Short Sale Information for Buyers and Sellers
Warren Nass is a Certified Short-Sale & Properties-in-Foreclosure Specialist (CSSPIFS)
EXPLANATION OF A SHORT SALE: A "Short Sale" occurs when a Lender agrees to accept less than the amount owed to payoff a loan as an alternative to foreclosure. If the property is worth less than the amount owed on the loan, then even if the Lender forecloses and takes back the property, it realizes that it is going to take a loss. We can often satisfy a Lender that it will benefit by taking less than what is owed now rather than taking the property back by foreclosure and trying to sell it later.
TIMEFRAME: The Short Sale negotiation process is a lengthy one. It may take several weeks or even several months to get an approval. Lenders have several layers of bureaucracy, insurers, and investors that we will have to maneuver through in order to get a Short Sale approved. So it is important to be patient during this long process. The Short Sale process often takes 3-6 months.
MY HOUSE IS GOING TO FORECLOSURE, IS THERE ENOUGH TIME? Not Always. Starting a Short Sale process will not automatically stop a foreclosure. However, many times we can convince a Lender to stop the foreclosure process in order to let us attempt to negotiate the Short Sale. So, while there are no guarantees of stopping a foreclosure, negotiating for a Short Sale may prevent a foreclosure of the property.
HOW LONG CAN I STAY IN THE HOUSE? The key word in "Short Sale" is sale. The purpose of a Short Sale is to get the property sold. So you will need to move. This is NOT a program that can stop a foreclosure and allow you to keep the house indefinitely. It will be easier to sell the house if it is vacant, so you should make plans to move as soon as possible.
HOW DO I KNOW THIS WILL WORK? You don't. We cannot, have not, and will not make any promises to you that this short sale negotiation will work. Once you missed a payment to the Lender, the Lender is in charge and can proceed to foreclosure if and when they want to as prescribed by law. But we know lenders often do not want to foreclose and we are very good at presenting alternatives to the Lender that they often want to accept rather than foreclose. We are very good at what we do, but NO PROMISES are being made as to whether or not the Lender will accept a Short Sale - every lender is different.
HOW MUCH MONEY WILL I GET? Unfortunately, we cannot give you any. A universal requirement of Lenders in granting a Short Sale is that the borrower will not receive any of the proceeds from the sale of the property. The Lender is going to take a loss on your loan - they are not going to let you receive any money from the Short Sale.
WHAT HAPPENS IF THIS DOESN'T WORK? Your house will likely go to foreclosure. A Short Sale is something we try after you have exhausted all your other options of keeping your house.
WHAT IS A "RELEASE": A Lender may offer to "release" its security interest against the property in exchange for less than the total amount of the note. A release will allow the property to be sold without paying off the obligations of the note. However, the note is not satisfied. Advantages: This successful Short Sale will allow the property to be sold and thus avoid a foreclosure. Disadvantages: The remaining debt on the property (sometimes called a "deficiency") still exists. You are still liable for the note - in other words - you still owe the money. However, our experience is that it is not likely that the Lender will pursue the deficiency unless you have other significant assets. Furthermore, if you do not try a Short Sale and the property goes to foreclosure, you are going to have a deficiency anyway. Note that in California, the Lender cannot pursue a deficiency judgment if the property has not been refinanced and if it is a "Purchase Money Loan."
WHAT IS A "SATISFACTION": A Lender may agree to accept less than it is owed as complete and total satisfaction of the note and release its lien against the property. Advantages: Your note and obligation to the Lender are satisfied for less than you owe. When the property is sold, the debt is paid off completely. Potential Disadvantages: You may have tax consequences that you should discuss with your tax advisor due to the fact that the Lender is forgiving a portion of the money that you owe to the Lender. Sometimes our negotiations are successful in obtaining a satisfaction; sometimes all we can get is a release.
HOW CAN I HELP? The Lender will require a review of a financial package that usually includes two months' bank statements, two months' pay stubs, two years' IRS tax returns, and other information. The leading cause of delay and even denial of our offer to the Lender is caused by the Seller failing to deliver these items in a timely manner. To help us succeed, please find as much of this information as you can right now and complete the attached "Financial Worksheet" - this will help us work faster and increase our success.
Some items you may need to supply lender for short sale approval:
A hardship letter, 2 to 6 months bank statements, 2 to 6 months paycheck stubs, authorization to release information, financial worksheet, 2 years tax returns and W-2's and an estimated HUD or closing statement. Each lender may ask for different information.
Real Estate Short Sale
Do you owe more than your home is currently worth and you need to sell your home? If so a real estate short sale may be the service you need.
What is a Short Sale?
A real estate short sale is when you owe more than your properties currently value but you need to sell. In a typical situation, your mortgage lenders would require you to come in with the difference in the amount owed. A real estate short sale is where we negotiate with you lenders to accept a pay-off that is less than you currently owe and you do not have to pay the difference.
Who can Qualify for a Real Estate Short Sale?
Typically, the mortgage lenders will only accept a real estate short sale if you are at least one month behind on your mortgage payments, have a ready and willing buyer and you are unable to debt service all of your existing liabilities. Also, if you financial situation has changed and you are currently making less money than before and you have no more savings, you most likely qualify for a real estate short sale. This is the reason why we need to above documents to paint a clear financial picture of your current situation.
I have successfully closed many short sale transactions by personally negotiating with the lender on my sellers behalf. Let me know if I can assist you. Short sales are the best alternative to foreclosure.
Foreclosure Vs. Short Sale in California
Whether you're are having a real estate problem or you're searching real estate listings as a potential buyer, it's important to know the difference between a foreclosure and a short sale. Foreclosure is a worse fate than a short sale if you are the seller, but as a buyer of a distressed property, a short sale is often the more difficult process to wade through.
Foreclosure for Owner
- A property that has been foreclosed on means that the owner was not able to make the monthly mortgage payments for a certain amount of time and the lender has taken control of the property. How much time you have without making a payment before your property is seized and sold at auction varies from state to state, per Realty Trac, usually between 4 months and 1 year. This grace period is called pre-foreclosure. Once pre-foreclosure ends and you're unable to make the loan current, your property is lost to the bank.
Short Sale for Owner
- You can stop a foreclosure by considering a short sale. A bit of a misnomer, a short sale is actually a lengthy process in which the distressed owner makes an agreement with the lender to sell his house for less than he owes. Since foreclosures are more expensive for lenders, they often agree to the short sale and forgive the balance owed from the owner, though certainly not always. However, a very important consideration is that in many cases the IRS considers the balance forgiven to be taxable income and you will owe tax on that amount.
How Your Credit Is Affected
- With both foreclosure and short sales, your credit is affected negatively. For a foreclosure, you can expect your FICO score to drop by as such as 200 and stay on record for up to 10 years. Future lenders generally look at a foreclosure as very serious and in the vein of bankruptcy. However, you're not out of the woods with a short sale either; your score can drop at least 75 points, most likely more, and if you have defaulted on payments prior to the short sale agreement, it's possible other areas of your credit have been affected, such as higher credit card interest rates. However, it is generally considered less serious than a foreclosure, and it carries fewer stigmas. Both types of default are considered as "not paid as agreed," so they will both severely impact your credit score, according to MyFICO.com.
Buying a Foreclosure Property
- In many cases, foreclosure properties are sold at auction. If not sold at auction, then the property is simply owned by the lender, often called REOs or real estate-owned properties. In either case, the seller or owner is taken out of the equation and the buyer only negotiates with the bank or lender, unlike the short sale where there is owner involvement. It's often safest to buy directly from a bank, instead of at auction, to avoid money pits with unknown issues, such as tax liens, structural problems and the like.
Buying a Short Sale
- Don't be fooled by the name, the process of a buying a short sale property is a very long one. Once the owner accepts an offer, he sends it to the lender for approval. Even if an owner accepts your offer, the lender's approval is the one that matters and that can take quite a while. There is more paperwork involved in a short sale than a regular sale, or even a foreclosure, and lenders tend to drag their feet on short sales, according to Forbes' Investopedia. Make sure you use a realtor who is knowledgeable in short sales, as there are many nuances to completing a short sale successfully.
Buying Distressed Properties
Foreclosures, short sales and REOs remind me of, "Lions and tigers and bears, oh, my!" The latter are dangerous animals but different from each other -- just as foreclosures and short sales and real-estate-owned (REOs) are distressed sales but different from each other.
However, they are also similar because without knowledge about handling foreclosures, short sales and REOs, you could find yourself in dangerous territory. For example, while most short sales are foreclosures, not all foreclosures are short sales. To further complicate matters, REOs are not short sales either, but some intended short sales can end up as an REO.
Foreclosure and Short Sale Taxes - Home Sellers Might Owe the IRS
The IRS says there is no free lunch. If you transfer title on your home, whether voluntarily through a warranty deed or grant deed, or involuntarily through froeclosure, you have sold your home. You might be subject to taxes, even if you sold your home at a loss, either on a short sale or by foreclosure.
It doesn't seem fair. What's worse is you might not even find out that you owe taxes until the day you open your mail to find a 1099.
Here are some opinions about taxes, gains and losses on distressed sales such as foreclosures and short sales:
"But sellers of residences acquired within the past two years or so are going to incur losses. Even assuming no price declines, losses will result because of expenses for real estate brokers, lawyers and the like. Sellers will not be able to deduct those losses. Makes no difference that they are forced to sell because of, for instance, job changes or health reasons.
"Besides problems for sellers of personal residences, there are tax troubles for investors who, say, bought several condos in places like Florida and are unable to flip them because prospective buyers are waiting for further price declines. Often, it is not worthwhile for those investors to rent their places; what they receive as rent payments will be insufficient to cover their real estate taxes and mortgage interest. Their only option is to sell at a loss."
Block on Offsetting Losses Against Gains
"Sellers can offset their capital losses against capital gains. But in the absence of capital gains, the yearly cap is $3,000 ($1,500 for married couples filing separately) on the amount of losses they can offset against their "ordinary income," meaning income from sources like salaries, pensions and withdrawals from retirement plans. The law allows them to carry forward unused losses to later years."
Block on Tax Rules for Foreclosures
"The IRS has tax rules for foreclosures or repossessions by lenders of homes of owners who have fallen behind on their mortgage payments. There can be severe and unexpected tax consequences for an owner who simply walks away because he or she has little or no equity and the lender takes over and sells the place.
"In that situation, cancellation or forgiveness by the lender of the debt usually means the debtor has reportable income, though there are some exceptions -- for instance, insolvency."
Block on Personal Liability
"An example: Brown buys a condo and uses it as a personal residence. He pays $300,000, down payment of $15,000 and takes a mortgage loan of $285,000. He is personally liable for the mortgage. When the remaining balance of the loan is $280,000, Brown defaults and the lender bank accepts his voluntary conveyance of the unit, canceling the loan. Similar condos at the time sell for $230,000.
"The tax code treats the transaction as a sale. Brown incurs a nondeductible loss of $70,000, the amount by which his condo's adjusted basis of $300,000 exceeds its market value of $230,000. No deduction for the loss because Brown uses the condo as a personal residence.
"Brown also has reportable income of $50,000 when the bank cancels the loan. The $50,000 is the amount by which the debt of $280,000 exceeds market value of $230,000.
"Enter the IRS when the mortgaged property is foreclosed or repossessed, and the bank reacquires it, or the bank knows Brown has abandoned the property. The bank sends a Form 1099-A to Brown and the IRS. Using the numbers in the example, the 1099-A indicates the foreclosure bid price ($230,000), the amount of Brown's debt ($280,000), and whether he was personally liable. Debt cancellation (here, $50,000) is taxed at the rates for ordinary income, same as for salary."
Secured Debt Without Personal Liability
According to Klienrock Publishing, the IRS says sellers who are not personally liable for a debt will realize an amount that includes the full canceled debt, even if the value of the property that is security for the debt is less, which can be offset depending on your adjusted basis in the property. Purchase money loans secured by real property in California carry no personal liability.
For example, Ms. Smith buys a home valued at $300,000, puts down $30,000 and takes out a mortgage of $270,000. Smith stops making payments. The bank forecloses on a loan balance of $260,000, and the market value of the home has fallen to $250,000. Smith has an adjusted basis of $295,000, due to a $5,000 casualty loss. The amount Smith realizes on the foreclosure is $260,000. Smith figures her gain or loss by comparing $260,000, which is the amount realized, to her adjusted basis of $295,000. She has a $35,000 realized loss.
Before Foreclosure or Selling, Plan Ahead
Before you sell on a short sale or go through a foreclosure, seek legal and tax advice. Do tax planning ahead of time, before it is too late.
For more information, contact a Certified Public Accountant or check the IRS website.
A temporary fix, called the Mortgage Forgiveness Debt Relief Act of 2007, provides relief from debt forgiveness taxation for certain owner occupants until December 31, 2012. Call your lawyer to determine if you are exempt from taxation.
Senate Bill 401 and Short Sale Tax Consequences
Homeowners no longer have to pay California state income tax on debt forgiven in a short sale, foreclosure, or loan modification. Enacted into law on April 12, 2010, Senate Bill 401 now aligns California's tax treatment of mortgage debt relief income with federal law. According to a press release from the California Association of Realtors®, "for debt forgiven on a loan secured by a ‘qualified principal residence,' borrowers will now be exempt from both federal and state income tax consequences. The existing federal exemption is for indebtedness up to $2 million, whereas the new California exemption is for indebtedness up to $800,000 and forgiven debt up to $500,000."
These tax changes apply to debt discharged from 2009 through 2012. Additionally there is a Form 540X that Californians can now file if they had already completed their 2009 tax return before the law was enacted. According to the California Association of Realtors®, the above exemptions apply to principal residences, but there may be other exemptions available for those with a second home or rental property.
If property is in foreclosure, 1-4 units and at least one is owner occupied and the buyer is an investor, the buyer, listing and the selling agent must abide by Section 1695 of the California Civil Code, the Home Equity Sales Contracts Law. Also the Notice of Default Purchase Agreement(NODPA) must be used.
Warning!! No money can be given to junior lien holders or the seller unless written permission is obtained from the first lien holder. Otherwise, this constitutes fraud.
Average time frames for foreclosure process is 90 days once Notice of Default(NOD) is filed and then approx. 21 days when the Notice of Trustee Sale is posted for a total of a little less than 4 months.
HAFA - Home Affordable Foreclosure Alternatives Programs on should call lender prior to listing the property to see if the seller could qualify for the program, order BPO and establish the list price and lender's desired net. HAFA provides seller a financial incentive of $3000 to borrower for using the program. Traditional short sales do not allow the borrower to get any money from the sale.
HAMP - Home Affordable Modification Program You need to have a loan that is a first lien originated on or before January 1, 2009, the loan secured by 1-4 units, one of which is borrower's principal residence, loan is delinquent, or default is reasonably foreseeable due to a financial hardship that can be documented and loans currently in foreclosure are eligible, current unpaid principal balance no greater than $729,750 for 1 unit, borrower's total monthly mortgage payment on first, including principal, interest, property taxes, insurance & HOA fees exceeds 31% of borrower's monthly gross income.
Buyer needs to look into a Deed in lieu of foreclosure as a possible option. Also when considering a short sale the seller should consult an attorney and an accountant.
Under Federal Mortgage Forgiveness Debt Relief Act, taxpayer does not have to pay federal income tax on debt forgiven for loan secured by qualified principal residence for debts discharged from 1/1/2007 to 12/31/2012. Only applies if debt taken on to buy, build, or substantially improve taxpayer's principal residence. Does not apply to investor owned properties! Check for updates.
Call Warren Nass - CSSPIFS Certified Short Sale & Properties-In-Foreclosure Specialist (714)606-0329 I will help you get the highest possible price and try to work out the Short Sale. The sale will possibly help to salvage your credit, not necessarily save it. I will be there to help you resolve this unfortunate situation with dignity.
Free counseling at www.hud.gov and/or call (888)995-HOPE www.makinghomeaffordable.gov - Federal government's modification/refinance/short-sale programs. www.makinghomeaffordable.gov/borrower-faqs.html - FAQs concerning these programs
NAR at www.realtor.org/shortsales
CAR at www.car.org