Ask the broker: Any good sides to a short sale?

Q. I have a Las Vegas property that I currently rent. The house is about $160K upside down, and I lose about $500 every month. I’d like to get it off my back with a short sale when the lease ends in a couple months. What are the good and bad points of a short sale?

A. With a short sale you’re asking the lender to accept a loss on the loan, but if the value of the property increased the lender would get nothing extra. Little wonder lenders are not thrilled with short sales.

According to RealtyTrac, an online marketplace of foreclosure properties, Nevada posted the nation’s highest state foreclosure rate for the 50th straight month in February. One in every 119 Nevada housing units had a foreclosure filing during the month.

In such circumstances the real question is how to minimize your loss. There are several options to consider.

You might consider offering the property to the tenant with a short sale. Because the local market is so distressed this may actually be attractive to the lender as an alternative to foreclosure and possibly a bigger loss.

If the tenant says no, then start working on a short sale now with the understanding that the tenant’s lease must be honored.

Consider what happens if there’s no short sale and the tenant does not renew the lease. You’ll face even bigger monthly costs.

Would it make any sense for you to occupy the property if the tenant moves out?

Is foreclosure or a short sale even a viable option? Speak with a Nevada attorney for specifics. Also speak with a tax professional. Because this is a rental property, unpaid mortgage debt could be considered “imputed” income, income that may be taxable under federal rules.

It may be that your best option is to extend the tenant’s lease. Yes, this will mean losing $500 a month but that may be a better result than you’d get with a short sale or foreclosure. And besides, perhaps prices will rise.

Q. Wouldn’t the real estate market improve if appraisals did not include short sales and foreclosures?

A. The marketplace would not improve at all. Instead appraisals would be unavailable and lending would stop.

Legislation in several states has been proposed that would require appraisers to ignore short sales and foreclosures when valuing properties. In Maryland, for example, proposed legislation says that “in appraising a residential property, the licensed real estate appraiser or certified real estate appraiser shall use comparable sales only for an arms — length transaction in which the buyer and seller are not related in any way and are not entering into the transaction under duress or unusual circumstances, such as a foreclosure sale or short sale.”

Were such legislation to pass several things would happen. First, no appraisals would be made. Second, without appraisals no mortgages would be originated. Third, without appraisals or financing few homes would be sold and values would sink further.

Why would there be no appraisals?

“If these bills were enacted into law,” says the Appraisal Institute, “appraisers would be put in the difficult position of having to choose which law to violate. Appraisers are required to adhere to comply with the Uniform Standards of Professional Appraisal Practice in federally related transactions. The standard mandates that appraisers ‘must analyze such comparables sales as are available.’ Further, the standard cannot be voided by a state or local government.

“Not following USPAP could subject the appraiser to having action taken against their license. Therefore, appraisers would have to make the decision to commit a USPAP violation — which in the case of federally related transactions would be a violation of state law — or to violate the law prohibiting the consideration of distressed sales as comparables.”

Lenders could not make loans even if foreclosure-free appraisals were somehow available because they would be financing property on the basis of an inflated valuation — a sure road to more risk and losses.

Q. Imagine that someone bought a $450,000 home, the property value fell to $275,000 and the owner was foreclosed. The owner has now saved $35,000 in cash to buy a $100,000 replacement residence but cannot get a loan for the $65,000 balance. With 35 percent down why is financing unavailable?

A. After a foreclosure borrowers will generally need to wait three to five years before getting a new mortgage — and longer if the foreclosure was a deliberate walkaway. In this case the first lender lost at least $175,000, and the borrower is now regarded as so risky that no lender will accept his or her mortgage application.

ŸEmail Peter G. Miller at peter@ctwfeatures.com.