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Short Sales are Becoming more Common, what are they?
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.
There seems to be some confusion regarding Short Sales. A Short Sale is a proven way for a homeowner who owes more than the house is worth to avoid a foreclosure and the subsequent credit hit.
I would advise anyone facing foreclosure to discuss their situation with an experienced Realtor. Short Sales are not a part of real estate basic training but there are a number of educational seminars a Realtor can take to get up to speed. Lenders will pay a reasonable selling commission so Realtors have an incentive to get involved in Short Sale situations.
The basic requirements for a Short Sale are a Listing Agreement with a Realtor and a Sales Contract from a Buyer which are submitted to the Lender along with a Hardship Letter from the Seller explaining why they cannot continue to pay the mortgage and supporting documents such as tax returns, bank statements, information and photos of the home and the Comps, or comparative home prices supporting the offer. The way mortgages are sold, the lender can be anywhere in the country and certainly not aware of local real estate conditions.
If the package is complete, the Lender will order a BPO, or Broker's Price Opinion, from an independent Realtor. Ths BPO is the key to the whole process. If it is too high, the Lender will not accept a low offer. Your Realtor can meet with the Agent doing the BPO and offer information supporting the offer, such as the average time on market of comparable homes, recent selling prices and point out any defects in the home. Most Lenders will accept an offer lower than the BPO, but usually not much more than 10% lower, though that will vary depending on the company.
The sales contract should specifically state that the offer is contingent on the Lender accepting the purchase price in full and forgiving the Seller the deficiency on the mortgage. There can be tax consequences but if the Seller is truly in a difficult financial situation they can be avoided. A 1099 is issued for the "forgiven" part of the mortgage, but if the homeowner is insolvent, the "phantom income" is exempt. Most Short Sellers are insolvent or the Lender would not be allowing the short sale in the first place. - an accountant should certainly be involved in that question.
This does all take time and Lenders are swamped, expect at least 2-3 months before a sale can be finalized, even if the Lender accepts the first offer. If they do not, the price can be negotiated.
I am a Realtor, a Broker Associate and I am involved in Short Sales. It is a detailed but fairly straightforward process that can work to benefit Buyer, Seller and even the Lender. The Buyer gets a good price on a home, the Seller gets to avoid the disruption and credit hit of a foreclosure and the Lender avoids the delay and expense of foreclosing on a property they don't want to own and that would negatively impact their ability to make more loans.
All this information is available on the web site
www.free-foreclosure-information.com
Thanks Brian. I have also been successful with short sales.
Short sales have become extremely popular since the market has dropped so significantly. Big equity (or any equity for that matter) deals are no where to be found and agents and investors need to find a way to get through this down market.