As published in the March 27th, 2008 edition of the Yucaipa News-Mirror
How to Conduct a Short Sale
Special to the News-Mirror by Randy Fox
In our last article, we took a look at the basic fundamentals of a short sale; in this article we will take a more in-depth look of how to conduct a short sale on the selling side of the transaction.
As previously mentioned in the last article, when lenders agree to do a short sale in real estate, it means the lender is accepting less than the total amount due on the mortgage. Again, keep in mind that not all lenders will accept short sales or discounted payoffs, especially if it makes more financial sense for them to foreclose on the property. Also, not all sellers or all properties qualify for short sales.
Anyone thinking about conducting a short sale on a property should take preliminary measures to find out if a short sale is the right thing to do. Such measured include obtaining legal advice from a real estate lawyer familiar with short sales and calling your tax advisor to discuss the tax ramifications of conducting a short sale. As a real estate agent, I am not licensed as a lawyer or a CPA and cannot advise you on those issues; I can only advise you on what you should be aware of and who you should contact.
Mortgage Forgiveness Debt Relief Act of 2007
Due to the mortgage industry crisis, on December 20th, 2007, President Bush signed the Mortgage Forgiveness Debt Relief Act of 2007. This act was created to help Americans avoid foreclosure by protecting families from higher taxes when they refinance their home mortgages. This Act created a three-year window for homeowners to refinance their mortgage and pay no taxes on any debt forgiveness that they receive. Under prior laws, if the value of your house declined and your bank or lender forgave a portion of your mortgage, the tax code treated the amount forgiven as income that can be taxed.
Except for certain conditions pursuant to the Mortgage Forgiveness Debt Relief Act of 2007, be aware that the I.R.S. will consider debt forgiveness as income, and there is no guarantee that a lender who accepts a short sale will not legally pursue a borrower for the difference between the amount owed and the amount paid. In some states, this amount is known as a deficiency. Speaking with a real estate lawyer can determine whether your loan qualifies for a deficiency judgment or claim.
Under the Mortgage Debt Forgiveness Act of 2007, some homeowners granted forgiveness of mortgage debt won't have to pay taxes on that amount. But there are some restrictions:
- There is a limit on the forgiven debt: up to $2 million or $1 million for a married person filing a separate return.
- The tax break also has a time limit. It only applies to mortgage debt discharged by a lender in 2007, 2008 or 2009.
- The loan also must have been taken out to buy or build a primary residence, not a second or vacation home. If debt is forgiven on those additional properties, the owner will owe cancellation of debt income as usual.
If you would like to receive a copy of the Mortgage Forgiveness Debt Relief Act of 2007, contact me through phone or my website; I will be more than happy to send you a copy.
What You Will Need to Conduct a Short Sale
All lenders have varying requirements and may demand that a borrower submit a wide array of documentation; the following steps will give you a pretty good idea of what to expect and what you'll need to do:
Call the Lender
You may need to make a few phone calls before you find the person responsible for handling short sales. You do not want to talk to the "real estate short sale" or "work out" department; you want the supervisor's name, the name of the individual capable of making a decision.
Submit Letter of Authorization
Lenders typically do not want to disclose any of your personal information without written authorization to do so. If you are working with a real estate agent, closing agent, title company or lawyer, you will receive better cooperation if you write a letter to the lender giving the lender permission to speak with those parties who have a specific interest in your loan. The letter should include the following:
• Property Address
• Loan Reference Number
• Your Name
• Your Agent's Name & Contact Information
Preliminary Net Sheet
This is an estimated closing statement that shows the sales price you expect to receive and include the costs of the sale, unpaid loan balances, outstanding payments due, any late fees and real estate commissions, if any. Your real estate agent or lawyer should be able to prepare this for you if you do not know how to calculate these fees. If the bottom line shows cash to the seller, you will probably not need to conduct a short sale.
Letter of Hardship
This statement of facts describes how you got into this financial bind and makes a plea to the lender to accept less than full payment. Contrary to popular belief, all lenders are not cold-hearted; they can be sympathetic and understanding to situations such as if you lost your job, went through a divorce, were hospitalized, etc., but lenders are not particularly empathetic to situations involving dishonesty or criminal behavior.
Proof of Income and Assets
It is best to be truthful and honest about your financial situation and disclose all assets. Lenders will want to know if you have savings accounts, money market accounts, stocks or bonds, negotiable instruments, cash or other real estate or anything of tangible value. Lenders often require assurance that the debtor cannot pay back any of the debt that it is forgiving.
Copies of Bank Statements
If your bank statements reflect unaccountable deposits, large cash withdrawals or an unusual number of checks, it's probably a good idea to explain each of those line items to the lender. In addition, the lender might want you to account for each and every deposit so it can determine whether deposits will continue.
Comparative Market Analysis
Most short sales conducted today are due to property values falling; if this is part of the reason that you cannot sell your home for enough to pay off the lender, this fact should be substantiated for the lender through a comparative market analysis (CMA). Your real estate agent can prepare a CMA for you, which will show prices of similar homes:
Active on the market
Sold homes from the past six months.
Purchase Agreement & Listing Agreement
When you reach an agreement to sell with a prospective purchaser, the lender will want a copy of the offer, along with a copy of your listing agreement. Be prepared for the lender to renegotiate commissions and to refuse to allow payment of certain items such as home protection plans or termite inspections.
If everything goes according to plan, the lender will approve your short sale. As part of the negotiation, you might ask that the lender not report adverse credit to the credit reporting agencies, but realize that the lender is under no obligation to accommodate this request.
Our next article will explain the process of how to purchase a short sale property. Until then -
Randy Fox is a residential and commercial real estate agent with Century 21 Best Properties in Yucaipa. He can be reached by phone at (909) 965-2937 or email at email@example.com. He also has a website; www.yucaipaproperties.net