a sweet deal on a new home.
The lender, meanwhile, actually saves money by not having to foreclose on the house and then attempt to preserve, market and re-sell it to a new buyer months — possibly even a year or more — down the road.
But, short sales are typically anything but “short.” The process has been streamlined and improvements have been made; however, there are several roadblocks that can and often do gum up the process.
Homeowners Associations (HOAs) are among the many culprits that can kill deals.
Most short sales are “distressed” situations. In other words, short sellers either can’t afford — or simply refuse — to pay their mortgages.
Therefore, once that decision is made it’s reasonable to assume that most of them also stop paying dues to their neighborhood associations. HOAs typically exist in planned and/or gated communities, managing and maintaining the common areas (pools, fitness centers, playgrounds, etc.) and ensuring that all its residents follow the HOA bylaws.
Missed HOA payments add up over time. And when it reaches a tipping point (all HOAs have different thresholds), it will typically file a lien (or liens) for the amount owed against the property. So when a potential buyer comes along, the lien will appear on the title and will need to be paid off prior to closing.
That could be a major sticking point, especially (in the above example) if a buyer is plunking down a quarter-million dollars for a new home. Factor in closing and moving costs, as well as all the other inevitable “move-in” expenses, and ponying up another $5,000 to clear the HOA debt he or she didn’t incur, is a significant setback.
Sure, the seller could offer to pay off the amount owed, but chances are he or she doesn’t have that kind of cash just laying around if he or she can’t afford to even pay the mortgage. And unless the lender is super motivated, it also will most likely not be too thrilled to pay it off, considering it has already agreed to accept a $75,000 loss on the mortgage.
Indeed, HOA liens are tricky.
Settlements can often be reached to ensure clear title, but once again it becomes an issue of who is going to pay. In most situations in today’s “buyers market,” potential buyers simply move on to the next property that doesn’t have so many headaches and require them to spend more money than they have to.
Who can blame them?
Unless, of course, the short seller manages to cobble together the cash to ensure he or she doesn’t get slapped, potentially, with a tax bill at the end of the year. And with an extension or amnesty possibly in the cards in the near future based on the historic nature of the real estate market collapse, those folks are likely few and far between.