Whither short sales in 2014?

shortgreenWhat’s going to happen with short sales in Massachusetts and New Hampshire come 2014?

It’s more than just another end-of-the-year speculation article: there seems to be some genuine disagreement as to whether the short sale will be a viable bail-out option for underwater real estate owners in the near future.

Maryann Little, who offers a short sale negotiation and brokerage service, thinks short sales will be around for a long ways in to the foreseeable future. Her argument in a nutshell: Fannie Mae is currently making outrageous counter-offers in every short sale situation.

Fannie Mae’s strategy: make the short sale fail, so that it won’t sell or go to auction, then re-list it later at a super high price. Potential buyers won’t be able to purchase, because they won’t get financing when the house doesn’t appraise anywhere near the asking price. EXCEPT is they choose to finance through Fannie’s in house preferred “HOMEPATH” financing. Then like magic, the deal goes through. Except if buyers are routinely overpaying under this scenario, setting up a future of short sales from here to eternity.

The other side of the argument — that short sales are about to plummet drastically — is taken up by Robert Weed, a bankruptcy lawyer in Virginia. Attorney Weed points out that the special tax break on short sales is set to expire on December 31, 2013. It doesn’t look like there is going to be an extension forthcoming from the current do-nothing gridlocked Congress. Therefore, the short sellers of 2104 will be flirting with whopper tax bills.

How come? The culprit is the tax laws on cancellation of debt, which essentially treat loan forgiveness as income, dollar for dollar. Get $100K whacked off your mortgage through a short sale? That’s $100K added to next years income, which could mean a push in to the 28% tax bracket, and presto — a $28,000 tax bill coming soon. More if you’re in a state with an income tax.

So what’s it gonna be — booming short sales or the extinction of the short sale species? Stay tuned in 2014 to find out.

By Doug Beaton

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