What is a short sale?
A short sale is the sale of a property for less than the total amount of the loan. This type of sale is completed with the lender's cooperation. The short sale carries lower credit consequences than a foreclosure, and allows the borrower more involvement in the process. The short sale is not ideal in every situation, nor is this type of sale accepted by all lenders.
For what reason might a borrower request a Short Sale?
The purpose of a Short Sale is to stop the foreclosure on a property when default has occurred. Properly negotiated, the Short Sale can also prevent a lawsuit against the homeowner for the deficiency on the loan. Deficiency is the balance on the loan that remains after the property has sold for fair market value. In Massachusetts, deficiency can be as much as hundreds of thousands of dollars.
A voluntary agreement between borrower and lender stops foreclosure and prevents the FORECLOSURE entry on your credit report. Avoiding this entry, you are in a much better position for the future purchase of property, especially considering the current FHA underwriting requirements.
Part of our Short Sale process is our negotiation for NO lawsuit against the homeowner for any monies written off in the sale transaction.
Entering into a Short Sale agreement also means the borrower has greater peace of mind, knowing exactly when they must vacate the property rather than fearing sudden eviction.
Why would I hire a real estate attorney for my short sale?
Several aspects of the Short Sale can make it a difficult process, such as the need for specific information and documentation, but not too much. If too much information is provided or is provided in the wrong format, the entire transaction can be destroyed. One of the most important bits of documentation required is the demonstration of property value, which the lender verifies with what is called a “BPO,” or Broker's Price Opinion.
The borrower will also be required to submit financial information to the lender in the Short Sale process as a part of convincing the bank that payments on the property can no longer be made and that the property cannot be sold for the entire amount of the loan. Think of it as a loan application in reverse. At this stage, it is important to paint a grim picture of financial circumstances while also remaining honest and transparent, possibly providing tax returns and bank statements to corroborate the claim of economic hardship.
This is a very tricky stage because the borrower has to prove they do not CURRENTLY have the means to make the mortgage payments they once had to prove they DID have the means to pay. Without finesse, the borrower could implicate him or herself in mortgage fraud. Proper representation by a qualified Short Sale attorney is important to protect the borrower, especially considering the fact that some unscrupulous mortgage companies have used, in recent years, shady tactics to get borrowers into mortgage loans.
What are the tax implications of a Short Sale?
Every borrower's tax situation is different. Most often, however, any 1099 income that would come from a Short Sale is offset by the financial loss of a bad investment. Critics of the Short Sale often consider only the 1099 income without also looking at how this is offset by the loss on the property.
The bottom line on taxes and the Short Sale is that the year in which a Short Sale is completed is complicated enough to warrant the preparation of taxes (for that year) by a Certified Public Accountant. The deduction is easy to miss, and you don't want this to happen to you. We have yet to hear that any one of our clients has had to pay taxes on a 1099 for a short sale due to the numerous exclusions. It is important to speak to a trusted CPA in the year of your Short Sale. Our specialty is short sale and debt, not tax law. We are therefore not able to advise or assist clients in such matters.
What are the qualifications for a short sale?
Both the property and the borrower must qualify in order for the short sale to be considered by a lender.
A property may qualify for a short sale when comparable sales in the area substantiate the claim that the fair market value of your home is less than the balance of your loan. Comparables are identified in a broker price opinion letter, referred to as a BPO.
To be considered for a short sale, the borrower will typically have to prove that some type of hardship has made it impossible to continue making payments on the property. Hardship is beyond the borrower's control, an event, or circumstance that has taken away the ability to maintain a mortgage. Examples of hardship include:
- Loss of primary income or unemployment
- Separation or divorce
- Failure of a business
- Employment relocation
- Excessive medical expenses
- Inability to work due to health condition
- It is necessary to move from the home
- Death of spouse or significant other
What if the problem is not my own financial hardship but the property itself that is creating the hardship?
Many people have found themselves in a situation where their mortgage payment has rapidly adjusted up and the value of their home has declined significantly. Some lenders consider these factors alone sufficient for Short Sale qualification, especially when a borrower is in default. The question lenders ask when determining their move is whether they will lose less in the short sale than in a foreclosure.
What if I have assets?
Most lenders look only at debt to income ratio, not assets, when agreeing to the Short Sale process. If assets are considered, the lender may approve a Short Sale but require some type of payment from the borrower.
Is default on a loan required for a Short Sale?
Default is the first step towards foreclosure. Understandably, many borrowers considering Short Sale want to avoid the negative mark a defaulted loan will make on their credit. Some lenders will consider a short sale before default has occurred, though this can be a challenge. The attorney negotiating the case works to convince the lender that default will occur if a Short Sale is not agreed upon. If there has never been a default on the loan, the lender may not feel compelled to approve the request.
What is the objective of a short sale?
The first objective of a short sale is for the chosen real estate professional to procure an acceptable offer for the purchase of the property in question. An acceptable offer will be in line with fair market value for comparable properties. The second objective is for the attorney representing the case to oversee the short sale to ensure approval. The attorney will present a multi-part package to the lender to obtain approval as well as forgiveness of the remaining balance on the loan. If necessary, the attorney will also mitigate on the borrower's behalf any liabilities resulting from the short sale.
Working with Real Estate Agents/Brokers
Many people work with a real estate agent or broker in the negotiation of a short sale. Many agents and brokers are very good at what they do. They are not, however, attorneys. A real estate agent may be held liable for wrongly advising a client or failing to discuss with clients the legal liability they face in the Short Sale. It is beneficial to involve an attorney in the short sale to assist with negotiations with the lender or to protect the borrower's legal interests (as well as the real estate agent) through the review of contracts and approvals from the lender. We are very experienced in working with lenders, homeowners, and real estate agents. Our full service short sale negotiations include deficiency judgment, 1099 issuance, and credit report negotiations for both short sales and deed in lieu of foreclosure cases. Services are also available a la carte.
How will a short sale affect my credit?
Credit experts agree that a deed in lieu and a short sale are equally damaging to the borrower's credit. The variable in terms of damage is the number of months (if any) the borrower was either required to be behind on payments or was, in fact, late. Each of these closures of a loan fall under ‘customer did not pay as agreed.' It is believed that we will soon have legislation that will minimize the credit damage resulting from a short sale. The credit advantage at this time is that a short seller may be able to obtain a home loan two years after the short sale. This is significantly shortened from the time for foreclosure, which is five years. Guidelines may vary from one lender to another and are subject to change, so it is important to check with your lender regarding their guidelines for home mortgage.
Will I have liability for the balance on a loan amount after my short sale?
There are two ways in which liability may result from a short sale.
Liability may be in the form of a deficiency judgment, a civil judgment in favor of the lender. This judgment leaves the borrower responsible for the balance owned to the lender after the short sale.
If no deficiency judgment is made, the difference between the sale amount and the balance on the loan is “debt relief” that can be taxed. The lender may issue a 1099-C for the amount not paid off in the short sale. This balance, though written off in terms of payment, will incur a tax liability and it must be reported as income. Through the Debt Forgiveness Act of 2007, principal residence homeowners became exempt from the federal debt relief tax. Borrowers may still have to report debt relief on the state return, however. In the year of a short sale, taxes should be professionally prepared by a certified accountant due to the intricacies of the short sale liability.
Why would I choose Short Sale over foreclosure?
The short sale limits and controls damage in a number of ways:
- Whatever balance remains after a short sale will either be repaid by the borrower or counted as taxable income. The borrower and his or her agent take proactive steps to obtain the highest possible sale price for the short sale property, which lowers the tax or deficiency liability to the borrower. The foreclosure price will always be less, which means the overall liability to the borrower will be higher.
- Lenders who can avoid foreclosure are often more inclined to legally forgive the remaining balance and forego a deficiency judgment.
- Though credit is impacted by the short sale for three to five years, this approach is favorable to a foreclosure, which indicates the borrower walked away from a debt.
- The short sale enables the borrower a greater amount of control over the sale of a property and, therefore, over his or her life. The borrower selects the negotiator and the real estate agent with whom he or she wants to work. With these professionals, the borrower decides upon the best list price and the borrower responds to offers just as he or she would in a standard sale. The borrower is also involved in the negotiation process before the offer is sent to the lender for acceptance. We work with our clients and their lenders to minimize liability resulting from the short sale. Being in greater control, the borrower feels much more empowered through a potentially stressful process.
When is the best time to begin the Short Sale process?
Borrowers may investigate short sale options as soon as they recognize difficulty in making payments. Default is not necessarily a prerequisite for short sale. The sooner negotiations with the lender begin, the better the chances of successful resolution with the highest sale price become.
What is involved in the short sale process?
The multi-step short sale process includes:
- Pre-qualification for the borrower as well as the property
- Pre-qualification of the lender
- Real estate agent is hired and the sale price is set, along with a schedule of price reductions
- Borrower financials are analyzed and packaged
- Any predatory lending violations by the lender are documented
- Offers on the property are negotiated with the lender
- Post-sale credit reporting and liability are negotiated with the lender
How Long Does a Short Sale typically take?
The short sale process can be so long that the foreclosure sale can occur first; either that or the buyer withdraws their offer. For this reason, it is important to begin short sale negotiations with the lender at the first sign of financial challenge.
Typically, the short sale can be completed within a few months of submitting an accepted offer to the lender. In cases where the foreclosure trustee sale has been imminent, we have been able to negotiate successfully in a matter of a few weeks. In general, timing will depend on the prompt start of negotiations and the receptivity of the lender to work on files. The sooner, the better.
Can the process be expedited if I am facing foreclosure or an auction date has been set?
While it is possible that an impending foreclosure can speed up the short sale process, this is not a guarantee. Taking proactive steps early not only decreases the stress involved in the process but also improves the chances of a favorable outcome. Don't ignore financial challenges nor obligations. Call our office today for a FREE consultation.
The short sale process seems to be negative. Is there a positive side?
Yes, losing a home can be an immense challenge in life. At the same time, this experience brings with it the opportunity to realize that a house that has become too expensive is not worth the toll on quality of life. If you have family by your side, your health, and perhaps faith in something greater than yourself, you are equipped to handle the challenges life brings, including the temporary loss of a home. The short sale brings relief from excessive financial burden and allows you to regroup and make a new plan to purchase in the future, which will only be a few years away if you so choose.
What makes us different than other short sale negotiators
The Law Offices of Matthew T. Desrochers, P.C. provides outstanding service through a potentially complicated, lengthy process. Our licensed, experienced professionals help our clients make sense of the various aspects of the short sale process and make them feel empowered through this understanding.
Working with a skilled short sale negotiator, you will be able to see a light at the end of a tunnel that is shorter than you had imagined. Call (781) 279-1822 to speak with one of our short sale professionals today.