Q: What is a Short Sale?

A: A short sale is a real estate transaction in which the lender agrees to take less money than is currently owed for the trust deed/note it holds on a property. A number of factors may necessitate a short sale:

• The client purchased the home at the height of the market and home prices in the area have fallen.

• The client refinanced to 100% at a time when market value was much higher than it is today.

• The client purchased/refinanced with a negative amortization product.

The hallmark of the short sale is that the lender ultimately controls the deal. Only the mortgage holder can agree to accept less than is owed on the property. The seller cannot make that call nor can the listing agent.

Q: Does the lender have other options besides short selling the property?

A: The simple answer to that question is YES. The only way for a homeowner to discover what the lender can do is to contact them directly. Many lenders have forbearance and recast options for homeowners. The availability of those options depends on homeowner circumstances. Saving the home should be the first avenue to investigate and begins with a simple phone call to customer service.

Q: How much time do I have once a Notice of Default (NOD) has been filed?

A: Foreclosure time periods vary by state and method of foreclosure. California practices a non-judicial form of foreclosure. Legistlatively, you have 122days once the NOD has been recorded. In actuality, these days it is taken much longer because all of the homes going into foreclosure.

Q: Will a 1099 be issued as a result of the foreclosure or short sale process?

A: In almost every case the answer is YES. The lender is compelled by federal law to issue a 1099 for any realized loss they incur. If the owner does not have a judgment issued against them or has not arranged for a personal note they will receive a 1099 for a foreclosure, short sale, or deed in lieu.

Q: What is the difference between a short sale, a foreclosure, and a deed in lieu?

A: The basic difference between the three is the method in which the information shows up on a credit report and the potential financial damage the borrower faces. FORECLOSURE, an action in which the lender actually takes the property back from the homeowner will reflect on credit as a trade line, or in some cases multiple trade lines, with a foreclosure notification. This will linger on a credit report for up to 7 years, and in many cases will stay even longer, unless the person takes proactive steps to remove it.

Q: What will this do?

A: It may keep a person from purchasing a new home in the future. It could even keep them from renting the apartment they choose. It may also affect their ability to finance automobiles, buy furniture, apply for credit cards, or curtail any other items or services that may require credit approval.

A DEED IN LIEU will still show as a foreclosure on a credit report. It’s a method in which the property owner simply turns the keys over to the lender without going through the foreclosure proceedings. The credit damage is still real and as long lasting as that suffered as the result of foreclosure. A SHORT SALE can have several advantages over the two options noted above. First, it gives the homeowner a sense of control over the situation at hand. They are not simply sitting back and letting the bank take the property. Instead, they are playing a part in the liquidation of the asset. Secondly, they are helping limit their own post-sale financial exposure. Thirdly, while their credit will still be damaged as a result of the transaction, in many cases it will show as a settlement or profit/loss rather than a foreclosure.

Q: How much will a short sale cost a seller?

A: In most cases nearly nothing. The seller shouldn’t be paying for termite inspections, home warranties, or property repairs unless absolutely necessary. In most cases, the owner is insolvent to begin with, which is why the home is subject to short sale. Homeowners and agents should be wary of offers which require payments to be made outside of escrow. Depending on the state and the circumstances, these may not be in the homeowner’s best interests and may not even be legal.

Q: What are the tax and legal ramifications of doing a short sale or foreclosure?

A: As is often the case in real estate, the legal ramifications may be state dependant. In California, for example, which is non-judicial, there is no deficiency judgment recourse to the property owner in the case of a foreclosure (assuming the mortgage in question is a purchase money loan). Other states have few or no laws governing the matter. Lenders able to pursue deficiency judgments may attach one to the property owner and in some cases may be able to seize or force the sale of other assets as well as garnish wages. It is wise for a homeowner to talk with a lawyer and a tax professional to discuss a foreclosure situation and the laws of the state governing the property. Depending on how the lender disposes of the loss, they must issue a 1099 for any deficiency realized.

Q: If the homeowner will get a 1099 no matter what, why do they want to do a short sale?

A: This question has answers based both in morality and in finance. Obviously, trying to do the right thing and helping with the sale of the property to minimize the lender’s loss is morally appealing to many, but the real reason is to minimize the damage to the homeowner. By conducting the short sale of the property, the homeowner wields some control over the situation, and helps to limit the loss incurred by the lender, while also reducing the amount of taxable gain that they may be charged with in the form of a 1099. As stated earlier, the homeowner should receive advice from a licensed tax professional to discuss their tax situation and how to best position themselves for this coincidence.

Q: Why would a lender agree to a short sale?

A: There are lots of answers to that question and, sadly, none of them have anything to do with compassion for the homeowner. The reason lenders agree to a short sale is simple: It is far less costly to short sale the property than it is to take the property back through a foreclosure proceeding. To get a better understanding of why a short sale may benefit a lender, let’s examine the costs to a lender who forecloses and takes possession of a property:

• Lost interest money that they would have gotten had the property still been generating payments.

• Attorney fees

• Posting/Publishing fees.

• Reconveyance company fees

• Appraisal costs

• Inspection fees

• In some cases there are repair bills

• Maintenance fees

• Home Owners Association dues

• Taxes

• Insurance.

• Fees for commissions

• Escrow charges

• Title Insurance fees

Remember, the lender is required to comply with any state and local mandates for the sale of properties just as a homeowner that would sell the property is required to do. All of these fees could add up to $40,000 or more. If the lender allows the short sale to take place, all of the associated holding fees can be alleviated.

Q: What’s the story with companies that advertise that if they’re put on title they can save the property?

A: Be very cautious of these types of scams. When a homeowner transfers title of their property to a third party it DOES NOT stop the foreclosure process. There have been multiple articles published in newspapers and on the Internet regarding schemes of this type. Promises of assigning title are, in almost all cases, false and will lead to further damage to your credit, increased 1099s, and may cost you even more in a larger deficiency judgment if you live within a state that allows them.

Q: How long does a short sale take?

A: This obviously is a loaded question and depends on several things.

1. How is the house priced in comparison to others on the local market? Of course, an over-priced home will take longer to sell.

2. What’s the condition of the house? The homeowner needs to be part of the solution, not part of the problem. The home must be kept clean and available for showings, including open houses and broker caravans.

3. Once an offer is made, it may take several weeks to negotiate a settlement agreement with the lender, so be prepared to keep the lines of communications open and everyone up-to-date on the current status of the file.

4. Once a settlement agreement has been reached with the lender, a normal escrow will occur with the usual time periods outlined within the purchase offer.

Q: What does it take to complete a short sale?

A: You’ll need information and lots of paperwork. One of the big pluses in a short sale is that the homeowner tends to be forthcoming about their situation and cooperates with the process by providing all of the paperwork necessary to get the transaction under weigh. Information necessary to initiate the file will include the following:

• Current mortgage payment coupons

• Copies of any correspondence with the lender

• Copies of HOA and tax bills (especially past due notices)

• A hardship letter,

• A mini-financial statement.

Many lenders also have their own proprietary forms. Knowing what lenders are involved at the beginning of a listing allows you to contact them early in the game and determine what paperwork, if any, must be presented on lender forms. Once all of the initial paperwork is together you will be ready to hit the ground running when an offer to purchase is received from a potential buyer. I recommend that you engage Short Sale Support as soon as you take the listing; they can supply the essential paperwork and check-off sheets to ensure that the lender gets the complete package so necessary to a successful transaction.

Q: Is it good to use a professional negotiating firm to conduct the lender discussions on my home sale?

A: You wouldn’t want a dentist to perform brain surgery, nor a plumber to preside at the birth of your first child, would you? Why would you trust the most difficult part of a short sale transaction to someone without training and expertise in loss mitigation negotiations? Short Sale Support and a staff of seasoned professionals who have actually been in the business and successfully negotiated short sale settlements with lenders in this market. A homeowner can feel confident that Short Sale Support will work diligently on the file so they can close their short sale and move on with life.

Q: Is there anything else I should know?

A: While the loss of a home is devastating to a family, the most important thing is that you get through this difficult time and prepare yourself for the future. To this end, make sure that you use a licensed Realtor®, preferably a Certified Distressed Property Expert to represent you on the real estate portion of your transaction and Short Sale Support to complete the lender negotiations once you get an offer from a prospective buyer.

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