Let me first apologize, as this is my first time writing a real blog, and I am quite sure it will show. I am not a lawyer, nor a CPA and recommend you speak with both if you are considering any and all options that I am about to outline. I am a Realtor and consider myself a Short Sale Expert and they seem to have taken over my life, as there is probably not a hour that goes by that I am not talking, typing or working something Short Sale. There is so much bad information out there, I have decided that instead of shaking my head or arguing with others, I would write this and hopefully give some good, sound advice to use. Yes I consider myself an expert, but do I know everything, NO. What I do know I will tell you here with the best of my ability and if you don't agree, that is fine, as I know I will continue to help my clients and strive for 100% successful short sales, while the national average is 10%.
Simply put, a short sale is a real estate transaction where the homeowner owes their lender more than what their property is worth and they need to sell. In a short sale, the lender must approve and accept less than what they are owed as full payoff. If they don't accept, the next step is foreclosure. It is happening all over the country and if you are in this position, you are not alone. There is also a term called 'deed in lieu' or D-I-L, which means you fill out paperwork and give the keys back to the bank, but guess what? It's still foreclosure, whether you want to call it deed in lieu or foreclosure, the credit agencies and the banks still see it one way, foreclosure. I like to think of a D-I-L as the 4 leaf clover, while there are some, they are rarely seen. Banks don't want the keys to home, same as they don't want the keys to your car. Try giving your car keys back and see what comes up on your credit report, Repossession. The other issue with D-I-L is that it is impossible for anybody who has more then one lender or mortgage, because the second, or junior lender, in this case won't just agree to take a complete loss just because you decided to stop paying. If the second is going to wiped in a foreclosure sale, meaning they will get nothing from the proceeds because the first, or senior lender is already taking a loss and has senior position, they will get all proceeds up to what is owed to them, the second would rather approve a short sale where they get something now, usually $1k-$5k, rather then get nothing later.
Some common misconceptions, some of which I used to believe are...
You must be behind at least two payments in order to qualify. This is probably the most inaccurate one of them all, you need only prove a hardship to qualify for a short sale, maybe a job transfer, military move, or loss of job, etc. Many of the people you deal with at the lender don't even know how late you are, or if you are at all.
Short sale is just as bad for your credit as a foreclosure or D-I-L. Wrong, if you are not behind on payments and your agent negotiates with the bank to show the mortgage as paid in full, and it is stated that way on the Approval Letter, you may still have decent credit. Where as with your first 30 day late, it is estimated that your credit will take an 80 point hit and another 40 for your second or 60 day late.
The bank reviews and excepts the best offer. NO, that's the agents job to get the best offer for his seller, not the bank. The bank has a bottom number, called the net, which is the lowest they will accept, there isn't a magic percentage or dollar amount that you can use to figure it out. The bank simply gets notice from the borrower that a short sale is requested, so they send out someone for what is called a Broker Price Opinion, or BPO, which is similar to an appraisal, although it isn't certified or as expensive. The BPO is usually done by Realtors at a very cheap cost, compared to a true appraisal. The BPO lets the bank know what the Fair Market Value, or FMV is and uses that number to help them figure their net. The net is derived from calculating every dollar needed to sell the home now, including but not limited to, owed taxes, other mortgages and liens, commissions, title work, etc, with a short sale and then is compared to every dollar needed to sell the home later, after foreclosure, taking in to account the same expenses, plus they must figure in decreasing market values and holding costs (maintenance, property taxes, liability, etc). The bank simply compares these numbers and decides whether it is fiscally better to sell now with the offer presented or wait to sell after foreclosure. Will they try to get more now, of course they will.
The IRS will send you a 1099. NO, the lender issues a 1099 and reports it to the IRS. A 1099 is like a W-2 that most people get from their employer, and it basically states how much money you made. You might be asking what I mean by made? If you owed $300k on your home and you Short Sell it and the lenders/bank net is $200k, then they just technically gave you $100k in income. Did you see and touch this money, I think so, everytime you walked in the front door to your home, but now you lost it. There are ways to help with this issue and are outlined in the Mortgage Debt Relief of 2007, as well as some other "programs" but only a qualified financial advisor or CPA can give you the ins and outs of this. The 1099 can be "negated" (probably not the best word to describe) if the short sale was on the sellers primary home and the lender(s) being shorted was from the money used for the purchase of the home, again...call a CPA.
The seller will get a 1099 and a deficiency judgment after the sale. NO, you will get one or the other, you can't get both, by law.
You won't get a 1099 with a foreclosure but you will with a short sale. WRONG, you will get one with both, although they will be a little different, one will be a 1099A and the other will be a 1099C and depending on what your CPA says, may not effect you. The other difference will be that the amount of taxable income on them will usually be much higher with the foreclosure, as they usually sell for much less then with short sale.
The lenders will ask you to accept a unsecured note, to be paid back over a certain amount of time after the sale of the home. YES and NO. Reason being the lender always wants more, so yes they may ask, but it is the job of the Realtor or Negotiator to know whether this is a true request or simply just an attempt to get some more money. In a typical Short Sale, the first will not request anything additional and once they have approved it they will send out an approval Letter, which will give the terms of the deal. Hopefully, whoever negotiated the deal took the time to try and have the lender put in writing that the loan will be noted on the credit reports as "Paid in Full" the bank may or may not agree, but remember, this is all a negotiation. The unsecured note that many speak of, usually comes from the second or junior lien holder, and is typically when that second isn't truly a real second, but is a Home Equity Line Of Credit, or HELOC. As I noted in the end of my second paragraph, if the second knows that they will be wiped in a foreclosure sale, they will take a little now, rather then nothing later. The trick with the HELOC is this, it is really a revolving credit line, same as with a credit card. The lender in reality, gave you ( your name and credit worthiness) the line of credit, and only used the home as collateral, but just because the collateral, or the actual equity is gone, this doesn't mean that the responsibility to the credit line is gone. You can lose the house by short sale, D-I-L, or foreclosure but you will still owe the HELOC, all of it. The lenders know this and they also realize that they can keep coming after you for it for years, in order to collect, so they use this as a bargaining chip. The first lender must approve how much the second lender will get in the short sale and only then can you really negotiate with the second. Now lets say the first only approves $5k to be given to the second, if this is a true second and they will wiped in foreclosure, they will usually except, as they know they will get nothing. Will they say they want more or that they want an unsecured note, of course they will as it is there job to recover as much as they can from the borrower, all the way to the last minute if they choose. If this second is really a HELOC, that is when the lender has more play and can require and almost always get the unsecured note. First thing they will ask for is the total note to be repaid, remember this is a negotiation, then you must work it down as low as you can and on the best terms, hopefully interest free. All the while in these negotiations, trying to get the lender to note the account, Paid In Full.
This is probably more like a book then a blog, so I will end it here and save some more for another time. One more very important item. If you are successful in coming to terms on a short sale with the lender, READ the Approval Letter and be sure it is what you agreed to, don't just take the lenders word that it is what all parties verbally agreed to. Again, please except my apologies, as I said this is my first time and it will show. Good Luck.
Michael Ceparano
Copyright © 2008 By Michael Ceparano, All Rights Reserved.. *Copyrights- Short Sales. The Good, The Bad, and The Ugly*
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