FREQUENTLY ASKED SHORT SALES QUESTIONS

A "Short Sale" is relatively new phrase to many homeowners, but this type or sale has been part of the real estate market for many, many years. Most Realtor's are not up to date with the process and that has cost much confusion in the community with homeowners and even real estate agents. Since I'm a "Certified Distressed Property Expert," I thought it would be prudent to explain and dispel many misunderstandings.



What is a Short Sale?

It's when:

    A homeowner is authorized to sell for less than what is owed on the mortgage.
    The lender authorizes or accepts the sales price as a payoff.
    The seller avoids foreclosure and many times they can also avoid a judgment.
   The seller avoids a negative report, by the lender, to the credit bureaus.

The seller won't get any money at closing, but they will avoid the emotional toll a foreclosure can cause. The negotiations include a favorable wording for the forgiven debt on the mortgage that can help the recovery of the homeowner.

Why would a lender agree to lose money?

   Financially, it's a smaller loss to accept a short sale than it would be to incur the additional expenses of a foreclosure.
   Lenders are in the business to lend money not home ownership. The more resources they have tied up on a property the less they have to lend out.
    With prices dropping so rapidly, even if the lenders decides to foreclose they will lose even more money when they finally try to sell the property later rather than sooner.

How does a short sale help me?

    It helps you avoid an emotionally draining foreclosure process.
    Avoiding a foreclosure with help save your credit. Typically a foreclosure will drop your credit score up to 200 points per loan.
    Avoid having a foreclosure on your credit report anywhere from 7 to 10 years, which affects your future purchasing power and interest rates.
     It could help you avoid a "deficiency judgment" from the lender after the foreclosure as they try to recuperate their loses.

But I've already received my foreclosure notice, is it too late for a short sale?

    The short answer is no, but there are a few variables that can affect the foreclosure timeline.
    A qualified Realtor or better yet, a Certified Distresses Property Expert can help you extend the foreclosure timeline up to 6 months and in many circumstances up to 7 or 8 months.
     A sale of a home can be done and approved up to the day of the bank sale or auction of the home.

I haven't missed any mortgage payments; can I still do a show?

     Typically the lender will not consider a short sale if there have not been any missed payments but can be overcome if we can show a compelling reason why the payments have been made but the payments are not sustainable into the near future.

-- We would need to show if the payments were made with your credit cards, by borrowing from family members or even if the money came from retirement accounts, as an example. This will not guarantee the lender will accept but there are instances where they have done so.

How do I pay the Realtor commissions, taxes and other expenses associated with a home sale?

   The homeowner does not pay any of the expenses associated with the sale of the home, such as commissions and other closing costs. Those expenses are also paid by the lender.
    In December 2007, President Bush signed into law the Mortgage Forgiveness Debt Relief Act which eliminates the income tax that used to be levied on the forgiven portion of the primary home's sale. The tax is still in force for second homes and investment properties

Short Sales and Income Tax

There is a current misconception that the tax laws have changed and that ALL sellers involved

in short sales will be excused from paying income tax on the amount of the mortgage

shortfall. Unfortunately, that is NOT true!

On December 20th, President Bush signed into law a measure that will change the tax effects

for a homeowner in foreclosure.

If a homeowner who was in foreclosure worked out a short sale agreement with their lender,

the amount of debt that the lender "wrote off" is considered as ordinary income to the seller.

That means if the seller negotiated a $50,000 reduction in the payoff in order to get the property

sold, the seller would have to claim that $50,000 as taxable income on their tax returns

(resulting in a potential tax bill between $7,500 and $17,500). Some sellers had decided NOT

to sell on a short sale for this very reason...but that's where this new law comes in!

The new law makes that "income" from written off debt NOT TAXABLE to the seller under! Here are some key points:

certain circumstances

· The only time the written off debt is NOT TAXALBE is on a seller's principal residence,

not 2nd home/vacation/rentals/speculation. So many of your clients that are in

an upside-down situation on non-owner occupied properties may still owe income tax.

· Effective for debts discharged between Jan 1, 2007 and Dec. 31, 2009.

· It applies to debt for acquisition, construction, or substantial improvement to the property.

This means that if someone had refinanced and taken cash out or paid debts off,

then the forgiven debt WILL be taxable.

· Forgiveness is limited to $2,000,000.

· The amount of forgiven debt will be reduced from the sellers basis in the house. Most

sellers will still be able to sell with no capital gains bill as long as they've lived in the

house for at least 2 years, but people in their homes less than 2 years may still have a

surprise! And for investment properties, they will either pay long or short term capital

gains based on how long they held the investment.

Jackie Allen is a Certified Distressed Property Expert (CDPE), who can help you stop and avoid a credit-destroying foreclosure. Through extensive and ongoing education, Jackie Allen has earned the CDPE Designation, and has dedicated her time and effort to understanding the issues distressed homeowners are dealing with. Jackie Allen understands the full range of solutions and is ready to help, using the utmost discretion.