During a down real estate market, many people leery of selling instead choose to wait with the hope that the market will improve. This is not always a good idea, especially if you need to relocate or get into a bigger house in a good school district. Some situations necessitate taking a loss to improve your lifestyle. There are other instances where selling a home at a loss can be advantageous.
When housing prices are falling, you can’t be sure of when the bottom will hit. Dr. Stan Humphries, real estate expert for Zillow, wrote in Forbes in 2011 that he expected prices to remain low for three to five more years. By selling during a housing decline, even if it means taking a loss, you avoid the possibility that the value of your house will fall even more. At the time of publication, interest rates were at historic lows. If you are selling so that you can buy another house, you can take advantage of the low rates. If you wait to sell, you risk the possibility that interest rates will rise again before you can buy.
If you missed some mortgage payments, you risk foreclosure. Some people who purchased during the housing bubble, which peaked in 2006, found themselves in an even worse situation: They were underwater, meaning they owed more than their homes were worth. Sometimes, banks allow homeowners to sell a house for less than what they owe to avoid foreclosure. This is called a short sale. Selling your home at loss is a better option than foreclosure because you forgo the stress and embarrassment that can come with foreclosure, Bankrate.com writer Bobbi Dempsey notes.
If you sell your home for a loss through a short sale, you will hurt your credit score just as badly as if your mortgage lender forecloses on your home, but the damage might not carry the same weight with a future lender. Bradley Graham, senior director of scores product management at FICO, told "Washington Post" writer Michelle Singletary, “Certain lenders may look more favorably at a short sale than at a foreclosure.” It also helps your credit score if your lender does not report a deficiency balance. Graham said there is no meaningful difference between the impact of a short sale on your credit score and the effect of a foreclosure.
In the years between the start of the housing market decline and the date of publication, sellers of rental properties have lost money, according to Bill Bischoff of SmartMoney. Those losses represent an advantage when filing your income tax return. If you have owned a rental house for more than a year and lose money when you sell it, you can deduct that loss on your return.
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