Can I Rent Out My House While I Am Doing A Short Sale?
Can I rent out my house while I am doing a short sale?
For homeowners that have already moved out of their home and are starting a short sale, it is sometimes tempting to put in a short term renter in the property to generate a little cash flow. To answer the question “can I rent out my house while I doing short sale?” the answer is of course yes. It is still your property and you can do what you want with it?
Should you rent out your house while doing a short sale – hell no!
There are several reasons that I strongly discourage homeowners from putting tenants in their homes or while doing a short sale. The first is accessibility while trying to get it sold. Real estate agents are more likely to show vacant homes than they are ones that are occupied and need notice before showing. Tenants can also make getting homes sold simply impossible because of the way they maintain property.
Having tenants the property also affects possession by the new buyer. Consider the situation from your prospective buyers standpoint. If you have already waited for months for a short sale to be complete, do you really want to wait additional time to give tenants notice and deal with moving them out? The answer is probably no!
If you rent out your home during a short sale, the bank will want their money!
To be fully within the law, when you rent out your home during a short sale you must disclose that income to the bank. Since the bank is getting ready to take it in the shorts on your mortgage they are likely to look at the money you are generating from rent as theirs!
Renting out your home during a short sale may change its classification!
Additionally, turning your primary residence into a rental home may change its status affecting whether or not you can be sued by the bank for the deficiency amount. Currently in Washington is a no recourse state and your lender cannot come after you for the deficient amount after a short sale. Please keep in mind that this applies to the first mortgage only and in some cases a 2nd mortgage can still pursue depending on how it was originated. The small amount of rent you will gain does not seem like enough to risk a lawsuit from the bank over the deficiency.
The last reason to not rent out your home while doing a short sale is that you jeopardize your tax credits. Currently the IRS is waiving income tax on any deficiency that occurs on your primary residence due to a short sale. If you rent out your home, you need to declare as rental income on your tax return. If you show rental income on your primary residence, it is possible for the IRS to decide that it is an investment property, and tax you on the amount of your loan that the bank forgave.
Renting out your home during a short sale makes negotiations more difficult.
Anyway you slice it putting tenants in your home makes successfully doing a short sale more difficult. Another consideration is that some programs require the property to be owner occupied. Most HAFA related programs run by Fannie Mae and Freddie Mac require that the owner be occupying the property for participation in those programs.
You can rent out your home while doing a short sale, but I would not suggest it.
As with any real estate situation, it is always good to consult with your tax professional and CPA. They may have their reasons to disagree with me. However as a professional short sale negotiator and real estate broker, I have never seen good things come from renting our property that is going into a short sale.
If you have questions about doing a short sale on your Seattle area property please call me at 425-773-3149 or fill out the form below. I would be happy to sit down with you and discuss your situation and what can be done to successfully short sale your property.
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Written by: Jacqueline Cliff
