Short Sale Seller Information

Helpful Hints For Short Sale Purchases

By | April 1, 2011

First of all, let me say that short sales have come a long way. There was a time when banks were very hesitant to accept short sale offers and, as such, they were pretty unreasonable about the whole deal (wouldn’t you be, if it was you who was losing millions of dollars to bad debts?)

These days, acceptance rates are way up and processing time at the banks is way down. Lenders, sellers, and buyers alike have embraced the short sale as a legitimate way to do business.

It can still take a while.

Depending on who the bank is, the number of banks who are owed money, and the borrower’s personal financial situation, expect to wait 3-5 months for a response from the bank BEFORE the regular clauses of the contract kick in (those are the mortgage, the inspection, and the title clauses.) The bank needs to size up the specific situation, get a feel for the value of the property, determine the eligibility of the borrower for a short sale (if the seller has tons of liquid assets, the banks might hold them to their note) and exhaust all their options to try and get the highest payment for themselves that they can.
You have a contract with the seller, not with the bank.

Short sale contracts are regular real estate contracts.

Yep, you read that correctly – they’re absolutely normal in every way. Like every other real estate contract, there are certain contingencies that must be met for the contract to be finalized: the inspections have to be done to the buyer’s satisfaction, the financing has to go through, and the seller has to provide clear title to the buyer. Short sales just add another contingency – bank approval.

Banks aren’t bound to accept your contract.

They don’t have to accept your terms, they don’t have to accept your price, and they don’t have to accept you. If you have a solid offer, they still probably will – after all, banks can’t sell it over market value anyway, and they certainly don’t want to spend money they’re already losing just to maintain a property they own through foreclosure. If they can turn a profit (or reduced loss) through a short sale they’re likely to accept – but don’t be surprised if your lowball offer gets turned down outright.

The seller’s mistakes don’t follow the property.

I’ve talked to tons of buyers about short sales, and to a one they’re concerned about the liens on the property – the mortgage, the equity line, the delinquent HOA fees. They don’t want to pay them after closing and they should never have to.

Most standard real estate contracts require the buyer receive clear title to a property. That means that banks have to either accept an agreed-upon price minus any other liens that they will have to pay (including back taxes and real estate commissions) or foreclose on the property, pay the liens anyway, and then try to sell it.

Also, title is easier to convey if the property hasn’t been foreclosed on (as in a short sale situation.) In a foreclosure suit, the bank forcibly takes title title from the borrower in default, then passes it on – in a short sale, they simply release the property from the note.

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What’s A Short Sale?

By | March 29, 2011

Once upon a time, short sales were among the rarest of transactions. Houses tended to appreciate (heavily) over time and mortgages used to come with heavy down payments, leading to lots of equity for sellers. People could wait a few years, get a few tax benefits, and then sell for a profit.

Not anymore.

These days, more and more homes are marketed as short sales (the first step a house takes toward foreclosure.) High loan-to-value mortgages and unsustainable price appreciation led to an unprecedented drop in home values. Here are some Sarasota, Florida market statistics for the last five years:

sarasota median sales prices

Homes prices have plummeted to unbelievable lows, but the market has stabilized substantially over the last year (as of March 29, 2011). Lots of homeowners remain upside down in their mortgages, however, and need to find a way to sell their property.

Enter the short sale.

What is a Short Sale?

A short sale is, simply put, a way for homeowners to sell their properties for less than what they owe. It’s not a ‘get out of jail free’ card; short sale sellers take big hits to their credit, lose any money they’ve invested in their properties, and in some cases are required to repay some or all of their mortgage after the property has been sold.

For a short sale to work, the bank that owns the note (the instrument that binds the seller to repay the mortgage) has to agree to take less than what they’re owed. In many cases, this can be hundreds of thousands of dollars less than the original amount.

Why Would a Bank Accept a Short Sale?

Money talks.

From a bank’s perspective, here’s the problem: borrowers owe lots more than their houses are worth and are unwilling or unable to make payments. Mortgage payments are the bank’s primary sources of income. When borrowers don’t make payments, banks don’t make money.

Once upon a time, banks would just foreclose on properties when the borrowers went into default. This didn’t happen often, and when it did, the income from other mortgages more than made up for the loss – and in any event, the newly foreclosed home could be sold at market value and the banks might even be able to turn a quick profit in the resale market.

These days, when banks foreclose, they’re up against heavy competition to get a house sold. The market values are so far below what the borrower originally paid that the banks will take a loss regardless of their actions. If they do foreclose on a home they have to sell it at a steep discount and they take over all kinds of other payments – lawn service, taxes, HOA fees, maintenance, pool guys, and more. These are all red marks on the bank’s balance statement.

On top of that, banks have to pay attorneys to foreclose. And lawyers ain’t cheap.

A short sale is a way for a bank to trump all of those payments – homeowners will generally maintain their own properties as long as they live in the home, the banks won’t have to pay the courts thousands of dollars in fees and costs, and at the end of the day, the banks will actually net much more by allowing a borrower to walk on their mortgage.
Enter the short sale.

 

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Short Sale vs. Foreclosure – Seller Information

By | April 27, 2010

There are a lot of really, really good reasons not to let the bank simply foreclose on your property; to name a few, short sales have significantly less impact on your credit score, you can often avoid a deficiency judgement with a short sale, and short sales don’t jeapordize any security clearance you may have. Here’s a more comprehensive analysis.

Foreclosure Short Sale
> Primary homeowners who get foreclosed on are ineligible for Fannie Mae loans for a period of 5 years.

(Fannie Mae is one of the largest financers in the country.)

> Homeowners in a successful short sale are eligible again after only 2 years.
> Investors who get foreclosed on are ineligible for Fannie Mae loans for a period of 7 years. > Investors in a successful short sale are eligible again after only 2 years.
> On any future 1003 application, a prospective borrower will have to answer YES to question C in section VIII that asks, “Have you ever had property foreclosed upon or given title or deed-in-lieu thereof in the last 7 years?”

This will affect future rates.

> There is no similar declaration or question regarding a short sale.
> Your credit score may be lowered anywhere from 250 to over 300 points. Typically foreclosure will affect your score for over 3 years. > Only late payments will show and after sale mortgage will be reported as paid or negotiated. This will lower the score as little as 50 points if all other payments are being made. A short sale’s effect can be as brief as 12 to 18 months.
> Foreclosure will remain as a public record on a person’s credit history for 10 years or more. > Short sales are not reported on a credit history. There is no specific reporting item for ‘short sale’ and the loan is typically reported as “Paid in Full, Settled.”
> Foreclosure is the most challenging issue against a security clearance outside the conviction of a serious misdemeanor or a felony. Police officers, military personnel, CIA, security, and almost everyone else who has a foreclosure on their record will in almost all cases have their clearance revoked and their position terminated. > A short sale on its own will not challenge most security clearances.
> Employers have the right and are actively checking the credit regularly of all employees who are in sensitive positions. A foreclosure is in many cases grounds for immediate reassignment or termination. > A short sale is not reported on a credit report and is therefore not a challenge to employment.
> Many employers are requiring credit checks on all job applicants. A foreclosure is one of the most detrimental credit items an applicant can have and can present a major challenge to employment. > A short sale is not reported on a credit report and is therefore not a challenge to employment.
> In 100% of Florida foreclosures the bank has the right to pursue a deficiency judgement. > In many short sales it is possible to convince the lender to give up the right to pursue a deficiency judgement against the homeowner.
> In a foreclosure the home will have to go through an REO process if it does not sell at auction. In most cases this will result in a lower sales price and longer time to sell in a declining market. This will result in a higher possible deficiency judgement. > In a properly managed short sale where the lender has the right to pursue a short sale, the home is sold at a price that should be close to market value and in almost all cases will be better than a REO sale, resulting in a lower deficiency.

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Short Sale Tax Information

By | April 27, 2010

While there is a possibility that you will not have any tax liability after completing a short sale, there is also a possibility that the government will consider your debt forgiveness as income – and you may have to pay taxes on it. It’s very important to talk to a tax professional if you’re considering a short sale.

The following article is quoted directly from the IRS website.
See more at the following website:

http://www.irs.gov/newsroom/article/0,,id=174034,00.html

Home Foreclosure and Debt Cancellation

Update Dec. 11, 2008 — The Mortgage Forgiveness Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualify for this relief.

This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion doesn’t apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.

The amount excluded reduces the taxpayer’s cost basis in the home. More details. Further information, including detailed examples, can also be found in Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments.

The questions and answers, below, are based on the law prior to the passage of the Mortgage Forgiveness Debt Relief Act of 2007.

1. What is Cancellation of Debt?

If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes, depending on the circumstances. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven, the amount you received as loan proceeds is reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.

Here’s a very simplified example. You borrow $10,000 and default on the loan after paying back $2,000. If the lender is unable to collect the remaining debt from you, there is a cancellation of debt of $8,000, which generally is taxable income to you.

2. Is Cancellation of Debt income always taxable?

Not always. There are some exceptions. The most common situations when cancellation of debt income is not taxable involve:

  • Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.
  • Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you.You are insolvent when your total debts are more than the fair market value of your total assets.Insolvency can be fairly complex to determine and the assistance of a tax professional is recommended if you believe you qualify for this exception.
  • Certain farm debts:If you incurred the debt directly in operation of a farm, more than half your income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your cancelled debt is generally not considered taxable income.The rules applicable to farmers are complex and the assistance of a tax professional is recommended if you believe you qualify for this exception.
  • Non-recourse loans:A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral.That is, the lender cannot pursue you personally in case of default.Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income.However, it may result in other tax consequences, as discussed in Question 3 below.

3. I lost my home through foreclosure.  Are there tax consequences?

There are two possible consequences you must consider:

  • Taxable cancellation of debt income.(Note: As stated above, cancellation of debt income is not taxable in the case of non-recourse loans.)
  • A reportable gain from the disposition of the home (because foreclosures are treated like sales for tax purposes).(Note: Often some or all of the gain from the sale of a personal residence qualifies for exclusion from income.)

Use the following steps to compute the income to be reported from a foreclosure:

Step 1 – Figuring Cancellation of Debt Income (Note: For non-recourse loans, skip this section.  You have no income from cancellation of debt.)

1. Enter the total amount of the debt immediately prior to the foreclosure.___________

2. Enter the fair market value of the property from Form 1099-C, box 7. ___________

3. Subtract line 2 from line 1.If less than zero, enter zero.___________

The amount on line 3 will generally equal the amount shown in box 2 of Form 1099-C.  This amount is taxable unless you meet one of the exceptions in question 2.  Enter it on line 21, Other Income, of your Form 1040.

Step 2 – Figuring Gain from Foreclosure

4. Enter the fair market value of the property foreclosed.For non-recourse loans, enter the amount of the debt immediately prior to the foreclosure ________

5.    Enter your adjusted basis in the property.(Usually your purchase price plus the cost of any major improvements.)                                    ____________

6. Subtract line 5 from line 4.  If less than zero, enter zero.

The amount on line 6 is your gain from the foreclosure of your home.  If you have owned and used the home as your principal residence for periods totaling at least two years during the five year period ending on the date of the foreclosure, you may exclude up to $250,000 (up to $500,000 for married couples filing a joint return) from income.  If you do not qualify for this exclusion, or your gain exceeds $250,000 ($500,000 for married couples filing a joint return), report the taxable amount on Schedule D, Capital Gains and Losses.

4. I lost money on the foreclosure of my home.  Can I claim a loss on my tax return?

No.  Losses from the sale or foreclosure of personal property are not deductible.

5.  Can you provide examples?

A borrower bought a home in August 2005 and lived in it until it was taken through foreclosure in September 2007. The original purchase price was $170,000, the home is worth $200,000 at foreclosure, and the mortgage debt canceled at foreclosure is $220,000. At the time of the foreclosure, the borrower is insolvent, with liabilities (mortgage, credit cards, car loans and other debts) totaling $250,000 and assets totaling $230,000.

The borrower figures income from the foreclosure as follows:

Use the following steps to compute the income to be reported from a foreclosure:

Step 1 – Figuring Cancellation of Debt Income (Note: For non-recourse loans, skip this section.  You have no income from cancellation of debt.)

1. Enter the total amount of the debt immediately prior to the foreclosure.___$220,000__

2. Enter the fair market value of the property from Form 1099-C, box 7. ___$200,000__

3. Subtract line 2 from line 1.If less than zero, enter zero.___$20,000__

The amount on line 3 will generally equal the amount shown in box 2 of Form 1099-C.  This amount is taxable unless you meet one of the exceptions in question 2.  Enter it on line 21, Other Income, of your Form 1040.

Step 2 – Figuring Gain from Foreclosure

4. Enter the fair market value of the property foreclosed.For non-recourse loans, enter the amount of the debt immediately prior to the foreclosure. __$200,000__

5.  Enter your adjusted basis in the property.(Usually your purchase price plus the cost of any major improvements.)                                        ___$170,000__

6. Subtract line 5 from line 4.If less than zero, enter zero.___$30,000__

The amount on line 6 is your gain from the foreclosure of your home.  If you have owned and used the home as your principal residence for periods totaling at least two years during the five year period ending on the date of the foreclosure, you may exclude up to $250,000 (up to $500,000 for married couples filing a joint return) from income.  If you do not qualify for this exclusion, or your gain exceeds $250,000 ($500,000 for married couples filing a joint return), report the taxable amount on Schedule D, Capital Gains and Losses.

In this situation, the borrower has a tax-free home-sale gain of $30,000 ($200,000 minus $170,000), because they owned and lived in their home as a principal residence for at least two years. Ordinarily, the borrower would also have taxable debt-forgiveness income of $20,000 ($220,000 minus $200,000). But since the borrower’s liabilities exceed assets by $20,000 ($250,000 minus $230,000) there is no tax on the canceled debt.

Other examples can be found in IRS Publication 544, Sales and Other Dispositions of Assets, under the section “Foreclosures and Repossessions”.

6.  I don’t agree with the information on the Form 1099-C.  What should I do?

Contact the lender.  The lender should issue a corrected form if the information is determined to be incorrect.  Retain all records related to the purchase of your home and all related debt.

7. I received a notice from the IRS on this. What should I do?

The IRS urges borrowers with questions to call the phone number shown on the notice. The IRS also urges borrowers who wind up owing additional tax and are unable to pay it in full to use the installment agreement form, normally included with the notice, to request a payment agreement with the agency.

8. Where else can I go to get tax help?

If you are having difficulty resolving a tax problem (such as one involving an IRS bill, letter or notice) through normal IRS channels, the Taxpayer Advocate Service may be able to help. For more information, you can also call the TAS toll-free case intake line at 1-877-777-4778, TTY/TDD 1-800-829-4059.

In some cases, you may qualify for free or low-cost assistance from a Low Income Taxpayer Clinic (LITC).  LITCs are independent organizations that represent low income taxpayers in tax disputes with the IRS. Find information on an LITCs in your area.

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Common Short Sale Documents

By | April 27, 2010

If you’re getting ready to apply for a short sale, please have these documents ready at your initial listing appointment. Your lender will require them to process your application, and you can save lots of valuable time if you can prepare them up front.

Please note: lenders may need recent updates of each item, so put your paystubs and bank statements in a safe place every week!

> Two months most recent mortgage statements (all mortgages)

> Two months checking account statements (all borrowers)

> Two months saving account statements (all borrowers)

> Two months other account statements (Roth IRA, 401k, Trust, etc., all borrowers)

> Last two paycheck stubs (all borrowers)

> Two years tax returns

> Hardship letter (see sample)

> Financial Worksheet (attached)

> Authorization Forms to allow your Realtor, attorney, and title company negotiate on your behalf

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Foreclosure and Short Sale Alternatives

By | April 27, 2010

There are several options you can pursue when you’re behind on your mortgage and you want to stay in the house. An attorney can help you work through most of these solutions.

Reinstatement – If the reason you’ve missed your payments was temporary and you’re now able to continue paying your mortgage, you may be able to reinstate your mortgage. You’ll probably have to pay all missed fees, late fees, and legal fees due up to the date that you reinstate.

Forebearance If you’d like to reinstate your mortgage but the one-time payment is too high, there is a chance that the lender will allow you to negotiate a repayment plan, or forbearance. The lender will allow you to pay your debt over a specific period of time or will tack the extra debt onto the end of the mortgage.

Rent The PropertyIn some cases a homeowner will have payments low enough to allow him/her to rent the property and pay the excess mortgage payment out-of-pocket.

Refinance – If you have sufficent equity and income, and your credit hasn’t taken too large a hit, you may be able to refinance to a lower rate or better terms – or get enough cash out to cover payments for a while.

Mortgage Modification – In cases where homeowners do have the means to afford their payments, or a payment close to their payment, lenders may qualify the borrower for a mortgage modification.

Short-Refi – The relatively new phenomenon shows just how far some morgage companies are willing to go to avoid foreclosing on properties. This process involves the refinance of a home with reduction in the principal balance and often the interest rate as well. While relatively rare, and attorney can help you negotiate a short-refi.

Deed-in-Lieu – Often called a “friendly foreclosure,” deed-in-lieu occurs when the homeowner gives his deed back to the bank. In exchange for a non-contested repossession the banks will often give up the right to a deficiency judgement; however, in most cases a short sale is more beneficial to the homeowner.  It is still a form of foreclosure and will affect your credit as such.

Bankruptcy – Bankruptcy may allow the homeowner to reorganize his debt and keep his property. An attorney can help you with a bankruptcy.

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What Is A Short Sale?

By | April 7, 2010

Once upon a time, short sales were among the rarest of transactions. Houses tended to appreciate (heavily) over time and mortgages used to come with heavy down payments, leading to lots of equity for sellers. People could wait a few years, get a few tax benefits, and then sell for a profit.

Not anymore.

These days, more and more homes are marketed as short sales (the first step a house takes toward foreclosure.) High loan-to-value mortgages and unsustainable price appreciation led to an unprecedented drop in home values.  Here are some Sarasota, Florida market statistics for the last five years:

Sarasota median sales prices

Homes prices have plummeted to unbelievable lows, but the market has stabilized substantially over the last year (as of April 7, 2010).  Lots of homeowners remain upside down in their mortgages, however, and need to find a way to sell their property.

Enter the short sale.

What is a Short Sale?

A short sale is, simply put, a way for homeowners to sell their properties for less than what they owe.  It’s not a ‘get out of jail free’ card; short sale sellers take big hits to their credit, lose any money they’ve invested in their properties, and in some cases are required to repay some or all of their mortgage after the property has been sold.

For a short sale to work, the bank that owns the note (the instrument that binds the seller to repay the mortgage) has to agree to take less than what they’re owed.  In many cases, this can be hundreds of thousands of dollars less than the original amount.

Why Would a Bank Accept a Short Sale?

Money talks.

From a bank’s perspective, here’s the problem: borrowers owe lots more than their houses are worth and are unwilling or unable to make payments.  Mortgage payments are the bank’s primary sources of income.  When borrowers don’t make payments, banks don’t make money.

Once upon a time, banks would just foreclose on properties when the borrowers went into default.  This didn’t happen often, and when it did, the income from other mortgages more than made up for the loss – and in any event, the newly foreclosed home could be sold at market value and the banks might even be able to turn a quick profit in the resale market.

These days, when banks foreclose, they’re up against heavy competition to get a house sold.  The market values are so far below what the borrower originally paid that the banks will take a loss regardless of their actions.  If they do foreclose on a home they have to sell it at a steep discount and they take over all kinds of other payments – lawn service, taxes, HOA fees, maintenance, pool guys, and more.  These are all red marks on the bank’s balance statement.

On top of that, banks have to pay attorneys to foreclose.  And lawyers ain’t cheap.

A short sale is a way for a bank to trump all of those payments – homeowners will generally maintain their own properties as long as they live in the home, the banks won’t have to pay the courts thousands of dollars in fees and costs, and at the end of the day, the banks will actually net much more by allowing a borrower to walk on their mortgage.

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