Short Sales
What is a short sale?
A short sale is a transaction where the proceeds of the sale will not be sufficient to cover the amount owed to the lender and the total of all liens and closing costs. At least one lien holder will be asked to satisfy its lien for less than the amount owed. Most of the time the lender agrees to do this; but sometimes the lender will not agree. A short sale allows both the lender and the distressed property owner to avoid final foreclosure by selling the property at a loss.
Short sales are more complicated and time consuming than the usual real estate sale. The lender is not obligated to accept less than a full payment or to effectuate a short sale. Every reply from the lender, if a reply is given at all, will usually take weeks. There is usually no quick resolution of a short sale. Many times, lenders will not consider a short sale unless the borrower is in default on the loan. If a borrower defaults on the loan, but is current on all other debts; this may also affect how the lender responds to the short sale request.
Request for a short sale usually includes submission of an entire closing package “up front” for the lender to review, without knowing whether the lender will accept anything less than the full amount due. Documents that are commonly required by the lender as a minimum start to the process include a hardship letter to explain why the borrower is unable to pay; proof of income for the last thirty days (pay stubs); two most recent tax returns; and all pages of the last two months bank statements.
What are the consequences of a short sale?
A borrower considering a short sale must know and accept certain consequences, such as: 1) Borrower’s credit rating and ability to buy another house will be seriously affected; 2) Even if the lender agrees to satisfy the mortgage with less than full payment, the remaining balance on the note might not be satisfied; which means the lender retains its right to collect the remaining balance; 3) The borrower and any other non-borrower seller will not be allowed to walk away from a short sale with proceeds of any amount;4) The property will probably sell for less than its full value; 5) An interested party or family member cannot be the purchaser and the borrower cannot remain in the home after closing; 6) A request for short sale will not slow down nor prevent, nor have any effect on the foreclosure of the borrower’s property unless the lender agrees to do so; and 7) Bankruptcy might cause a delay but probably will not avoid foreclosure.
What are the tax consequences?
If the lender agrees to waive its rights to the remaining balance; the difference between the amount actually owed to the lender and the lesser amount that the lender accepts in full payoff is called “forgiven debt”. All borrowers on the loan will receive a 1099 from the lender reporting the forgiven debt amount to the IRS. Whether or not a borrower receives a 1099 from the lender, all borrowers must report the forgiven debt as income. This may generate a tax obligation. The borrower must seek advice from a tax professional regarding borrower’s IRS filing and reporting obligations and any tax consequences of a short sale transaction.
Does a short sale benefit the borrower?
After the borrower has considered all options available and has determined that a short sale is the best option for the borrower, is there any benefit to the borrower?
The successful completion of a short sale will usually benefit the borrower even if the lender does not waive the remaining balance. Some benefits may include: substantial portion of the debt being repaid; lesser damage to the borrower’s financial well-being and credit standing and freedom from a stressful and unhealthy situation.
Other options
Other options to consider and possibly attempt are modification of the loan, deed-in-lieu of foreclosure and refinance. Typically, a new loan on new terms will not help or be a valid option because of the property’s current market value. Modification of the existing loan will depend upon lender’s cooperation and whether the borrower qualifies under one of the available programs and whether the terms of a modification loan are going to be acceptable to the borrower. Deed-in-lieu of foreclosure as an option will depend on many factors and will usually be denied if there are junior lienors.
If you would like our office to represent you in the handling of your short sale, please go to our home page and look for Worksheets/Retainer Agreements to obtain a copy of our Short Sale Retainer Agreement.
If you would like a consultation with an attorney to discuss the options available to you, please call our office at 239-542-8899.