I can keep this post short. When a bank will accept less than what is owed on a property it is called a short sale. When a borrower falls behind on his or her mortgage payments lenders can ask the borrower to pay the entire mortgage off immediatly.
Most borrowers can not do that so that bank starts the foreclosure process. To avoid foreclosure the borrower can give the home back to the bank, we call this deed in lieu of foreclosure, or the borrower can sell the property and pay off the mortgage, or the borrower, and maybe a Realtor can negotiate with the bank to accept less than what is owed on the property.
It costs banks money to go through the foreclosure process and after it is over and the home is on the market they still might not get what is owed on it and recoup their costs, which is why they may agree to a short sale.
I will write more short posts on the subject in the future. The reason I have not written many is because they attract a lot of spam and attract the "get rich quick through foreclosures crowd". See related posts: Foreclosures
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Thanks Teresa.
I was just asking someone else for some clarification on this as I have clients that are in this boat so I wanted to get a better understanding of where they are coming from.
I’ll be looking forward to more of your posts on this subject, hopefully spam free
An unfortunate consequence of short sales is the potential unexpected tax burden come April. The difference from what was owed to the bank and what the property was actually sold for is considered normal income and legally the lender must report this amount to the IRS. This phantom income can increase your tax liability and tax bracket. Example: if the lender sold your home for $30,000 less than you owed you’d be 1099 for $30,000 in income added to your regular W2 or self employment income. What’s ridiculous about this is these clients are already broke, how are they going to pay this tax burden? There will likely be alot of Federal Judgments for unpaid tax amounts.
Another interesting thing about short sales is that the seller’s credit doesn’t get dinged badly. It gets hit for the payments they are behind on, but I think that is about it.
It is my understanding that the income tax hit referenced above may not be automatic and may be negotiable in the short sale, depending upon the lender, the degree of the default and the negotiating abilities of the borrower and their agent. There are also alternatives that may be pursued, such as negotiating a restructuring of the loan and/or a forebearance agreement with the lender which would effectively delay the additional amount owed to a later date and/or by adding it to the principal loan balance.
I don’t know about anyone else, but that picture does not look like a “Steve” to me!
What is a Steve?
I have never heard of income tax being negotiable. As a MN licensed broker I can’t give tax advice, so I let my clients know that there may be tax implications and that they should consult their tax adviser.
Thanks Brian. I have also been successful with short sales.
I find them through our MLS.
Thanks Theresa,
I was hoping for an angle that would show a different set of short sale properties. Maybe faster?
Sites like realty store or, for that matter, any one of the thousand results that come up for ‘short sale listings’ in Google – could they possibly have a leg up over the MLS?
LOL the MLS has far more short sale listings and the data is more accurate and fresher because it is in the MLS before it is fed to other sites. I just checked the site you mention. It is what is known as a lead generation site. They use our listings as bait and they kind of misrepresent it leading potential buyers to believe that it is some special source of secret inexpensive homes so they can collect the buyers information and put them in the system as a lead or sell them as a lead to a Realtor. It all worked better during the buyers market because right now most people are not having trouble finding bargains unless they are really misinformed. I think I will write a post about sites like the one you left the link to. Consumers need to be educated and they need to be careful about becoming a lead. Where do you think Google gets data? They don’t have it they get it through searches and in most cases it is Realtors and our MLS’s that are the source of that data.