Are You Short Sale Savvy?

 

What exactly IS a Short Sale?

The best answer is that by definition, the “short” in the title of Short Sale refers to the fact that the payoff amount agreed to in the transaction is indeed, shorter than the mortgage balances on the property. In other words, there is more owed on the home than what it will sell for.

 

Lenders would never entertain a SHORT sale of a property if the value exceeded the amount owed by the defaulting owner. They’d foreclose, list it and realize a gain.

 

Why should a seller do a Short Sale?

The reason a distressed seller would consider a short sale is that they are really faced with a big decision and only a few real options:

- They could let the lender foreclose, ruining their credit.

- They can use an agent to help them negotiate a Short Sale, which would be a charge off on

their credit

 — so a “bruise” if you will– rather than a foreclosure, which gives them the option to buy again within two years.

- They can choose a Deed in Lieu of Foreclosure, which means they sign the house back to thebank. This is only an option however, if the bank is willing to take the house back. In a declining market, lenders are more apt to suggest sellers find an agent and consider a short sale.

- They can reinstate their mortgage by coming up with all of the past due monies, interests,

penalties and fines. Obviously, that is not an option for most consumers in this position.

- They can try what is called a Forbearance Agreement. In other words, they then take what is

owed and move it to the back of the loan and start all over. This would depend largely on their

credit, their payment history, how long the lender has carried the loan and if they feel comfortable enough with that particular homeowner to take the risk. Clearly, if a homeowner is truly in tough financial turmoil, a Short Sale can be a viable option to get themselves out from under a bad situation and back to rebuilding their lives and credit.

 

What makes a Short Sale attractive to a lender or what makes it a win for them as well?

The lender can get the same or more net as they would in a Sherriff’s Sale, Auction or Clerk Sale, but in much less time. Short sales reduce the non performing asset inventory carried by the banks. According to CNN Money, Reuter’s, CNBC and the Washington Post on August 17, 2007, Countrywide Home Loans used $11.5 million of their line of credit because of their non performing asset inventory. That, in turn, caused their stock to plummet in just one day. So, as you can see, lenders need this option as well to stay solvent.

 

How to handle Short Sales from a tax perspective in regards to working with the IRS and the Form 1099C.

There may be a lender who writes off a loss and may send a 1099C to the seller for forgiveness of the debt. However, the key here is that according to the IRS, if you are insolvent, meaning you have no assets, then a 1099C is going to be a wash. Take the time to research www.IRS.gov and pull the documentation that resides there which supports this position. Search key words: short sale, 1099C and insolvency.

The IRS recently put a Bill in the house that states anyone going through a Short Sale will not be penalized. The Bill has passed the house and now awaits Senate and Presidential approval.  Consult with a tax advisor or with the IRS for more information.

 

National Short Sale CenterNot Sure If You Qualify For A Short Sale?
Visit the National Short Sale Center for more information

  • Do you owe more on your property than what you could sell it for, especially after
    real estate commission, closing costs, late payments, interest, etc?
  • Have difficulty covering your expenses each month?
  • Not have money in the bank to cover the difference of what you could sell
    your house for and what you owe the bank