Questions & Answers about Real Estate Short Sales

If you are behind on mortgage payments, have not been able to obtain a loan modification, and are now facing a Sheriff's Sale, there is the Short Sale alternative. Let me briefly explain how this option can help you Avoid Deficiency Judgments and Salvage Credit Score - - - EVEN AFTER SHERIFF'S SALE.

1. What is a Real Estate Short Sale? This is a sale where the lender(s) who hold the mortgage(s) on the home are willing to accept a Buyer’s offer at a price where the lender(s) will receive an amount, which is less than the amount owed on the mortgage(s). The lender(s) will forgive the price difference owed on the loan(s) and will send notice(s) of mortgage release to the County Recorder.

2. Who is eligible for a Real Estate Short Sale? The Seller must be able to satisfy 3-conditions:

· Total liabilities exceed total assets (insolvency)

· Monthly expenses exceed monthly net income (negative cash flow)

· Hardship Occurrence – loss of employment, medical expenses, divorce, death, readjusting ARM

3. What is the Benefit to the Homeowner? Instead of a “foreclosure” mark against your name, a Short Sale will change your record to one of “late payments” history. Foreclosure can lower your credit score by over 250 points. The foreclosure mark on your credit report can affect for up to 7-years your ability to purchase another home, the interest rates charged on future loans and credit cards, future insurance policy rates, ability to lease rental properties, employment/job applications, etc. With the Short Sale your credit score will typically be reduced by approximately 100 points, and the affected time period is typically 2-years.

In those cases where there are multiple mortgages on the property, the foreclosure action is normally instituted by the primary mortgage holder, the one that has granted the largest loan. In such a case, the 2^nd, 3^rd, or additional lenders or lien holders will not be a part of the foreclosure action, and these secondary lenders or lien holders will not receive any money towards their loan balances. However, it may be possible for these secondary lenders or lien holders to institute separate court actions against the defaulting homeowner for the purpose of obtaining deficiency judgments. Their timeline can go up to 6-years after default - so when your financial situation improves, they can start court proceedings for Deficiency Judgments. However with a Short Sale, these secondary lenders have agreed to accept lower payoffs, in return for release of loans being given to the defaulting homeowner - - - No Deficiency Judgments.

4. What is the Benefit to the Primary Lender? Lenders are in the business of lending money, not in owning homes. When a lender obtains a foreclosed property at the end of the Redemption Period, it now becomes its “troubled asset”. The ability of the financial institution to make money by granting future loans is now curtailed. The greater the extent of troubled assets, the less the financial institution can lend out, and the less will be the lender’s profitability. Furthermore, the amount of money that the lender will receive upon the sale of bank-owned (REO) property will typically be less than that which would be realized through a Short Sale. With this understanding the primary lender is normally agreeable to accept a lower payoff in a Short Sale.

5. What is the Benefit to Secondary Lenders? At the conclusion of the Sheriff Sale, the primary lender obtains a Sheriff Certificate of Sale, with which the primary lender can sell the property at the end of the Redemption Period. The secondary lenders receive nothing. Their only recourse would then be to proceed with independent court actions against the defaulting homeowner in order to secure deficiency judgments. However, this type of recovery will take time, incur the cost of legal fees, and then there is no guarantee that the secondary lenders will receive any money due to the insolvent condition of the defaulting homeowner. So the secondary lenders are normally agreeable to accept a lower payoff from a Short Sale - - - some money is better than no money!

6. What is the Benefit to the Buyer? The Buyer will be able to purchase at a discounted price a home that is in fairly good shape, as compared to the typical REO sale of foreclosed property. It is not uncommon that bank-owned homes have been “trashed” by the previous homeowners, who have blamed the lender for the loss of their home. By contrast, in a Short Sale the homeowner wants to avoid the foreclosure mark on his credit report, and so he wants to keep the home in fairly good shape so that a Buyer will want to make a purchase offer.

7. Who Pays the Realtor’s Commission and Seller’s Closing Costs in a Short Sale? These payments are made at the time of closing by the Primary Lender, who has agreed to the short sale purchase offer negotiated with the Buyer. The Seller Pays Nothing.

8. What is the Timing for a Short Sale? With Minnesota’s 6-month Redemption Period for an occupied residential home, most lenders will be open to accepting a Short Sale in the time period from the Notice of Default to the end of the Redemption Period. After the Redemption there is no chance for a Short Sale.

9. What is the Income Tax Liability with a Short Sale? Whenever the lender receives less money from the sale of your property, the write-off amount is considered by the IRS to be a gift to you, and as such would normally become taxable income to you. The lender would report this amount to the IRS and would issue to you Form 1099-C stating the amount of the forgiven debt, and you would then have to complete Form 982 when filing your income tax for the year in which this debt was forgiven.

The Mortgage Forgiveness Debt Relief Act of 2007 exempted the amount of lender write-off from becoming taxable income to the defaulting homeowner, as long as the home was the primary residence, and the condition of insolvency existed at the time of sale, and the amount of forgiven debt was less than $2,000,000 ($1,000,000 for a married person filing a separate return). The mortgage debt discharged by the lender has to occur in years 2007, 2008, or 2009. Suggestion: talk to your tax accountant for details.

As you can see the Short Sale alternative to foreclosure can be a Win-Win-Win situation for the Seller, the Buyer, and the Lender(s). If you believe that this may represent a good opportunity for you, please call us.