My team at Prudential, the Crook and Abiera Team, successfully closed two short sale transactions this week. These short sales were with Wells Fargo on one, and Select Portfolio Servicing and Citibank on the other property. Both of these owners purchased during the peak of the market and had experienced a loss of income with the economic downturn. Let’s talk about the scenarios:
Property 1:
- Bought in 2005
- Sellers Owed $305,000
- Got the offer in July for $145,000
- Had an IRS tax lien.
- Successfully released the Federal Tax Lien
- Got Bank Approval in 3 months
- Closed 4 1/2 months from the listing date
- NO Deficiency judgement for the seller
- Bank took a $160,000 loss
Property 2:
- Bought in 2007
- Sellers Owe $290000
- Got an offer for $155,000 in September
- Successfully negotiated the first and second loan
- Got Approval 45 days after offer
- Successfully closed in 97 days
- NO deficiency judgement for the seller
- Bank took $150,000 loss on the property
The best part about these short sales is the fact that that BOTH short sale approval letters, from ALL the banks involved, gave the seller’s FULL SATISFACTION of debt. The banks are not going to be pursuing the sellers for the amount they were deficient! That is the whole point of trying to do a short sale, a full release of the debt. Many banks are becoming ruthless and are seeking deficiency amounts from the sellers. It’s a very difficult task to get the banks to change the verbiage on their approval letters, but luckily these banks worked out well.
Does all of this make sense? Are you struggling to pay your mortgage? My team and I can help you with your short sale. We also have recommendations to lawyers and accountants we have used before to help you make an educated decision on your home. You do have options, so don’t give up. Read more below or feel free to contact me on my toll free line at 1-866-589-1646.
What is a Short Sale?
- A Short Sale is when the home sold for less than the debt against the property and the lender(s) agree to accept a discounted payoff. The lender agrees to accept less than what is actually owed on the mortgage.
- A Foreclosure is when the lender seizes the home that the loan is secured by through the foreclosure process, which is notice of acceleration of note, notice of default, notice of sale, and then actual forced sale of the home known as a ‘trustee sale.’
What are the tax consequences?
- Short Sale & Foreclosure….all debt forgiven results in 1099C debt. Whether it is a primary or rental property makes a difference as to how much tax you may pay. Simply stated, if you get released from debt the IRS sees that as income to you, just like you got a pay check. See this publication from the IRS http://www.irs.gov/pub/irs-pdf/p4681.pdfon “Canceled Debts Foreclosures Repossessions and Abandonments.”
- You may qualify for an exemption under the Mortgage Forgiveness Debt Relief Act – visit this IRS article for more information: http://www.irs.gov/individuals/article/0,,id=179414,00.html
What are the Credit Issues?
Foreclosures and Short Sales will appear on your credit history and affect you for up to 10 years. This may affect a.) employment or b.) security clearance, etc. Rumor is that a short sale is better than foreclosure for these items? There is no evidence to back this up. Arguments on both sides are out there. We do know that there is a specific spot on the credit reports for foreclosure, whereas short sales are reported differently. We have also seen examples of the credit score being impacted based on the total number of missed payments.
What is the liability for the Debt AFTER the foreclosure or short sale?
6 Months Foreclosure – The foreclosing lender has the right to sue the home owner after the foreclosure for the difference between the amount gained at the ‘trustee sale’ discussed above and the balance of debt owed. The lender has only 180 days (six months) from trustee sale to file, after that the owner is no longer liable.
6 Years Foreclosure 2nd Deeds – All deeds that are junior to the foreclosing lender have different rights than the foreclosing bank. These lenders are called ‘sold off junior lien holders’ and they have six (6) years to recoup their debt. That means you get foreclosed on November 12, 2009, these junior lien holders have until November 12, 2015 to sue you.
Short Sale – All lenders that agree to a discounted payoff and ‘release the lien’ from the property to allow the short sale are no longer ‘secured lenders’ and are now ‘sold off junior lien holders’ as described above and have six (6) years to sue you. UNLESS, the short sale is negotiated so the lender releases the homeowner from any future liability as to the forgiven debt. Many lenders are taking a hard stance on this issue and NOT fully releasing and satisfying the forgiven debt.
As always, consult a lawyer when handling any legal issues and always consult an accountant for any tax advice.
Felipe Crook
Prudential Americana Group Realtors
Las Vegas, NV 89117
1-866-589-1646
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We are not the FHA, VA, USDA, HUD or any other government organization. The content on this blog is intended for information purposes only. 
Who were the banks?
The first bank was a FHA loan with Wells Fargo. The negotiator orginally said they would only be able to contribute 1% towards the new buyer’s closing costs because he was using another FHA loan to purchase the property, but you can request a HUD variance to ask for more closing costs. They ended up paying 2%.
The second property was Specilized Loan Servicing on the first and Citibank on the second. Citibank was trying to play hard ball, but they eventually released it.
I think too many agents are putting themselves in liability by not making sure that the Sellers have an attorney advise them when they get the Short Sale offer from the bank. One attorney told me that he expects an explosion of litigation. Banks can and I think will, come after buyers unless they have given up that right in their offer. Also, I have heard that some banks are selling off their bad debts, after closing to collection agencies who will hound the buyer to death. How will the agent who was selling their house explain that?
I ALWAYS ALWAYS get my sellers to speak to an attorney. I totally agree with you. It’s absolutely important to get legal advice when dealing with a short sale.