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Baby Boomers - Beware of the "Gotchas" Before Rushing Into a Real Estate Short Sale!
By Al Kernek

Having been hit hard by the recession, many Baby Boomers find themselves upside down on their mortgages. A short sale to get from under a home that that has lost considerable equity may seem like a good answer to Boomers seeking to financially reposition themselves for eventual retirement. However, there are "gotchas" to this solution...and they can come back to bite you!

The good news is that it is getting easier to accomplish short sales. New government programs offer incentives to both the first and second lenders on homes to participate in a short sale. Lenders are also subscribing to programs wherein they will respond within ten days (instead of months, if ever) with an acceptable short-sale price when requested. Bottom line, short sales are becoming more streamlined and feasible. This should help to clear the inventory of foreclosures, avoid some future foreclosures and offer a realistic alternative for Boomers caught up in the fallout of the Great Recession.

But like anything else that sounds too good to be true, short-sales are mine fields full of hidden pitfalls that can negate their apparent benefits:

• If you have a second loan on your home and the lender does not commit in writing to forgive any balance remaining from the short sale, then they can come after you for years to collect the shortfall. And that is just what they are doing. Many lenders are selling these "bad debts" to bill collectors for pennies on the dollar. Just when you thought you could start a new life, these nice people are going to hound you for up to ten years to attempt to collect huge profits.
• If you used part or all of a second loan on your home for cash out luxuries like a vacation, travel, a new car, timeshare or whatever, then the IRS wants taxes on that amount. This is true for cash-out refinances too. The only portion that is tax-free is that spent on fixing up your home (which increases your home basis for tax purposes). Disposing of troubled vacation homes and investment properties bare similar consequences.

So, there is no escaping the tax man. Upside-down Boomers who thought they were taking responsible steps to handle unexpected debt brought on by the recession are now awakening to a second act of their long nightmare. Sometimes, letting a property go to foreclosure or declaring bankruptcy (if you can financially qualify) is the best answer.

Boomers are urged to contact a knowledgeable tax attorney before taking any steps to resolve a financially-troubled property. If feasible, it just may be that holding onto your upside-down home by renting it out for several years until a break-even situation can be achieved is the best answer.

Unfortunately, there are no easy resolutions for Baby Boomers who have seen their retirement dreams shattered by the recession. Nonetheless, the more knowledge you gain, the easier it is to develop a realistic "Plan B" for eventual retirement.