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What is the right way to work short sales?

Many realtors and investors out there know that working short sales can be very challenging and frustrating. When it comes to dealing with a bank, and trying to get them to accept less than what a seller owes them on a property, they can sometimes make it very difficult. It is like someone borrowing money from me, and then call me to try to get me to accept less than the amount that I loaned them. If you are like me, that would not go over too well. So, I don't think these lenders are very happy about accepting less than what is owed on these properties. It will take a higher level of skill, knowledge, and patience to coordinate this type of sale, I think that is why most agents don't work short sales.

I am working on a couple of short sales right now, and I have been doing a lot of research to try to add to what I already know about the right way to work short sales, I have heard some people say some of the same things that I learned in my initial training on short sales. But, I spoke with someone yesterday who suggested that I call the lender and ask them how much they are willing to take on a short sale, then add all the fees on top of that, and market the property at that price.

This person also said that the seller will get a 1099 from the IRS because this will be considered an income. I thought there was a law that states that a debtor will not be responsible for paying taxes on the difference between the amount the debtor owed and the amount that the seller accepted for the property.

I know we have a lot of people here on Active Rain who don't mind sharing their knowledge and experiences, please let us know if this is true, and how you handle your short sales.

Thank you for your contribution to this topic.

Greater Greenville County SC MLS Real Estate - Homes for Sale in the Greenville Area of South Carolina. Here you have access to the following market segments: Greater Greenville Entry Level Homes, Greater Greenville Median Homes, Greater Greenville Upscale Homes, Greater Greenville Luxury Homes, Greater Greenville Million Dollar Homes, and Greater Greenville Lots, Homesites and Land for Sale in Greenville County SC. Surrounding towns and communities include: Greenville, Simpsonville, Greer, Easley, Fountain Inn, Mauldin, Taylors, Travelers Rest, Piedmont, Landrum and Marietta South Carolina. Also includes Greenville County, Spartanburg County, Anderson County, Pickens County, Laurens County, and Oconee County real estate and homes for sale. Call Victor Amadi at (864)525-0201. EXIT Upstate Realty

Posted by Victor Amadi on 09/24/2008 01:37 PM

Comments (82)

Shortsales in the ActiveRain Channel

short sales, avoiding foreclosures, tips, advice

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82 Comments on What is the right way to work short sales?

SEP

2008

The right way to work shortsales? Thats the magic question. I will have to say that there is no right way because it depends on the Lender. I have found Lenders that will approve a shortsale amount first and then you search for the buyer. Some will have you list the property and specify that a it is subject top short sale approval. Whatever offers you receive you then submit to bank.

The right way is to contact the loss mitigation department and ask how they do it. I have done some that close in less than 90 days and some that take up to 10 months. Hope this helps.

Realtor, Massachusetts

Victor, Short sales are big business in my market. The Seller will have tax relief as long as the property being sold is their primary residence. If it's an investment property or second home then they may very have have tax ramifications and should seek advice from their accountant.

One important thing to remember is that the bank is not a party to the purchase contract. Market the property as you would any other disclosing that the transaction is contingent upon 3rd party approval. Negotiations are handled between the seller and the buyer as normal. Once you have an accepted contract the property goes pending and the short sale package is submitted to the lender. Their approval is nothing mre than a contingency in the contract that needs to be removed. It will take anywhere from 30 to 90 days for this to happen. I usually allow 60 days in the contract for this contingency to be removed.

As a listing broker your goal is to get as close to market value as you can. You need to be able to justify the price to the bank. You are trying to sell the bank on the fact that it is to their advantage to accept the short sale as opposed top foreclosing. It's all about the NET.

I hope this helps a little.

I am no short sale expert, but I have done one or two, and have learned the hard way...but I was never able to get a lender to give me a price, until I had a contract first.....even then I had a hard time getting intouch with the lender, but I suppose that's specific to each lender..

Adriana, thank you so much for your contribution. I know some lenders have do this a little differently. I called Citi mortgage to get a fax number so that I could send them an Authorization to release info, but they told me that it had to be on their letterhead.

Broker Bryant, I really appreciate you taking the time to share some knowledge on this blog. It sounds like you have extensive knowledge in short sales. I am sure I will be subscribing to your blog. BTW- enjoyed your "list your house for cheap" video. Thank you.

Konnie, I really appreciate your contribution to this blog post. Maybe I should have not have asked for the expert opinion, I should have just asked for people that have had some experience with short sales. If we had a bunch of people that shared there experience, that could show all that one could expect when working a short sale.

Victor... Each company will handle shorts sales different from the next.. Once you think you have them figured out... it will change. As for the 1099... They could get one

SEP

2008

Victor: Sounds like you probably have this under control. Of course the 1099 rule, part of the Mortgage Debt Relief Act of 2007, only applies to people who short sell their primary residence. No help for investors. But don't dispense tax advice. Send them to a tax attorney.

In my experience they WILL NOT forgive the debt if the home has been refinanced and cash was taken out.

I had a client recently who bought the house for $279,000 and then did a cash out refinance a year later for $325,000. Higher than any similar home had sold in the area to date. If I was a bank I would not be happy either- The lender & appraiser obviously had done some creative numbers- The lender had collected over $5500 in upfront fees on that transaction.

Victor, it is good that you are staying in touch and keeping up to date with short sales. My advise to you is that every financial institution is different so always ask what the procedure is and get the details on everything including your commission split in writing. Best of luck to you.

This is for your information only and you should redirect any tax info to a qualified professional.

You should also find out more info in your state about recourse and non-recourse type of loans. Usually non-recourse loans don't have the liability of a deficiency judgment.

As for taxes, there is a way out even if the home has been refinanced. It is called insolvency.

I am referring to laws in California.

1. The 1099 issue is a whole study in itself. Generally, if the owner is living in the house and has the homestead exemption, there will not be a 1099. Again, in general, an investor will get a 1099. There are many, many exceptions and I suggest you get a copy of the current rule, which has been posted by several people. As noted, cash out re-fis will usually trigger a 1099 unless the bank has a policy against it.

2. Setting a price is a study. I personally have never had a bank tell me what they will accept on a short sale until we had a contract signed by buyer and seller and we had a bank appraisal (and BPO) in hand. Then the asset manager has some numbers to work with. Once they give you this bottom line number (by letter) they usually will not budge, so if you go to closing a few dollars short, guess who has to eat it? The listing agent is always in the weakest negotiating position, so if the selling agent or buyer agree to contribute to a shortage, give thanks!

3. You will need a preliminary HUD to send to the Asset Manager with the contract. Be advised that the numbers on the HUD enter into the bank's pricing decision. make sure that your title company takes this seriously and does not screw you by coming up with different numbers for closing. YOU WILL EAT THE DIFFERENCE!

4. The firmest rule in short selling is that there are no rules. Banks usually dictate terms and conditions....take it or leave it, so be prepared and have your buyer prepared. Buyer can write all sorts of conditions in the ammedment section of the contract....Bank will often not even read it, let alone pay attention to it. Like in sandlot baseball, He who owns the baseball makes the rules.

Note: I like to slowly study the contract and any amendments before taking any action on a short sale. Even more so than on a regular deal. Always talk to the other agent and/or buyer before taking the next step....look for problems at every turn. Ask yourself: "How will this look at closing?". Talk to the asset manager as often as you can & ask for guidance. You will get precious little, but take seriously what you get. By doing this you try to avoid getting backed into a corner where commission give-backs are the only solution.

Jim Gibson, Florida Realtor, MBA, E-Pro

Wait until the bank forecloses, then sell the REO.

Thanks to you Victor for starting the ball rolling on this much-needed wealth of information. And thanks to all the commenters who are so enlightening. I'm book markin' this one for future reference.

Victor, my primary Real Estate Business is Short Sales, I have a 98% approval rate. I am retired from the banking industry after almost 40 years. My background is residential and commercial lending. In my business I advise my listing clients that they must be at least 60 days past due on their mortgage before the bank will even look at and/or consider a short sale contract. I have a pricing strategy which has worked successfully for me. Start this listing (can be prior to the 60 day delinquency) at what is owed on the property, then drop to the market value, then drop by $10,000 increments until you get a contract. Then prepare a CMA market analysis on your listing, print out your mls history, a showing history from your lockbox. Send in a complete short sale package:

1. contract, 2. hud1. 3. the above state items. 4. 2 yrs tax returns, last 2 pay stubs, 2 yrs w2's, financial statement and a one page to the point hardship letter.

With a complete package your file will be assigned to a negotiator within 10 days and should have an approval letter in less than 30 days.

The 1099 issue, if the seller stated on their original mortgage application the property was to be their primary residence and/or is now the primary residence, there will not be a 1099 tax form issued, period. The lender can not have the borrower sign a promissory note nor can they make any type of repayment arrangements with them. They can not pursue the borrower through collections, judgments or liens. They must report to the credit bureau that the mortgage loan was paid/settled in full and report a .00 balance. This is all covered in the Mortgage Debt Relief Act of 2007 that President Bush signed into law. To the best of my knowledge this allows 2nd homes to be included. (Winter visitors that use two homes throughout the year.)

I do teach short sale classes for a $50 per participant fee, I co-authored a Short Sale Book that can be purchased for $29.95 if you might be interested. Don't pass up this part of the market, it is not that difficult if you have a process in place.

Let me know if you have any further questions, I am glad to help and share my success.

One of my agents is now teaching MCE-certified classes on short sales here in the Austin area, and I have learned a LOT about this topic over the past few months. I will keep an eye on the comments here for some good tips.

the best advice I can give is to make sure the packet is well prepared, clearly marked, and easy for the loss mitigation department to sort through and get the information they need. We had one approved in 23 days last month, and I was shocked! I took an extra time to make sure I had a table of contents and a fully complete file with MORE than they asked for. It worked, and we closed quickly.

Short Sales, nothing but short. Full of suprises and endless months of waiting. But each one is completely different, The Short sale that I am currently working on now wants me to find a buyer and then get the offer approved. How do you really know what price to market the home at. From the buyers perspective, they wait and wait and wait, until the bank makes a decision on their offer.

Some lenders are easier to work with than other. Many still do not have sytems in place to adequately handle the flow of information. I got approval on one last month in 31 days and have another that has been under contract for 5 five months and still no resolution in sight.

Freddie Mac has incentivized the process for lenders who have their guarantee by extending the allowed holiding period (time the loan in in default) to 180 days versus 90 and offering a $2000 bonus for accepting short sales on properties in default.

Amazing the different scenarios we have in the comments above.

I have been having my clients ask me lately if I have any ideas for doing short sales, but with all the differences mentioned above...it sounds like it might just have to go on a case by case basis. If anyone has any specific advice that I can pass along, please email me outside of this post. Thanks!

Victor,

Generally, as long as the property is a Principal Residence the difference between what owed and what's accepted by the bank is not taxable.

Gayle nailed it above....the Mortgage Debt and Forgiveness Act outlines that a 1099 will NOT be sent from the IRS that will trigger a taxable federal liability, however each state handles the issue differently. Specifically in my primary state of California, the borrower will still be on the hook for the taxes to the State Franchise Tax board.

The comments in this blog are a vivid and perfect example of how incorrect informaton can be so easily communicated, as well as how each institution can handle things differently (or not at all, in some opinons), AND, how so many other factors can come into play.

Ignore the noise, and focus on this very profitable sector....you'll be thankful you did.

Victor, I feel your short sale frustrations. What Realtor wants to sit on the phone for hours and be passed around from dept. to dept only to be hung up on or sent to voice mail?

The number one reason short sales fall through is because the Realtor fails to keep constant contact with the bank and they do not know how to properly negotiate the short sale with the bank.

Any professional organization should be able to complete a short sale within 2 months. With the average being 4-6 weeks.

My organization negotiates loan modifications, if we cannot approve a client for a loan modification (if they have no income) we negotiate the short sale with the bank and refer the listing to a qualified Realtor in their area that wants to do their job listing and marketing the home and we can have our experts negotiate the terms of the short sale with the bank. This saves the Realtor the time and frustration of sitting on the phone for hours with the bank. Therefore the Realtor can be out prospecting, marketing and listing instead of banging their head against the wall.

If you are interested in our referrals or would like us to negotiate your short sales call me or email me your resume.

If one is representing the buyer, it is important to make sure that you have an attorney add provisions to the "standard form purchase and sales to protect the buyer" e.g. ability to revoke the offer after a X days; postpone inspections until after written 3d party approval; find out about the possiblity of a foreclosure rather than the short sale; are their other liens that may leave NO money once the lender is paid off --e.g., 2d mortgage, condo due and/or assessments -- etc. Check how the agents will be paid.

HI VICTOR!

I'm far from the expert on short sales, but I know where to go the get expert info...Katerina Gassett. She and her husband have been doing quite well with short sales. I suggest you read some of her posts and get the 411 from her. I'm sure she'll be glad to share with you.

All the best,

I agree with US Mortgage Modification, the follow up is where most of these daels fall apart.

I always make sure my sellers have a legitimate reason to short sale and that they are willing to provide the truckload of documentation before I even take the listing. Yes, it would be nice to have the free advertising in their yard, but my reputation is more important than a few weeks or months of a yard sign.

Down here in San Diego, the buyers are all out of the woodwork, so if the home is priced right, sellers will see several offers in the first few weeks. After that it's "last man standing" most of the time.

Short sales can be very lucrative, just a matter of getting the right systems in place and hire an assistant to do the follow up calls. Or get your teenage kid to do that instead of chores around the house, or something- just don't waste your time on it.

I am just about to put together a massive blog about short sales, so check out my page in the next day or two- I hope to have a lot of comments on it.

One thing is for sure with short sales- they're here to stay for a while! Better learn to love 'em!

Peter Carlseen, San Diego

"Gayle nailed it above....the Mortgage Debt and Forgiveness Act outlines that a 1099 will NOT be sent from the IRS that will trigger a taxable federal liability, however each state handles the issue differently."

No. That is incorrect. That law only excludes acquisition debt on a primary residence or cash out debt on a primary where the money was used to "substantially improve" the property. No where does it specify that a 1099 will not be sent out. The lender is not in a position to determine what is and isn't taxable. The lender is still required to send a 1099C on any cancelled debt. The onus is on the seller to deal with this, so if they believe the debt qualifies under the new law, then they file IRS Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, with the 1099 on the tax return.

Here is an IRS publication that gives a few examples - http://www.irs.gov/publications/p4681/ch04.html

Whatever you do, DO NOT tell the seller that they will not get a 1099.

I hate short sales. I have a buyer that wants to buy one. The selling agent has the audacity to try to tell me the bank won't even look at the offer until the buyer does an inspection on a home they don't have a signed agreement on. What a waste of money on a unsure thing

I cannot believe what I am reading! 1099's, deficiency judgements, tax consequences!?!?! We are licensed real estate agents - NOT accountants nor attorneys! Not sure about yours, but my E&O insurance doesn't cover me for negotiating short sales. Al it takes is 1 seller to do a short sale when another option was in his/her best financial interest and you have a lawsuit on your hands. Use an attorney to handle these things and counsel your clients accordingly and protect your real estate license!

Tina in Virginia

I am in the middle of one right now and it is SO frustrating. We had verbal approval from lender. And then they said NO, they want another appraisal and another 30 days to review, after we already ordered title & were ready to settle. Maddening.

WOW! Tina Merritt...is that right about the insurance thing? I've never heard that. How can your E&O not cover that? It's still a real estate transaction. I'm speechless.

Wow... lots to take in on this subject. We have been doing a little research on short sales. Can't wait to read some more blogs on this. Thanks for the great info.

Great post Victor - LOTS of discussion!

My E&O does cover my short sales thankfully and I'm in one of the most litigious states - sunny southern California!

Victor - I imagine the "right way" is to follow the lender requirements. The first step is to contact the loss mitigation department. I load them with all the info they need - comps, photos, etc. not to mention the seller financials, hardship letters, etc. There is a lot of front end work that if done completely and correctly will likely get approval for a specified price. I am currently working with over 15 major banks and each one of them have slightly different requirements. You want to ask first!

A much needed topic. I especially appreciate the comment from GAYLE and will be checking out the book. Thanks VICTOR.

WOW I must say Victor that thanks to you we have so much valuable information here. I started working in shortsales in 12/07 and that particular deal is still not closed. Now that I have a buyer ready and willing to close the bank does not want to issue a 14 day extension for the closing date. They say only if the Buyer pays a per diem charge of $100.00. Its crazy because in this market it took me months to get a buyer and they are getting an FHA loan which requires the property to be totally livable. The buyer is willing to do all the repairs prior to closing to get it cleared but the bank is giving me a hard time for 14 days????

Victor....great post with lots of experienced advice!!!

Roland, thank you so much for your contribution to this blog, reading all the comments here, I truely believe each company handles it differently.

Chris Ann, thank you for stopping by, I have been telling my short sale clients that I am not a CPA, and that they would have to consult with a CPA to get better details on tax questions. I appreciate your contibution.

Ellie, I have not heard the one about refinancing not being forgiven, I will have to research that one a little further. Thank you so much for your contribution.

Diana, thank you for the advice, I will definitely remember to get everything in writing.

Alex, I will work on getting educated on recourse & non-recourse type of loans, and especially insolvency. I really appreciate your input.

foxgator, thank you for sharing your knowledge, I will remember to be very careful so that I don't end up having to flip those bills.

John, the whole idea is try to help my clients avoid foreclosure. Thank you for commenting.

Dave, thank you, I am so glad to have this great support system on AR.

Short sales are anything but short -- and they require a long amount of patience.

Gayle, wow, such a wealth of knowledge. I will be contacting you to fet details on how to get the book, and or the class.

Jason, glad to hear about the MCE-certified short sale class in Austin, I will check to see if we have that in Greenville. I was in Austin about a month ago, really enjoyed it, except the humidity. Thank you for contributing.

Team Caroll, thank you for the advice, I will be keeping everything organized. I had the buyer on one where it took about 45 days. It sounds like keeping the paperwork organized helps make things easier.

Michelle, not really looking forward to having to wait 5 months, but I guess it is the nature of the beast. Thank you for letting us know that "Freddie Mac has incentivized the process for lenders who have their guarantee by extending the allowed holiding period (time the loan in in default) to 180 days versus 90 and offering a $2000 bonus for accepting short sales on properties in default".

Joy, thank you so much for your input.

Bill, I will see what my state law says about the debt relief. Thank you so much for your contribution.

US Mortgage, holding on the phone definitely takes a lot of patience. I am going to be using the calender in my phone a lot more to remind me to continue to follow up. I will contact you for details on your service. I really appreciate your input here.

Joan, thank you so much for your advice, and for your contribution to this post.

Yvette, thank you for stopping in, and for your recommendation, I will check out Katerina Gassett's blog.

Peter, as you know we are not in the business of putting out signs, we actually want these homes sold. I am considering getting an assistant, I am not sure if I have that level of faith in our 15 year to handle that task. I am looking forward to reading your posts. Thank you for sharing your knowledge.

San Diego Short Sales, you are right. I read the IRS publication, it does say that the lender will send the seller a 1099c. The link you pasted is not linked, so here it is for those who need to check it out http://www.irs.gov/irs/article/0,,id=179073,00.html. Thank your valued input.

I love being able to learn from the stories and perspectives of so many agents, from so many diverse places.

Victor... Congratulations on getting a featured on this one... Keep up the great job !

We do lots of short sales...suggest that if you are going to do them that you take one of the many courses offered but from reputable folks...you don't want to be giving sellers the wrong information or take longer than people with more experience would and have your sellers end up in foreclosure.

Victor, last week my office closed on three short sales.

1. One was on a million dollar home with a local bank - my listing. I had a contract on the home within about a month of marketing it. The bank accepted the first offer and took a $ 300K loss. From contract to close it took only a little over two weeks, the fastest short sale I've ever had. The lender was exceptional. The bank is small and local and they are in tune with our market, so they acted expeditiously. They understand that time wasted only costs them even more money. That is a key concept a lot of the large lenders do not comprehend.

2. Another short sale was with an outside bank. We were representing the buyer. We had an elevator clause in the contract, and although there were multiple bids on the well priced property, our buyer garnered it because of that clause. It took about 7 weeks to close on it.

3. The third short sale was the short sale from Hell. My Buyer tried to fire me twice, being so unhappy with the length of time and the lack of answers from the bank. I warned him from the beginning about it, but somehow he expected something else. It took since May to finally close on it last week. When the closing attorney called me and said that the check was ready and asked what to do with it, I told her: "Frame it!"

Tomorrow we are closing on an REO. Flawless process, closing right on time.

Last week I also wrote an offer on an REO and another offer on a short sale. The REO is progressing nicely and will close on time next month. The short sale... not so much! I've already advised my Buyer to move on and he made other offers on regular offerings. We are moving forward with a normal transaction from a motivated seller who will just bring money to closing; a lot of it!

Communication is key. Establishing a friendly relationship with the other agent who is stuck in the trenches with you is very important. No matter how dismal or frustrating the situation gets, find some comic relief and joke about it with the other agent. Don't let the frustration drive you. Be nice, offer to help, tell jokes. You can come out of a bad transaction with a new friend (the other agent). Listen, take notes, ask for help and advice. Pretend that you don't know anything, because in actuality it all changes so fast and has so many hues that it's hard to really know where the real picture is anymore...

Victor,

We work closely with Realtors in performing shortsales and we will actually contract the property and get the lowest shortsale price approved while we market as FSBO (with the seller's approval) which opens the doors to our 250,000+ investors as well as the retail market. I usually get a contract with an end buyer for 115% of the final shortsale price while we're negotiating the shortsale and assign YES I SAID ASSIGN the contract to the end buyer while placing our fees on the HUD. All of this is done in house which takes the work off of your shoulders and we can even get 6% Realtor Commission! AND WE CAN DO AS MANY AS YOU CAN BRING US!!!

Can it get any better? Yes it can.

We also offer private money financing for any buyer with a

Mid 500 Credit score

3%-5% Downpayment

and we offer 4.5%-8.5% financing for 30 years.

I can't find anyone in the industry that has the pull that we have with lenders and can offer private money at that price.

We're looking for Buyer's brokers!

Good luck! I do a ton of short sales.. each bank is different though there are generally some common threads of items needed, etc. Someone balked at all the talk about 1099's , taxes, etc etc.. but as professionals we have to know enough to know if a client is getting into trouble. We do not dispense advice, ever, but we need to know these things or we will never know how to help our clients or which of our trusted professionals to send them to. If we dont' know more than they do its like the blind leading the blind. There are some clients I know may be heading down the wrong road and I insist they see their attorney before we proceed.. Anyway, that's my opinion. We need to know our "craft" and in this market that may include short sales. I think there will be some action against realtors in the coming months and years as many agents doing short sales don't even know enough to know a client MIGHT have tax or recourse implications... scary but true.

Catherine Myers, REALTOR
www.CCShortSales.com
San Francisco East Bay Area Short Sales

SEP

2008

This is quite a discussion you have here Victor. I am learning a bunch. Thanks.

Short sales are really market value sales. Realtors need to stop telling their buyers to expect to get good deals on short sales. They are just regular market value sales that take a little bit longer. If the house is not worth the wait, then the market will determine that the property needs to be sold at a lower price.

I believe that the Mortgage Debt and Forgiveness Act only applies to primary residences and purchase money loans or loans to improve the property. That said, that is solely my interpretation, and as I am not an accountant nor a tax attorney, I refer my potential short sale clients to these professionals to answer any questions they might have in this arena.

Regarding short sales themselves, they are a huge portions of the market here in Orange County. Of the 336 homes currently for sale in Costa Mesa, 112 of them are in the foreclosure process, have a notice of default filed or are listed in the MLS as short sales. I don't see how we can avoid them in this market. So, I simply counsel both my buyers and sellers to have patience and use perseverance to get through the banks' decision making process.

Victor,

We specialize in short sales in Las Vegas and the 1099 and reported income on the loss is temporarily suspended if it is the homeowners primary residence.

Hey Victor, no 1099 on primary. Investment property is being sold at a loss. Here my nickel worth. Never pay accountant or Lawyer. Have your seller do the hardship upfront at the time of listing. Make it a real true hardship if you don't forget it. If it is FHA, VA or any other government backed loan forget it that is why we are having the fredie and fannie bail out because they have insured the government backed loans and therefore they hae to pay the banks for their loss so the banks are not even going to consider a short sale. They will let you play with it till they get ready to foreclose but with them having so many right now they are taking their time on em. But on a conventional they will short sale, it will take about 90 days and they will consider any offers even after they accept yours. In fact they will usually no sign an acceptence they will ust have the listing agent proceed to closing and if no other offers come you will get a call about a week before closing saying they have accepted it. If your buyer has backed out it will just make it quicker for the next one.

I've got five nightmares right now...there isn't much you can do but call them a least once a week and yell..ask to speak to a supervisor...the people who answer the phone are unqualified to answer your questions...the most important thing is the time frame...if you can shorten the time frame it could save you 30 days or more. That includes gathering all the paperwork a head of time from the seller. I did one that closed in 50 days because we had everything in place.

If you go to the IRS website there are links about the 1099 and for some reason there are two different views as to the correct answer.

Victor: What a great post and thanks to everyone for their answers. I have done several short sales (and have gotten them approved) as well as I have several short sale properties I currently have listed. The biggest thing I have learned is that each one is different; and it's crucial to partner with a title company that understands the importance of an accurate HUD.

I can't believe we actually have to all become short sale specialists in todays market, but it's true. We do.

Tina, the purpose of this post is so we can get a better idea of how to handle these situation. Thank you for your input, it is a great idea to recommend that they talk to an attorney about the legalities. My E&O does cover short sales.

Erica, I can see how that could be frustrating. Stay positive and do the right things so they don't end up extending it any further. Thank you for sharing your experience.

Kathleen, I agree with you about doing the upfront work completely and correctly. Sounds like a great way to lower the frustrations. Thanks for your input.

Trunda, Gayle seems to be very experienced on this topic, with a 98% approval rate, I want to hear more of what he has to say too. Thank you for stopping in.

Adriana, that is a long time to wait, and then risk loosing the deal over 14 days. I hope the lender you are dealing with is really motivated to settle on the loan. Thanks for sharing your experience.

Roland, thank you. I had no idea this would be a featured, thank you all for making it so. It shows that many are interested in learning more about short sales.

Sally & David, thank you for your advice and input.

Mirela, I appreciate you sharing your experiences. You are so right about establishing a friendly relationship with the other agent. After the one deal is done, both agent may have to work with each other again. In my experience, it is always easier to work with agents that enjoy working with me and vise versa. PS: I enjoy reading your blogs.

Darlene, I will definitely visit your profile page and keep your services in mind just in case. Thank you for stopping in.

Catherine, "blind leading the blind" that is what we are trying to avoid. I hope realtors learn from the knowledge, opinions, and experiences shared on this blog post.

Christine, 112 out of 336 wow, I have to check my MLS to what ours is. I sounds like we realtors are going to be dealing with these properties one way or the other, whether we like it or not. Thank you for your input. Here the IRS Mortgage Forgiveness Debt Relief Act Q&A, for those who need to understand it better http://www.irs.gov/individuals/article/0,,id=179414,00.html.

Paul Francis, temporarily suspended? Thank you for your input. I need to research this a little further.

Charles, thank you for sharing that information. I appreciate it.

Neal, thank you for your input. Most of the lender have probably hired some new people to help them handle the load.

Kathy, "it's crucial to partner with a title company that understands the importance of an accurate HUD". I like that one. Thank your contribution.

A good rapport with the Loss Mitigation Department / representative is always a good thing. I closed a short sale and was very pleased with the communication between the bank and myself.

do not give advice on the 1099 situation. it is very dependent on whether or not it was a primary residence or an investment property. realize that many times the IRS and the Congress pass legislation that really helps a homeowner on their own home but it doesn't necessarily help investors. yes, they may be taxed. just refer them to their tax professional.

H.R. 3648: Mortgage Forgiveness Debt Relief Act of 2007

To amend the Internal Revenue Code of 1986 to exclude discharges of indebtedness on principal residences from gross income, and for other purposes.

Summaries

Highlights from Project Vote Smart

The following is Project Vote Smart's highlights for this bill, graciously made available by PVS:

The following summary was for the Passage for this bill on 2007-10-04. The bill may have changed since then.

- Excludes the debt forgiven on a qualified principal residence from the definition of gross income subject to income tax (Sec. 2).

- Reduces the income tax breaks on most gains from the sales of non-primary residences using a formula based on the amount of time that the taxpayer actually lived in the property during the five-year period before the sale (Sec. 5).

Congressional Research Service Summary

The following summary was written by the Congressional Research Service, a well-respected nonpartisan arm of the Library of Congress. GovTrack did not write and has no control over these summaries.

12/20/2007--Public Law. (This measure has not been amended since it was passed by the Senate on December 14, 2007. The summary of that version is repeated here.) Mortgage Forgiveness Debt Relief Act of 2007 - Amends the Internal Revenue Code to exclude from gross income amounts attributable to a discharge, prior to January 1, 2010, of indebtedness incurred to acquire a principal residence. Limits to $2 million the excludable amount of such indebtedness. Reduces the basis of a principal residence by the amount of discharged indebtedness excluded from gross income. Disallows an exclusion for a discharge of indebtedness on account of services performed for the lender or any other factor not directly related to a decline in the value of the residence or to the financial condition of the taxpayer. Sets forth rules for determining the allowable amount of the exclusion for taxpayers with nonqualifying indebtedness and taxpayers who are insolvent. Extends through 2010 the tax deduction for mortgage insurance premiums. Sets forth alternative tests for qualifying as a cooperative housing corporation for purposes of the tax deduction for payments to such corporations. Qualifies a corporation if: (1) 80% or more of the total square footage of the corporation's property is used or available for use by its tenant-stockholders for residential purposes, or (2) 90% of the corporation's expenditures are for the acquisition, construction, management, maintenance, or care of its property for the benefit of the tenant-stockholders. Allows members of a qualified volunteer emergency response organization (i.e., an organization that provides firefighting and emergency medical services) an exclusion from gross income for state and local tax benefits and for certain payments for services. Terminates such exclusion after 2010. Allows certain full-time students who are single parents and their children to live in housing units eligible for the low-income housing tax credit provided that their children are not dependents of another individual (other than a parent of such children). Allows a surviving spouse to exclude from gross income up to $500,000 of the gain from the sale or exchange of a principal residence owned jointly with a deceased spouse if the sale or exchange occurs within two years of the death of the spouse and other ownership and use requirements have been met. Increases the penalty for failure to file a partnership tax return and extends from five to 12 the number of months in which such penalty may be imposed. Limits disclosure of tax return information that includes individual taxpayer identify information. Imposes an additional penalty on S corporations for failure to file required tax returns. Amends the Tax Increase Prevention and Reconciliation Act of 2005 to increase the estimated tax payment due in the third quarter of 2012 for corporations with assets of at least $1 billion.

To cite this information, we recommend the following: GovTrack.us. H.R. 3648--110th Congress (2007): Mortgage Forgiveness Debt Relief Act of 2007, GovTrack.us (database of federal legislation) <http://www.govtrack.us/congress/bill.xpd?bill=h110-3648&tab=summary> (accessed Sep 25, 2008) Because the U.S. Congress posts most legislative information online one legislative day after events occur, GovTrack is usually one legislative day behind.

Hi Victor,

I think the 1099 question was answered in earlier replies. I've worked a number of short sales and if you get a bank to tell you what they'll accept - you're lucky.

Before accepting a short sale listing, I advise the seller to talk to their accountant and a debtor lawyer (better known as a bankruptcy lawyer). If they feel comfortable and qualify for a short sale then I advise them that I will use a proffesional short sale negotiator. I then have them fill out the hardship/short sale package, make a CMA/BPO for the bank and have it ready if we get an offer.

I haven't had a short sale refused yet. But some of them have taken as long as 6 months. I have had sellers with assets that had unrealistic expectations of getting away without any costs - I normally refuse those listings as when the bank gives it's OK with the deficiency judgement the sellers normally run away and hide.

What would happen if short sales were banned?

A) People would stay and find 2nd, 3rd, jobs to pay for their decisions

B)Less inventory on the market

C) Fraud Prevention

D) Of course casualties and life lessons learned like if you don't have enough down WAIT and have 6 mths reserves for rainy days (2008)

E) All of the above

F) This is how I make my living-Are you nuts?

just a thought ;)

Well, I guess I'm the odd man/woman out. I love short sales! Yes, I said I love short sales. Will take them all day long. I start out by pricing the home at fair market value, based on comps and current sales. Then I drop the price $5000 every 2 weeks until I get an offer.

Once I get an offer, I make sure I have a complete package, including documentation of all price reductions, notes from follow up calls to showing agents, pictures of problems with the home along with all their required documentaion. I include a cover letter with a summary of the listing history including everything I did to try and get the property sold. I have a title company that helps me by making all contacts with the bank!!! Yes, that right, THEY deal with the bank! And they are very good at it. They also help me get all required documentation, send the package to the bank and verify that it was received. They do all the follow up, keeping me informed the entire time.

I don't send a signed contract to the bank, only the buyers offer. That way I can keep marketing the property. They are not going to look to see if the contract is signed by all, They are too overwelmed. So, you might ask why I bother to send all the other extra stuff that they probably won't read. Because perception is reality. The fact that I have all this documentation, that they may or may not glance through, presumes that all was done to try and get the home sold. All they really care about and look at is the BPO and the HUD. If the numbers work, based on the BPO and HUD, then they say Ok.

Most of the sellers I work with are very cooperative. There are no problems getting price reductions, since they are not going to get any money anyway. They will agree to just about anything you wnat to do. They just want out and they, in most cases are very greatful for the help. Of course, I advise them to consult with appropriete people, accountants, attorneys, etc. Yes, all banks are different but when you have great people helping you, you do what ever it takes and get the job done.

When the market shifts, you must shift with it to survive. Take classes, learn all you can and get good people to help you and you in turn will be helping a lot of financially distressed sellers while helping yourself at the same time.

"Al it takes is 1 seller to do a short sale when another option was in his/her best financial interest and you have a lawsuit on your hands. Use an attorney to handle these things and counsel your clients accordingly and protect your real estate license!"

Tina, you are dead on about the risk. I can tell you that there are several law firms tracking short sales with the end result of getting many of those sellers to sue their agents. If one wades in the short sale pool without an attorney, they are a fool.

Victor,

There is a very good real estate attorney, that I use for my short sales, and he is an AR member. His name is Richard Zaretsky. You can wasily find him using "Search". He posted several blogs discussing Short sales, and I strongly recommend you read them. I find it the best info on Short Sales out there.

Good luck

SEP

2008

The former practise of the IRS to consider all debt forgiven as taxable income has been ended. Now (see link) although all forgiven debt must be reported to the IRS, only "cash-out" forgiven debt is taxable.

This was the "Mortgage Forgiveness Debt Relief Act of 2007"

http://www.irs.gov/individuals/article/0,,id=179414,00.html

I have been involved with only a couple of short sales, but I think they are needed and it's important for agents to be able to handle them.

One of our customers is using online bidding to help accelerate getting an offer they can take to the bank. It's working well for them because they are able to attract more buyers by starting low and going up vs. the traditional start at market and drop ever week or so. It also gives them more control of having open house (previews), and setting a deadline of about 3 weeks to have an offer and bidding history they can take to the lender.

Technology is a wonderful thing!

Victor, Excellent post and the responses provide good content and great information - very informative. From my experience with short sales, the banks would not commit to a price but just to bring them an offer. Make sure you have the short sales packet already to the bank as that will speed up the process. Do not forget to include in the short sales packet the seller's hardship letter and the letter of authorization signed by the seller authoring the bank to speak to you. Unless the bank has that letter - you can forget about them even speaking to you. Also include a copy of the listing and in New Jersey we are required to write in the MLS description that the price is subject to lender approval as is the commission.

Keeping in mind that most of the lenders are from out of state, it is up to you to provide them with current market information (supporting the list price and/or offer price) and it is equally important to make them fully aware of the condition of the house. Even if a BPO was already done, its usually onky a picture of the outside of the house. Fully advise them of the inside of the homes especially if its in distress - providing interior pictures of a distressed home will further support the short sale position. Once you receive an offer - you are basically selling the offer to the bank. Remember the bank will either accept the short sale or foreclose...and they will choose the option wherein the lose the least amount of money.

It is also my understanding that HR 3648 applies to the primary principal residence only and that if there a cash out refinance is applicable, the cash out portion is taxable. You must negotiate with the bank to issue a FULL release for the debt which will in turn prevent the bank from pursuing the deficiency.

Patience, a napkin to wipe the sweat off, the thought of anger management, a nice refreshing glass of cold, sweet lemony iced tea nearby, and the sound of a cool breeze. All of these things help the short sale process. :-)

Victor, make sure the attorney you consult is licensed and experienced in your state.

"The 1099 issue, if the seller stated on their original mortgage application the property was to be their primary residence and/or is now the primary residence, there will not be a 1099 tax form issued, period.""

This is not accurate.

"The lender can not have the borrower sign a promissory note nor can they make any type of repayment arrangements with them."

Again, not accurate. They most certainly can and do ask.

"They can not pursue the borrower through collections, judgments or liens.and not subject "

In certain instances, such as where the loan is a refi where the lender has recourse, they can and do.

"They must report to the credit bureau that the mortgage loan was paid/settled in full and report a .00 balance. This is all covered in the Mortgage Debt Relief Act of 2007 that President Bush signed into law."

No it wasn't.

Here is an overview of the mortgage debt forgiveness act that covers the bill line by line and referencing the IRC that are referenced.

"We work closely with Realtors in performing shortsales and we will actually contract the property and get the lowest shortsale price approved while we market as FSBO (with the seller's approval) which opens the doors to our 250,000+ investors as well as the retail market. I usually get a contract with an end buyer for 115% of the final shortsale price while we're negotiating the shortsale and assign YES I SAID ASSIGN the contract to the end buyer while placing our fees on the HUD."

If you are an agent an turn over your short sales to sharks like these without the seller FIRST consulting an attorney with no ties to the sharks, then you better have a real good attorney yourself.

Why? Because there are many instances where debt forgiveness is taxed and every dollar you leave on the table, or give to the sharks as their profit margin when they flip the property, is money your clients can be on the hook for tax wise.

These sharks do not have your clients best interests at heart.

"The firmest rule in short selling is that there are no rules. Banks usually dictate terms and conditions....take it or leave it, so be prepared and have your buyer prepared."

Jim, if you believe that, then you may be the wrong guy to be handling a short sale.

"Never pay accountant or Lawyer."

Charles,

Why on earth would you say this?

SEP

2008

As an agent with many successful short sales, the key is a good system with all the right documents for the lender as the first offer comes in. Pricing is key and you must do your homework. Watch for government backed loans because the lenders have guide lines they must follow. 82% net to lender for FHA and 88% net to lender for a VA. If you have priced a property too low, believe me, the lender will let you know in the form of a counter offer. Have your comps ready to justify your pricing and also have the listing history of the property.Best tip I can give is to list at a higher rate of commission and that will ease the pain of the reduction that the lender will agree to.

SEP

2008

It seems that many of you have had great success with short sales, any advice on how to market for listings.

OCT

2008

US Mortgage Modification

Hello: I'm an happy owner of a small mortgage comany with over 70 years of combined experaince.

Searching for ways to survive, we have handled several short sales and have found them to be time consuming.

My question is: Has anyone signed up with and is currently using US Mortgage Modification. They have a great concept but as we all know, the proof is in the service and pull thru rate.

feel free to call me at 910-538-6730 or e mail me at rusty@zerostressloans.com

OCT

2008

I was wondering if you could give me some advice on how to deal with Citi

I have a client that lives in a house that the owner was taking rent money on, and one day they found out that the bank was going to foreclose. He had been pocketing there money even though they had a rent to own contract. they got permission from him to try to get the house by a short sale.

The owner took out the original loan for 108,000 dollars we found out that the bank had paid 16,000 in back taxes. And they want the owner to come up with 141,000 in total with all legal and late fees etc.

So we put in our short sale offer for 121,000 this is exactly what my clients could get approved on.

When there own BPO and appraiser came out we had a long talk with them and explained the situation that they were basically getting screwed. Showed them the all money order receipts and everything. The BPO and appraiser said that it was a good offer and they were going to go low with all the problems with the house and don't worry. They could not say what they had to turn in for value amount but we had a good offer We should not have a problem.

So the very day I got my offer in the loss & mitigation person handling us. Emailed me and said the the investors wanted 140,000 for the house and since we did not meet there offer the file was closed.

I emailed her back and let her know that was crazy and the house was not even worth that much.

She emailed me back saying the investors had already come up with a number using there own values and that is what is worth. If I get a better offer meeting the requirements call her.

I sent her an email begging them to reconsider that it was a good offer and that my clients are not investors and they will be first time home buyers. And we can close now.

She said the file is still closed and they were going to go ahead and auction the house of in 5 days the original auction date even though when I put in my short sale they had postponed it till the November auctions. And sent a letter from the trustee that it was going to be in Nov instead of Oct.

Can they do that?

Any advice would be so appreciated. I don't know what to do to help this people from losing there home. Is this one of there games and how do I play. Do they really just come up with there own amount then close the door if not meet. I thought we would at least get the chance to go back and forth.

Should I tell them that my clients are the buyers and they have lived in the house for three years and what the owner has done to them. Would it matter? The owner is willing to sign over the house to my clients he has done everything he was supposed to do to help get the short sale going for them. After the lady cried to him and begged. At least he has some kind of conscious. I just don't know whether it would work for them to let the bank know. Or against them when they realize the owner was getting money on the house and he was using it for his own financial problems.

Any advice would be so helpful. I don't have the heart to tell my clients that they are going to lose everything.

OCT

2008

Texas, unfortunately the banks can do what they please, unless it is in writing. You have to watch what they say, take it in stride & try not to get them mad at you, because that really does not help your position.

Have you sent in comps & pictures to justify your offer? This will help sometimes.

Also, your clients expectations have to be "guided" concerning short sales, because there is never a 100% guaruntee of getting one through unless you offer full payment of loan, missed payments & lawyer fees.

OCT

2008

We all have to be very careful, visit our state, local and company policies in regards to short sales and how much information we are really allowed to handle for the seller. As for the banks... right now, they have to change how they handle these things almost daily! Playing devils advocate for just a second, I wonder what a "loss mitigation/short sale" department workers blog might look like, complaining about all of us pushy realtors!! I always like to try to look at things from everyones' perspective!

DEC

First of all, our first year in shortsale purchasing, we used a very small company as an outsource. Between communicating with the lender, homeowner, & realtor we found we were clearing up miscommunication and misplaced paperwork more than we were actually making any progress. We found lenders flat out lying to homeowners which affected our credibility in an already difficult market.

Now, we use a National Shortsale Negotiation Service which lends credibility to our Company as well as having the capacity to answer Realtor questions and Homeowner questions like this in an authoritative way. As an investment company, we only offer contracts on the property but we do remain communicative with all of our home sellers, so I've found that difficult questions like these are much more easily answered with the help of a professional team. Because this company negotiates hundreds of files consistently every month, we found the repore' that they already have the lenders who easily recognize their company, a huge plus. I cannot tell you how many times this has helped us. At one time we were submitting 50 files a month & with no upfront fees and no cost for a no close, we were able to keep our own internal cost to purchase & our Return on Investment extremely favorable.

All I can say is if you are "going it alone" be sure you have a great team of tax professionals, attorneys, agents, title companies, etc. These professionals lend to your own credibility.

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