My name is Jeffrey C. Nycklemoe.
In this, my first blog entry, I would like to write about a topic that has become a regular part of our day-to-day business.
those transactions in which the sale proceeds are insufficient to pay off the existing mortgage in full, have become common and will likely become more common as lenders attempt to avoid taking more and more properties into their inventory. Lenders generally can cut their losses in half as compared to a completed foreclosure and REO sale. As more borrowers find themselves upside down in their equity, and as lenders become more willing to entertain these transactions, you can help your business by being ready to complete these transactions in a knowledgeable manner.
Know what you are getting into. Before you can successfully close a short sale you need the cooperation of everyone who has an interest in that property. Sellers do not always know who all these parties are. Gibraltar Title can provide you with a Preliminary Title Report (a.k.a. "short sale report") that will identify all of the outstanding interests in the property. In the event there are junior mortgages, judgment liens, or tax liens, the holders of those liens all need to agree to give releases. They usually need to be paid something as an incentive to do so. If the property has gone to Sheriff's sale and is in the redemption period, negotiations may change some. Look at the amount bid as shown on the Sheriff's Certificate. Use that as the amount due, not what the seller's account statement says. A large percentage of foreclosure sales are now being sold on "specified bids" rather than total debt, which often means the amount due has already been discounted. You may find you are not in a short sale after all, at least as to the first lender.
"Gibraltar Title can provide you with a Preliminary Title Report (a.k.a. "short sale report") that will identify all of the outstanding interests in the property."
If you are the one negotiating the various discounted payoffs, you must be prepared to convince the first lender and all junior lien holders that a short sale makes good sense for them. Be prepared to meet with some skepticism. Make sure you have a signed authorization from the owner allowing the lenders to talk with you. Ask to speak with someone in the "Loss Mitigation" or "Work Out" department. Some lenders will not talk about a short sale on a mortgage that is not in default. This requirement can be a problem for a seller who is trying to complete this short sale with incurring an immediate "late" on his or her credit report.
Prepare a package proposal to send to the lender. Be prepared for this process to take longer than you think it should, several weeks, at least. You might consider putting an expiration date in your offer. Include in your package:
- Sellers authorization
- Purchase Agreement (for benefit of seller, this should be contingent upon
- approval of existing lien holders, a no out of pocket cost to seller)
- Preliminary net sheet (some may want this in the form of a HUD which Gibraltar Title can provide)
- Truthful disclosure of seller's financial ability and assets, perhaps backed by account statements and/or tax returns.
- Hardship letter, if appropriate.
- Synopsis of marketing attempts
- Market analysis, complete with comps
- Preliminary Title Report
The Lender will insist upon approving all disbursements from closing. The seller will not be allowed to get any proceeds. The lender is likely to scrutinize the real estate commission and perhaps require it be reduced. Most lenders realize that they must allow a junior lien holder to get something or the junior lien holder will withhold its release and kill the deal. If the lender does not understand this, you will have to convince them. The Preliminary Title Report should help. The amounts paid on junior liens are often nominal, from $1000 to $5000.
A short sale is beneficial to most everyone involved. Buyers can often get a good price, Realtors can earn a commission (although often discounted), loan officers, title companies, and appraisers can all get paid for their work. The one party involved about whom it is not so easy to unequivocally proclaim a benefit is the seller.
Credit and Tax Consequences
Sellers often are motivated into a short sale in an attempt to preserve their credit rating or minimize the damage. Whether that is possible is a matter for debate. Some have reported that their credit report only recited, "paid as agreed," or "settled" with perhaps a few late payments noted. Others have found it had the same impact as a default and foreclosure. Perhaps there is some personal consolation for the seller in that he or she did what could be done to minimize losses all around. There is a possibility for a tax consequence that impact an unwitting short seller. That has been greatly lessened by federal legislation passed this past December. In general, debt forgiveness is equal to income and will be taxed as such. The new federal law provides help from that by eliminating the forgiveness of mortgage debt from the seller's income when the mortgage debt was on the principal residence of the taxpayer and was incurred for the purchase, to build or to substantially improve the principal residence. Debt incurred to refinance these items also qualifies to be excluded from income. A short seller who had previously taken a cash-out refinance is likely responsible for income tax to the extent of the cash out or the debt forgiven, whichever is lower. In either case, the lender should send a year- end 1099 statement. The taxpayer/seller then calculates tax liability, if any, in filing his or her tax return the following year, taking any exclusion to which he or she is entitled.
Office (952) 830-1904
Facsimile (952) 893-5460