Foreclosure VS. Short Sale?

[technoreid1]

Foreclosure VS. Short Sale?

My bankruptcy attorney advised me that a foreclosure would be better for me as I would not be liable for the TAXES on the "deficeincy" balance with a foreclosure. (we owe 305k on our house, would sell for only 210k) -He just stated "let the house go".

I called my mortgage company and they told me the exact opposite.... If I do a short sale that I "WOULD NOT" have to pay taxes on the "deficient" balance - and with a foreclosure we would be liable to pay the taxes on the deficient balance.

*One note- We are going bankrupt and have no $ to pay the deficient balance even if was one......

Any answers or insight will be much appreciated.


Thanks, techno

[HHM]

Your mortgage company is playing "word games" with you. Your attorney is basically correct, but has omitted the "details" of why you would not be liable for taxes.

Here is how your mortgage company is playing word games.

If you do an approved short sale (note, ALL lien holders must approve the short sale), then, strictly speaking, there is no "deficiency balance". A deficiency balance only arises in the foreclosure context. In the short sale context, there is "forgiven debt", the difference between how much you owe and how much you sell the house for. Granted, we often use the phrase deficient balance to describe both situations, but that is technically inaccurate.

But make no mistake, you are liable to pay income tax on the forgiven debt of a short sale, UNLESS you qualify as insolvent (See IRS Form 982), and the mortgage company WILL send you a 1099 (assuming the amount is over $600).

However, the mortgage company is "technically" correct that you would ALSO have to pay income tax on the deficiency balance of a foreclosure if the mortgage note was a power of sale note and did not allow recourse to collect the deficiency. But this is where your attorney simply did not fill in the details...if the foreclosure happens within the context of a BK, you do not pay income tax.

[253BK]

I would check into this I swear they just passed a law forgiving the homeowner of taxes on the reliefed debts! Also you can end up with a deficiency balance with a short sale and alot of the lenders will try this!

What happens you have a company work the short sale for you and they make the bank an offer well they end up countering your offer always and will add wording to allow them to go after you for the balance as a NOTE this is like a home loan BUT you have no home! I do short sales in WA state and all over the west coast make sure who ever works your short sale you have them included that there is no def balance and you are to pay nothing at closing! This will amke the lender pay all closing and back taxes since they have to have a clear title!

If you need help with this drop me an PM I have friends that do this all over the US I can put you in touch with some of the best short salers! Stay away from real estate agents that say they can do it becuase if they arent trained you will just be waisting time!

Hope this helps let me know if you need anything

[ssdsco]

Many have done a foreclosure with BK...no 1099 tax, no deficiency balance, no legal fees, no selling costs or headaches. I'd go with the sure thing and stay away from a short sale.

[technoreid1]

Thanks for your clarification.... I do appreciate it!

So it looks like a foreclosure within the realm of a BK is probably best for us....

Techno

Your mortgage company is playing "word games" with you. Your attorney is basically correct, but has omitted the "details" of why you would not be liable for taxes.

Here is how your mortgage company is playing word games.

If you do an approved short sale (note, ALL lien holders must approve the short sale), there, strictly speaking, is no "deficiency balance". A deficiency balance only arises in the foreclosure context. In the short sale context, there is "forgiven debt", the difference between how much you owe and how much you sell the house for. Granted, we often use the phrase deficient balance to describe both situations, but that is technically inaccurate.

But make no mistake, you are liable to pay income tax on the forgiven debt of a short sale, UNLESS you qualify as insolvent (See IRS Form 982), and the mortgage company WILL send you a 1099 (assuming the amount is over $600).

However, the mortgage company is "technically" correct that you would ALSO have to pay income tax on the deficiency balance of a foreclosure. But this is where your attorney simply did not fill in the details...if the foreclosure happens within the context of a BK, you do not pay income tax.

[technoreid1]

I think a foreclosure with a BK is the way to go....
although it will probably hurt our credit the most...?


thanks for your input!

techno

Many have done a foreclosure with BK...no 1099 tax, no deficiency balance, no legal fees, no selling costs or headaches. I'd go with the sure thing and stay away from a short sale.

[253BK]

Yes this will hurt your credit most but I am sure as of now it isnt very good anyways! The plus side is we are all going through a hard time and many people are going to end up in the same situation so say 2-3 years down the road I would be suprised to see 1 in 10 with a BK or foreclosure at least in WA that is how it is looking!

[technoreid1]

True!

There are tons of foreclosures and BK happening now for sure.

techno

Yes this will hurt your credit most but I am sure as of now it isnt very good anyways! The plus side is we are all going through a hard time and many people are going to end up in the same situation so say 2-3 years down the road I would be suprised to see 1 in 10 with a BK or foreclosure at least in WA that is how it is looking!

[marializ]

short sale question

If someone did a short sale and you owe back real estate taxes does the mortgage company include this in the short sale?

[HHM]

If you owe back real estate taxes, it is doubtful you can pass a clear title. If you do a sale (of any kind), all taxes must be current.

[I want out]

If you owe back real estate taxes, it is doubtful you can pass a clear title. If you do a sale (of any kind), all taxes must be current.

Back taxes are a line item on the HUD and would be paid at closing as part of the short sale. The mortgage company looks at this when deciding whether or not to approve the sale.

[HHM]

Back taxes are a line item on the HUD and would be paid at closing as part of the short sale. The mortgage company looks at this when deciding whether or not to approve the sale.

True...my point is, simply, the back taxes have to be paid as part of the deal.

[DHM]

What's in it for the Bank

In considering my options, forclosure vs short sale, I understand the ramifications for the, and I use the term loosley, "home owner". However I'm curious as to why they seem to want to press for the short sale. What's it to them?

[avb103]

Do the short sale NOT the foreclosure

But make no mistake, you are liable to pay income tax on the forgiven debt of a short sale, UNLESS you qualify as insolvent (See IRS Form 982), and the mortgage company WILL send you a 1099 (assuming the amount is over $600).

I think it's better to do the short sale. As someone else commented earlier...check the IRS guidelines because a lot of people are not being taxes or the debt even if they get a 1099. I think this might be good until 2010.

What's in it for the bank is it's cheaper to do a short sale than pay all the legal fees to foreclose. Most lawyers don't really know anything about other investor options so they will just tell you to give the house back or take the foreclosure.

At least with a short sale, your credit can recover because you only have late payments. With a Foreclosure, good luck trying to EVER buy another house with reasonable rates.

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I had to get rid of a lot of properties and lost a lot of equity in one deal, short saled some others, but at least I know my credit isn't going to stay screwed. The recovery time is more like 1-2 years instead of 10-20 years because of a foreclosure.

You have to be careful of what lawyers tell you to do. I have also found they only advise you to take the approach that requires the least amount of work for them (less paper work and quickest to ditch). You pay them one time and they don't want to do extract work to ADVISE you of other options that are ACTUALLY more beneficial to you.

[StartingOver08]

Well, I am going to disagree with avb103. Maybe that works in your area, but in our area where we have thousands of short sales and foreclosures this is the way it works:

The lender/lender's servicer INITIALLY askes the homeowner to do a short sale. In order to get the short sale approved the homeowner must provide a CURRENT financial statement listing every asset and liability of the homeowner and each bank account number, location etc. (Notice they get your financials right up front). The financial package is submitted right along with the contract to purchase and the buyers' either proof of cash (in a cash sale) or pre-approval if the buyer is getting a loan. The lenders servicer loss mitigation dept (loss mit) reviews the file over many, many weeks. During this period lots of fees accrue. The servicer most likely will not accept the sale, but they do this by asking the homeowner to sign a note for some part of the 'deficiency'. They will actually even give the note at zero interest, but have it payable over terms from 10 yrs to 30 yrs. Most of the sellers will not sign the note, unless it is extremely small. Here we only have 4% to 7% of SHORT SALES actually closing. We have many under contract, they just don't close. I don't mean our office doesn't close them - I am talking about every title company, real estate agency, attorney, - all sources of short sales only 4% to 7% of the entire short sale market closes - the rest foreclose.

We did find out a couple of things though - in order for the lender to collect on the mortgage insurance the lender has to show the property is on the market a MINIMUM of 120 to 150 days (they do this with the MLS listing that is required in the SS pkg). Most loans originated within the last 5 years have mortgage insurance. Some is homeowner paid, but most is paid by the LENDER. (Bulk rate MI packages put on the loans when they were sold as mortgaged back securities).

So when the lender forecloses the lender gets paid anywhere from 19% to 35% of the original loan from the MI company. BTW, the lender does NOT get paid by the MI co if the property is a short sale. They only get paid when the property is foreclosed upon and they have proven market time and effort to sell. Plus they get the asset to sell as an REO property. Also they get a deficiency judgment on the difference (unless its a primary subject to the law referenced above - and there are several exceptions). Now, since the servicer has all of your current info on file (because you supplied it at the beginning to get the short sale approved); it is a relatively simple process for the lender to sieze your other assets to satisfy the judgment.

I say, if you are filing BK, give the house back and don't do the short sale route. If you are considering a short sale, find out exactly how many short sales have CLOSED in the last 90 days in your area before you take on the short sale effort. By the way, I am a real estate agent with extensive training on short sales - and the only winner in the short sale arena is the lender.