Loss Mit Services

Short Sale Tip of The Week 6-24-09

Posted on 23. Jun, 2009 by ctlms in Short Sale, foreclosure

What are the consequences of a short sale? Part 3

This week I am going to finish up the discussion on short sale consequences for a homeowner that must sell via a short sale.  This weeks topic is the deficiency balance.

I posted on this topic in my tip of the week on 5-13-09 so I will just sum up the topic here.

When a short sale is approved as a release of lien only, the sellers are still open to the possibility of the lender trying to collect the balance in the future.  This is NOT an acceptable short sale approval letter.  It leaves the sellers open to any and all collection options that are available to the lender at any time in the future, even after they get back on their feet financially.

These approval letters should be rejected and negotiated to a pre-arranged promissory note.  We always try to negotiate those notes for much less than the deficiency balance and at very low or no interest.  The difference between the promissory note and the deficiency balanced is forgiven and the sellers would receive a 1099-C for that amount.  We discussed the promissory notes extensively in tip of the week on 5-13-09.

As I have stated before, a satisfaction of the note is the best approval.  However that is not always an achievable outcome and the promissory note is the next best thing.  A well negotiated promissory note is by far more favorable to the sellers than an open ended ability by the lender to try to collect on the entire deficiency.  The lender would often sell the right to collect that debt to a professional collection agency that will relentlessly pursue the sellers.

That raps up this mini series on short sale consequences.  See you all here next week for my next Short Sale Tip of The Week.

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As always Visit the Ask The Expert Page to leave your questions or contact me directly if you need immediate assistance at [email protected] or visit www.CTLMS.com

Short Sale Tip of The Week 6-17-09

Posted on 16. Jun, 2009 by ctlms in Short Sale, foreclosure

What are the consequences of a short sale? Part 2

Ok, this week are going to discuss the tax implications of a short sale.

First off let’s take care of one common misconception about a short sale.  When the lender agrees to accept a short sale they have 2 choices.  They can write off the loss and the seller will receive a 1099-C or they can pursue the deficiency balance.  They cannot do both.  If they forgive the debt the seller gets the 1099, if they do not forgive the debt there is no 1099.

Now just because the bank forgives the debt does not mean the seller will receive a 1099.  The banks are so screwed up these days that many times they never send it out.  That does not relieve the seller’s responsibility to claim it on their taxes however.  Though without the 1099 they really would not know the exact amount of the forgiven debt, also the IRS would never have been informed of the forgiven debt if the lender never filed the 1099 to begin with.

It is not the end of the world for the seller to receive a 1099 either.  First of all it means that they successfully short saled their home and were relieved from the obligation to repay the difference. Also the tax on the forgiven debt would be substantially less than the debt itself.  So the sellers are already in a better place than they could have been.

Most of the time the sellers will owe little or no tax on the forgiven debt.  There are exceptions in the IRS code that allow the taxable gain on forgiven debt to be excluded from the seller’s tax liabilities.  In Dec. 2007 HR3648 was passed which basically relieved homeowners from owing taxes on forgiven debt if the debt was for a mortgage on their primary residence and the loan was used to purchase the home.  If the loan was a cash-out refinance it becomes more complicated as any money not used to pay off the existing loan or improve the house does not qualify for the exemption.  And obviously investment properties, which are not primary residences, do not qualify.

Yet another exemption which has long been used to exclude the tax liability of a 1099 for debt forgiveness is the Insolvency Exemption.  Basically this rule states that if the seller is insolvent they will not have to pay the taxes.  The IRS considers you insolvent if your debts exceed your assets.  If the seller just had to sell their home for less than they owed on it, it is pretty likely that their debts will exceed their assets since most peoples homes are their only real asset.

Obviously your sellers should always seek a competent CPA for further clarification of the tax consequences of a short sale and what will be required when it comes time to file their return.

Next week we will discuss the deficiency balance.

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As always Visit the Ask The Expert Page to leave your questions or contact me directly if you need immediate assistance at [email protected] or visit www.CTLMS.com

Short Sale Tip of The Week 6-10-09

Posted on 09. Jun, 2009 by ctlms in Short Sale, foreclosure

What are the consequences of a short sale?

There is a lot of misinformation out there regarding the positive and negative effects of a short sale.

Over the next few weeks we are going to discuss the 3 areas of concern when a seller short sales their house; Credit, Taxes and the Deficiency.

Before we proceed I should make it clear that I am not an attorney, CPA or counselor of any kind.  As a real estate agent your clients often expect you to know EVERYTHING about EVERTHING.  But in this case a good general knowledge is good, though you should always refer your client to the correct licensed person to answer their specific question such as an attorney, CPA or credit expert.  But without a general knowledge you would probably look like a deer in the headlights when asked about these subjects so let’s get into them.

This week we will touch on the credit implications to a seller that sells their home through a short sale.

The impact on the seller’s credit is not something that can be negotiated.  The banks are required to accurately report the status of the account to the credit bureaus.  A short sale will most often show up on the seller’s credit as “Settled for less than full payoff” or something very similar.  This WILL cause an immediate point reduction to their credit score.  However unlike foreclosure or bankruptcy, that are reported alongside other judgments and court actions against the seller, this will only be reported for the accounts that are settled with the short sale.

Bankruptcy and foreclosure stigmatize your credit for 7-10 years.  However short sales have a one time score reduction from which the sellers can begin to increase their score once again.  If they did not miss any payments their account would be shown as “paid as agreed” all the way until it was “settled for less than full payoff”.  However if they missed payments and possibly had foreclosure initiated against them; well then their credit is going to be crap for a while and a short sales effect on their score will probably not be top priority to them.

The take away here is that a short sale has less of a negative impact on the sellers score than bankruptcy or foreclosure, but there will be an effect.

Next week we will discuss the Tax consequences of a short sale.  The often feared and misunderstood “1099”.

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As always Visit the Ask The Expert Page to leave your questions or contact me directly if you need immediate assistance at [email protected]