Many people are nearing the 3, 5 or 7 year mark of an interest only mortgage. They are finding it is difficult or impossible to sell their home at this time for enough money to cover selling costs and the mortgages of the home. I hear about more people considering a “short sale.” A “short sale” is when the home is sold for less than the total of the mortgages on the home because the lender(s) agree to take less than the total that is owed them. 

Be careful. There are consequences to doing a “short sale.” While a person can avoid having a foreclosure, a “short sale” can be reported as an unsatisfied debt, which is not a good thing. The values of the neighborhood could be affected by a lower purchase price by the buyers in a “short sale.” Your real estate professional will probably be “squeezed” to give up some of his or her commission to make the deal work –risking giving you less attention than other transactions. The amount of your debt that is forgiven by your lender could be treated as ordinary income to you – meaning that you could be taxed on money that you do not actually receive. 

A seasoned real estate professional or experienced real estate attorney should be able to discuss some options for you, including (1) just selling the property with aggressive marketing; (2) doing a sale at full price, but having the buyer take the property “subject to” the existing loan (probably at a lower interest rate than could be obtained otherwise); (3) doing a sale with an Note secured by an All Inclusive Deed of Trust (sometimes referred to as an AITD or a “wraparound” loan); or (4) doing a lease option instead of a purchase transaction.

There are risks and benefits to each of these options. You should consult an attorney to explain each to you before structuring a transaction in any of these ways.

As usual, there are usually alternative ways to tackle most obstacles in life.   Doing a “short sale” is only one of the ways to deal with an approaching balloon payment or change in monthly loan payment.