Short Sales That Aren't Short Enough
Hello to all,
Haven't done a short yet but have tried a few times with close close closer results.
In the most recent negotiation, I learned something which I can't quite believe but according to the banker is true of every short sale and that is this:
In a short sale, even though the owner of the property agrees to a discounted sale price and signs a P&S, and the banker agrees to a discounted mortgage amount and accepts the short sale offer, the owner of the property STILL owes the bank the balance of the original mortgage.
So if an owner owes $100K and you convince everyone to sell for $50K, the owner still owes the bank $50K.
This seems ridiculous to me. Why would any home owner agree to a short sale if at the end of the deal they still have a mountain of unpaid debt, and have succeeded in losing their house to an investor, to top it off? Seems better to declare bankruptcy.
Thanks for your replies,
-presley
"In a short sale, even though the owner of the property agrees to a discounted sale price and signs a P&S, and the banker agrees to a discounted mortgage amount and accepts the short sale offer, the owner of the property STILL owes the bank the balance of the original mortgage."
Yes, that's correct. As far as it goes. The key to a successful short sale negotiation is to have the mortgagee agree to FORGIVE the deficiency.
If the Seller has any visible means of repayment potential (immediate or eventual) the mortgagee can release it's security interest in the property to facilitate the short sale, but NOT release the mortgagor from it's personal promise to pay.
Did somebody tell you that short sales were simple?
Having done about 1,000 over the last 20 years I can assure you that they are seldom as easy as some would have you believe.... and the rules are always changing.
In the case that the lender does waive any deficiency judgement, the banks will issue a 1099 to the seller which basically means that the seller may have to pay income tax for the amount that was discounted.
For more information about this, I suggest looking into purchasing the short sale premier..
Bginvestor
I'm kind of new to this, what is a P&S ?
Certain legislation is upcoming in Calif. re: the 1099 being issued to a person who has participated in the short sale. Assuming that they have not obtained a true money gain from such sale.
Also there is some talk of taking such a situation and filing an action in Federal Court to obtain a ruling. Of course all of this may just be a manipulation to have the IRS and the State Franchise Tax Board back off and not act on the 1099's. Or include them in an active collection.
I think it might be defendable on some future claim by the IRS trying to declare this as a portion of income. I wonder if you could paper the occasion upon receipt of a 1099? Could you perhaps start an Offer In Compromise? How in heavens name would the IRS set up the money claim or how would they ever come up with the right discounted counter to the offer? Talk about a long distance case. Might put Jarndyce v Jarndyce as reported in Dickens, to shame. I can see it now it is the year 2020 and the matter is still pending in the Court of Claims!!
Has anybody got an opinion on this or am I climbing a rainbow of future hope?
Lucius[ Edited by Lufos on Date 02/03/2004 ]
Like $300.00 smog impact fee that illegally taxed other state vehicles, which was passing California smog inspection anyway, the above mentioned legislation is another banditism to which we got accustomed so much in the past decade that we even do not react to similar tightening of the nut around our neck.
I am a bit cautious to tell another similar story, but I do not believe that anyone who live out of California would believe that you have to pay full 220% penalty on top of the traffic ticket that is by default a penalty, even if you are appearing on time to pay the bail in court JUST because you want to excersize your right and have your case heard by judge. And judge, what a mockery! he is paid by the same county who paid the officer to go out on a BMW bike and wtite as many tickets that come with 220% penalty on penalty that we call "traffic ticket."
What I think we should all do is close CA accounts and legally move out of state while we physically still live here and once we buy the house subject to or in short sell, let the legislator find out and come after the foreign corporation owned by Mr. bare-bond.
This state is in bad need of the throughout fix up and the German Austrian Swrtzy Terminator might just do the job!
Thanks for your replies, everybody, but now I think we're drifting off the topic so let me re-focus.
So, given the fact that banks do not automaticaly forgive the balance of the mortgage in a short sale and consider the seller obligated t pay it, what are some tips and techniques or scripts that you have used to convince bankers to forgive the outstanding balance of the mortgage?
And another question but sorta the same question:
I still don't see the seller's advantage in agreeing to a short sale if they still owe the balance to the bank. And not only that, may owe taxes. Jeezus! Has anyone successfully negotiated a short sale where the seller is still on the hook for the remaining balance and possibly taxes? What was their upside? Why not declare bankruptcy instead?
Thanks again folks,
-presley
In reply to Chaz242,
P&S = Purchase and Sale.
Cheers
Bankrupcy doesn't forgive a morgage in first position, nor does it not make them the owner of the house either. So BK would not help. They still have the debt, and the house. Foreclosure would get them out of the situation. They would prefer a SS to Foreclosure in many cases where they actually give a darn about their credit. BK only takes off like 100 points off of credit score, Foreclosure takes off double that. MAybe they want to have some sort of credit after it's all said and done so they can get back on track...Just a thought
Sam
Quote:
On 2004-02-04 07:33, the_acrobat wrote:
I still don't see the seller's advantage in agreeing to a short sale if they still owe the balance to the bank. And not only that, may owe taxes. Jeezus! Has anyone successfully negotiated a short sale where the seller is still on the hook for the remaining balance and possibly taxes? What was their upside? Why not declare bankruptcy instead?
Acrobat, I'm currently negotiating a SS where the first ($105K) is forgiving the debt in exchange for a discounted payoff, but the second ($35K) is merely releasing the lien on the property in exchange for $1K.
Here's how it hopefully will work: The homeowner has been out of work for a year, hasn't had any prospects for employment. I negotiated between the second and the homeowner so that after the sale is (hopefully) complete I will come back and work with the second on a 'settlement' where they take a couple thousand more and forgive the loan.
The homeowner understands that this may work, and it may not work. If it works, the homeowner understands that a 1099 will be issued for the forgiven debt - however, with virtually no income for 2003, the tax implications for the homeowner are negligible. If we are unsuccessful in negotiating a settlement with the second after the sale of the property, the homeowner can file bankruptcy and have the remaining debt discharged - it effectively becomes unsecured debt with the sale of the property.
That said, as a person of integrity I am going to live up to my word and try very hard to negotiate a settlement, so the homeowner can save that otherwise good credit rating.
One additional point: I have already negotiated terms with the homeowner regarding what I will be paying for "appliances" after the sale of the property , so the understanding between me and the homeowner is that any settlement with the second will come out of that figure.
I hope this helps you a bit . . . I'll let you know how my case works out!
Storm
[ Edited by Storm33 on Date 02/07/2004 ]
[ Edited by Storm33 on Date 02/07/2004 ] [ Edited by Storm33 on Date 02/07/2004 ]
Someone please correct me if I am wrong but... it is most likely that a house facing foreclosure will not be sold at the auction and will be taken back as REO. Eventually, this house will sell for less than what is owed on the mortgage. In turn, the bank can then decide to file a 1099 or a deficiency judgement for the difference, but not both. The benefit for the homeowner is that they have a greater chance of not having a foreclosure on their credit report by working with you b/c you will be the buyer or find a buyer. Yes, they may have the 1099 or judgement against them but they will have that without working with you! Plus, they will have the foreclosure on their credit report! By working with you, they won't have the foreclosure on their credit report which is the goal to begin with for those that are credit conscience.
Karen
If a short sale is done on a home which is part of the homeowner's bankruptcy, the bankruptcy DOES remove the deficiency judgment.