"Short" Sale Information.

[HHM]

We frequently get questions regarding so called "short sales" of real estate. So I thought I would summarize some of the basic information.

What is a short sale?

A short sale occurs when a person with a mortgage attempts to sell their home, or any parcel of real estate, for less than what is owed on the property.

Can you do a short sale without approval from the lien holders?

NO. In order to complete a short sale, the lien holders (i.e. the mortgage finance companies) MUST agree to the short sale. You cannot, of your own accord, sell your real estate for less than what is owed. Why? Reason being, in order to pass clear title of the real estate to the buyer, ALL lien holders must agree to release their lien. The only time lien holders release their lien is if they have been paid in full, or if they AGREE to accept less than what is owed. In addition, I have been hearing that some lenders are requiring the debtor tp list their home on the market for a certain number of months before the lender will even entertain a short sale proposal (typically 90 days).

How do short sales work?

Typically, a debtor is approached by a real estate investor who offers to buy your home for less than what is owed. The investor will (should) also offer to negotiate the short sale with lender, directly (note, if the investor does not offer to negotiate, run away). The problem is, that negotiating short sales can take time...and the investor may want to lock you into some sort of contract...don't do it. But in essence, the bank will assign a person to evalaute the short sale and offers that come in. This process can take in excess of two months.

Are there any benefits to a short sale?

Generally NO, not to the seller. If the Bank is willing to accept a short sale, doing so can prevent a foreclosure, but for credit scoring a short sale and foreclosure are EQUALLY negative. A short sale is an adverse entry on your credit report; thus, unless the bank specifically agrees to not report (fat chance, I have never heard of a bank agreeing to do so, because they have other regulations and duties to make a report), there is little difference between a short sale and foreclosure for credit reporting purpose. So, generally speaking, short sales, yield little benefit to the seller.

Is there any downside to a short sale?

YES. For IRS purposes, a short sale represents a sale of an asset AND forgiveness of debt. As a result of a short sale, you will receive a 1099 and be expected to pay income tax on the amount of the forgiven debt. (i.e. the difference between what you owe and for how much you actually sold the property). In the alternative, the lender may keep the debt collectable and refer it to a collection agency. And no matter what any real estate agent tells you, if the lender decides to foregive the debt, they MUST issue a 1099, it is an IRS requirement. You should have the Short Sale agreement (which is seperate from the sale/purchase agreement) reviewed by an attorney. Real Estate Agents are not lawyers and cannot advise you about the content or implications of the short sale contract...remember, they are just looking for a commission.

Is there a way to get out of paying that income tax?

Yes. If you satisfy the IRS definition of insolvency, you do not have to pay income tax on "forgiven debt". The form you need is IRS form 982.

What about short sales and 2nd mortgages?

Short sales are an unlikely option when you have more than one mortgage and the 2nd mortgage is with a different lender than the 1st mortgage. The lien a 2nd mortgage has on your property is just as valid as the lien of the 1st mortgage; thus, you cannot simply sell your property for the amount of the first mortgage. Again, ALL lien holders must agree to release their liens in order to finalize the transfer of the property to the buyer.

In the long run, is doing a short sale worth it?

That is a difficult question to answer, but in general, since there is no benefit to the seller for doing a short sale, the anwwer is no. Also, for many people who consider a short sale, they have other debt problems and income short-falls such that a short sale does not solve their financial problems. As for credit reporting, a short sale is no different than a foreclosure, the same FHA/HUD and Frannie/Freddie guidelines apply for short sale as for foreclosure.

What should I do if I am approached to do a short sale?

Be leery. After all, the person approaching you to do a short sale is a real estate investor looking to pick-up your property below market value, or who does not want to face competition at the foreclosure auction. Avoid signing any contract with an investor that would require you to take your home off the market or otherwise force you to refuse any other offers while the investor attempts to negotiate the short sale with the lender.

General advice.

DO NOT pin your financial future on your ability to complete a short sale on your home. Short sales are actually fairly rare and generally do not solve your underlying financial problems. In all honesty, from a seller's perspective, I am hard pressed to think of any benefit to doing a short sale.

What about Short Sales and BK?

Short sales in the BK context are a wash. I suppose in the long run, there is an argument that doing a short sale before a BK might "slightly" improve your credit coming out of BK. But a foreclosure that is done within the context of the BK is viewed as a "single" negative (i.e along with the BK); thus, any benefit of the short sale vs a foreclosure, when filing BK, is negligible. Moreover, if you do a short sale within a BK, there really is no benefit to the debtor because if a bank agrees to a short sale, there is NO deficiency balance, and thereby no lingering debt that gets discharged in the BK. Furthermore, the BK is of NO help regarding the income tax liability that would be owed on the forgiven debt. The tax liability would be too new to be discharged in BK, so you would still need to qualify under form 982 to attempt to get-out-of paying the income tax liability.

What about short sales after BK on NON-reaffirmed mortgages

Not reaffirming your mortgages has no affect on how short sales work. The lien a mortgage holder has on property is valid regardless of the BK, thus, the lender must still AGREE to a short sale. If you do not reaffirm your mortgage, all that means is you are no longer "personally" liable for the mortgage. Unfortunately, there is one question I am not sure about the answer...is whether, in the context of a non-reaffirmed mortgage, would you have any income tax liability for the difference...I honestly do not know the answer for certain.

[Boscoe]

This should be a sticky, especially in today's real estate market.

[HHM]

I posted this as a reply in another thread, but I think it should be part of this sticky

Well, obviously your an agent trying to get a commission, so swmorgan7 isn't exactly going to act in the client's best interests. But even paying $25K, let alone $80K, over 15 years to avoid a BK is just stupid.

But to answer the questions; yes, the deficiency is dischargeable in BK. If BofA keeps the deficiency in "collectible" status, there are no tax ramifications; you only get income tax ramifications if BofA forgives the debt. And as stated in numerous posts in this forum, so long as you can prove insolvency (see IRS form 982), you can except the forgiven debt from income.

In the BIG picture, there is practically no benefit to the seller for doing a short sale. The only people who benefit from a short sale are the buyer (who does not have to compete with other buyers at a foreclosure auction), the real estate agent who gets the commission, the buyers mortgage broker, and the sellers bank (sometimes) for liquidating a note that would have probably ended in foreclosure.

(1) Many people are under the false assumption that short sales are not reported to CRA's, that is not true. Unless you specifically negotiate with the lender to not report the short sale, the short sale is an adverse entry on the owners credit report; thus, from a credit reporting standpoint, there is little difference between doing a short sale vs. foreclosure.
(2) As has been pointed out, the deficiency balance must be dealt with in some manner. If your lucky, the bank will simply forgive the debt, and the seller will qualify for insolvency. Granted, the same is true for foreclosure, but usually in the foreclosure context, the banks are more apt to writing off the deficiency.
(3) The main question that needs to be ask, will getting rid of the house solve the underlying financial problem facing the seller. Many times the answer is no as they will have other debt and income issues, so simply doing the short sale and putting the seller in MORE debt is not the answer.
(4) Short sales take time. Since most people procrastinate when it comes to financial things (i.e. head in sand type thing), once they come to the realization that the house must go, their financial situation is probably too far gone for a short sale to be of any meaningful use.

Thus, I really have a hard time ever recommending a short sale because there is generally no benefit to the seller. I can really only envision a couple circumstances where short sale may be in the best interests of a seller, i.e. no other unsecured debt, stellar credit, the seller is able to negotiate the right kind of short sale (i.e. no adverse credit reporting, debt is forgiven, and seller qualifies as insolvent), then a short sale would work. But outside those conditions, there is no reason a seller should do a short sale.

Generally, real estate agents, mortgage brokers, and investors who promote short sales are about as scummy as pay day loans.

Sounds like the attorney has his head on his shoulders, the specific performance suit is an empty threat, and BK would take care of it if the buyers were stupid enough to actually sue. If the best argument you have is, lets take our chances, that is weak. BK brings certainty to all aspects of the situation. Sounds like you did a piss poor job putting this short sale together if you don't already have an agreement to deal with the deficiency and are needlessly trying to scare the seller with untrue doomsday credit reporting scenarios.

[Shaoline]

sad news but well taken

Hi HHM,

Thank you so much for the thorough info. I'm sad, to say the least, I thought the short sale would be my ticket out of getting a judgement against me. Countrywide called me and encouraged me to do a short sale, I was all excited. I thought this would be my saving grace for 2 of my properties. I'm not concern about my credit I was more concerned about being sued and having to pay a total of $275,000 for the rest of my life!

I guess it's good for them but not good for me.

Man, this is tough - being placed between a rock and a hard place.

Thanks again for the info.

[Shaoline]

ignore drama!

Ignore my previous drama. I realize I can file bankruptcy and have the amount discharged. It all very scary, I've never been sued and I know I might lose my other properties that I'm positive and current on. Gee, all that equity down the drain.

An attorney I spoke with advised me to file a chapter 11. He told me I could keep my car and the property I was living in. I have 3 other properties that I had but in my husbands name there is a chance that they will be taken if I'm sued. If they take those they will truely be taking everything I have I will be losing my rental income which was going to see me into retirement.

At 49, I guess I have time to start again. I have no choice.

I'm doing my best to fight off depression and self pity. I'm tired this ordeal is taking it's toll on me.

[1.6Million]

better life

I felt the same way! I though that the investments I would lose in the BK would support me when i stopped working. Look, the first thing you need to do is count your blessings. Life is all about the lessons we learn on the Journey we take. I learned a huge lesson in the business I lost. The lesson was "dont live on fear of what could happen" or "what you are missing". I thought that the 750 bmw, the beach condo, the business, my boat and all the other things I had made me happy. I was wrong. I spent so much time working to get these things that money could only buy, just to be happy. Now, I bought a used nice car, live in an average house but have a family that knows me, a soon to be wife that i can see all weekend long. I dont use credit cards anyway but i am not tempted to relive the life i had on consumer debt. I am motiviated to start fresh. You really need to look at those rentals and figure out what debts washed them out. In the end its better to have nothing!!!! than to be negative. in most cases it will be easier to find new investments than to have to pay for all the bad ones with the good ones you had. thats my soap box---- oh i hope to discharge on sept 3rd 2008....I always forget its not done yet because there is life after BK. A better life if you let yourself live it.

Let go of everything that is replaceable. You dont really need it.

-1.6million
filed 06/02/2008 12:00
341 meeting 07/02/2008 1:30

Starting living again 07/02/2008 1:35 ( after the meeting.

[sandilorenzana]

Question From Hawaii

Our home in HI is on the market and we really want to move back to the mainland. We are not in foreclosure but would like to leave. What would be the ramifications if we were to give the house and property back to the bank - Deed-in-Leiu ?????? Would we ruin our credit? Would we be able to get another home loan? How does this work, please.

Aloha, Sandi

[rainelli]

I couldn't imagine I will learn a lot by joining this forum,though I know it's not enough but I was so happy to be here....

[mand15]

wow that's a great explanation of short sales. thanks for that.

[inacorner]

Pretty good write up, but you didn't mention anything about the Mortgage Debt Relief Act of 2007 which helps avoid the tax consequences of short sale and foreclosure on primary residence between 2007-2012 (extended from 2009).

[HHM]

Please note the date of the post, the post was written just as that law was coming out. But you are correct, the Mortgage Debt Foregiveness act

http://www.irs.gov/individuals/article/0,,id=179414,00.html

can provide relief from the income tax consequences, under certain circumstances.
However, the person must still complete IRS Form 982.

[HHM]

More Inside Scoop on Short Sales

Thought I would share some info I recently learned from those on the "inside" of doing short sales.

To get a short sale approved
1. The owner must have a hardship. Simply being upside down in value and having too much mortgage is not enough. Something "external" must have changed. Note, a chapter 7 bankruptcy will sometimes be presumed to be a hardship.

2. The owner must have no other significant equity in assets (including retirement accounts), if you do, then you probably won't get the short sale approved.

3. With conventional mortgages, you must have an offer before you submit your short sale proposal. With FHA mortgages, you can submit the short sale package for approval before having an offer.

If you start getting the runaround from you lender on a short sale, try to track down the HUD manager in your area. At least for FHA mortgages, there are certain guidelines and time periods the bank must follow.

Unfortunately, most real estate agents and brokers have no idea how to do a short sale which is why barely 2 in 10 short sales ever close. If you are approached by a broker to do a short sale and they don't even ask you about hardship, then that broker has no idea what they are doing.

[StartingOver08]

The lenders are responding much more quickly now that the new rules go into effect April 2010. They also seem to be much more realistic in the property values now.

Here is the complete 43 page supplemental guide to the new rules.

https://www.hmpadmin.com/portal/docs/hamp_servicer/sd0909.pdf

[secondtimer]

Homeowners
Are
Fooled
Again

More extend & pretend tactics.
The banks version of "smile & wave"

[TBW]

Please correct me if I'm wrong, but one possible advantage to doing a short-sale POST bankruptcy is if you want to buy another house in the future. The FHA lending requirements will allow a new loan quicker after a short sale than after a foreclosure.