Real Estate Short Sales 101
Should I Consider A Real Estate Short Sale?
There are many ways to lose a home, but signing away ownership in a manner that destroys credit, embarrasses the family and strips an owner of dignity is one of the hardest for many home owners to deal with. For owners who can no longer afford to keep mortgage payments current, there are alternatives to bankruptcy or foreclosure proceedings. One of those options is called a "Short Sale."
When lenders agree to do a short sale in real estate, it means the lender is willing to accept less than the total amount due on the mortgage loan. Not all lenders will accept a short sale or discounted payoffs, especially if it would make more financial sense to foreclose; moreover, not all sellers nor all properties qualify for a short sale.
If you are considering selling as a short sale, there could be drawbacks. For your protection, we suggest that all sellers:
-
Obtain legal advice from a competent Real Estate Attorney
-
Obtain legal advice from a competent Bankruptcy Attorney
-
Call an accountant or tax attorney to discuss short sale tax ramifications
Frequently Asked Questions
Why does the short sale process work?
Your mortgage company runs different scenarios on your property to determine what they will get for a return on their investment. Your mortgage company takes the following factors into consideration:
1. The foreclosure process costs banks money of $30k - $60k per property.
2. They may have to pay realtors costs of up to 6% of the selling price of the house.
3. There are holding costs involved i.e. how long will the house stay on the market?
4. They may have to make repairs on the property.
5. They have to carry property insurance.
For these reasons the bank is sometimes willing to take less that what is owed on a property. The question we ask is “Do they want their money now?” or “Do they want the same amount of money six months from now?”
Why should I, the homeowner let you do this? What makes you different than other companies?
The foreclosure process is very fast. It is important that the homeowner be made aware of this fact. Our company is a licensed real estate service that specializes in foreclosures, and we are professionals. We know the foreclosure process because it is our business. Obtaining a short sale form the mortgage company is a very time consuming and complicated process. We are completely aware that there are other companies that work with foreclosures. The important thing is for the homeowner to feel comfortable with the company they choose to sell their home to. However, if the homeowner speaks with other companies it is important that they realize that the clock is ticking, and that the sale date is approaching fast.
Can I do this myself?
Yes. However, the process can be complicated, even if you know the right questions to ask. Obtaining a short sale is only part of the process. Finding someone to fund out, or purchase the house at a discounted price within the allotted time span is another part. Often times it becomes too personal and very frustrating as the banks do this everyday, you may not have the experience necessary to compete. That's why hiring a professional to negotiate on your behalf may be of a great advantage to the sell of your home.
What are some of my other alternatives?
We are not tax advisors, attorney's, or representatives of your mortgage company. However, some of your options are as follows:
1. Sell the property yourself within the allotted time.
2. Hire a realtor to sell the property before the foreclosure sale.
3. Declare bankruptcy. (See a licensed attorney to determine if this is best for you.)
4. Pay off your mortgage.
5. Pay off your back payments.
6. Deed in lieu of Foreclosure.(giving the home back to the bank-if the bank will accept it)
7. Try for a loan modification.
How will this affect my credit?
Credit history is a very complicated issue. There are many factors that determine your credit rating. What we hope to do is to keep a full foreclosure off of your credit report. Though every scenario is different, you can expect a 250 to a 280 point reduction to a FICO score for a foreclosure/deed in lei of foreclosure, and an 80-100 point reduction in a FICO score for a short sale. The short sale would be a more reasonable solution for a quicker credit rebound.
Can I repair my credit?
You can repair your credit. There are many different companies that can help you with this process. The cost ranges from $35.00 to several thousand.
Do I have to pay taxes on the difference from what I owe on the home and the sales price of the home?
In general, the IRS tax code specifies that a borrower must file a 1099C
Cancellation of Debt form when the forgiven amount equals or exceeds $600. Traditionally, the IRS has treated this amount as fully taxable income on the part of the borrower. The 2007 Mortgage Forgiveness Debt Relief Act (Public Law 110-142, HR 3648), however, amended the tax laws to allow borrowers negotiating the loan on their primary residence to avoid having to declare this debt as income (limited to debts of $2 million or less.) Importantly, this forgiveness stipulation does not apply to rental properties or other non-primary residences that a lender may hold. Previously, only a personal bankruptcy filing could prevent the forgiven debt from being treated as taxable income. With the Debt Relief Act effectively provides an amendment to the original 1986 Internal Revenue Code which allows selective exclusion of forgiven debt from taxable gross income.
Under the conditions of Form 1099-C, there are special circumstances that may affect whether canceled debt is treated as taxable income. In cases where the borrower declares bankruptcy, the debts are fully discharged although the declaration may have broader adverse effects in terms of other financial and tax obligations. Additionally, under certain circumstances the debt is not taxable if a professional accountant has determined that the value of the debt is greater than the appraised, fair market value of the asset in question.
Farm debt is also treated differently according to the law, which is signified by direct farm debt for those who earn over half their gross income directly from farming. If you are seeking to execute a short sale on a residence other than your primary home, but which served as a secondary residence for you personally during the last five years, the Relief Act also provides a graduated scale of gross income reductions.
Depending on the time you physically lived in the home in question, you may be able to deduct a portion of the forgiven amount. It is important to consult with a professional tax attorney or accountant, however, when considering the implications of the law upon your individual situation.
How much money will I receive from this process?
If a mortgage company takes a short sale on your mortgage you will not receive any funds from the sale. The reason is that your bank is going to request a signed HUD(breakdown or closing costs) statement from the sale. This is a federal form that the title company will produce for all parties of the transaction to see. The mortgage company takes a position that if they are going to take less than what is owed on a property than you should not receive any money from the transaction. If we were to show you receiving no money on the HUD Statement that we provided to the bank, and then we were to give you money, both you and other parties involved could be guilty of fraud.
How long does this process take?
It depends on several factors. The entire process generally takes less than 60 calendar days. However, there are some variables that may speed up or slow down the process. They are as follows:
- Some lenders have done much of the preliminary work before we contact them. This work includes an exterior appraisal of the house, and market evaluation. This would speed up the process.
- Some lenders are very difficult to get in contact with and are not good are returning phone calls. This would slow down the process.
- We will need to gather information as the bank requests it. You will need to provide this information to us as quickly as possible, or the process will be delayed. The information that we will need to obtain generally includes the following:
(Bank Statements, Pay Stubs, Tax Returns, Financial Statement, and a Hardship Letter)
Do you have to put a sign in my front yard?
Yes. We need to create interest in your property. Signs also make it easier for our investors and
buyers to spot the house, which will help your home sell faster.
What will it cost me to start this process?
The short-sale procedure will cost you nothing out of pocket as the bank will pay most fees associated with selling the home. However, I have seen some banks ask the owner of the property to pay for any HOA fees, such as fines, back payments, and transfer fees. This is on a case by case scenario, and I will do everything I can to make sure that no costs are associated to you for the sell of your home. You may have other choices as well, please feel free to call me anytime to discuss your current situation. Please remember time is of the essence and we can only help sooner than later.
*These answers are accurate but not guaranteed due to all Mortgage Companies, Banks, Municipal, City, County and State laws differ