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Thursday, September 18, 2008

Short Sale; Negative Reporting is Difficult, That Could Be in Your Favor.

Short sale has come into the living rooms in almost every home in the country. A term that was once only used by real estate investors and banks in an almost top secret manner, today is the topic of comnversation. In fact the term is used so loosely it seems to be the ultimate cure all of a bad situation in avoiding foreclosure.

What exactly is a short sale? Definition: Short Sale is a Real Estate Sales transaction where the proceeds of the sale fall short of the property owner's outstanding real estate debt obligations. A lender may agree to adjust the amount owed, and accept less than a full payment, forgiving the balance, if the seller is in a financial hardship or must relocate. When the lender agrees and you have a buyer for that agreed amont that is a short sale!

With that said, do you think you are a canadate for a short sale? Are you behind on your payments? Do you think you are at the end of your rope? Are you in preforeclosure? Are you in foreclosure? You maybe in all these situations or think you are heading towards them all at once. The fact is you have been told about short sales and it's your only hope. But is it?

In order to be considered for a short sale first your lender must approve it. You lender , you and the buyer are all now part of the contract of sale. And don't think anyone is going to steal it either. Banks are not fools. That's actually in your favor and I'll explain that in a minute...
Requirements to be consider for a short sale.
  1. You must show hardship. You must show your inability to pay your mortgage going forward.
  2. Caparable sale must substantiate that the home is worth less than the unpaid balance due the lender
  3. It used to be the note must be in default, that is no longer the case in the current market. but default is a good basis of hardship.
  4. Seller should have no assets.

Short sales may or may not affect your credit. Your ability to negoitate is the key. Always use an experienced negotiator familiar with Short Sales.

When your lender approves a lesser amount to sell the proeprty below the borrowers original loan amount the difference is passed onto the borrower on a 1099 as additonal income. So if the borrower earned 80k in their job and the short sale difference was 60k 80k + 60k=140k. $140k is what the borrowers regular income reported on the 1040. It would be issued as a 1099 to the IRS. Be prepared to pay income tax on the entire amount and in many cases this has put a borrower in a higher tax bracket. Now you owe the IRS money! A law was enacted called the Mortgage forgiveness Debt Relief Act of 2007 . This allows a borrower to have a short sale for a "qualifying primary residence" and not pay income tax on the difference. The banks are taking it on the chin and no other reprecussions are on the borrower. However in the negotiations lenders know this and are trying to sneak in clauses to make the borrower pay the difference. Garnishing wages etc. this is why it is important for you to have an experienced negotiator in short sales. The forgiveness act allows for a borrower to not pay any penalty but only on "qualifying" primary homes. 2nd homes and investments do not count. See the act for qualifying. Just because the governement is providing relief does not mean the lender will. You have to remember they are in the drivers seat, but so are too. You have leverage in that you have no other assests, you are about to be foreclosured on or showing hardship and the bank is acting on that problem to resolve so they don't get the property back because it's going to cost them $$$. This is for the bank's benefit too.

The biggest effect on a borrower is how this is reported on the credit report. Currently there is not a short sale terminology for reporting. So lenders cannot say short sale on your credit report. So many banks just zero the balance. Other lenders have used the term settlement, however this settlement term is broad and is reflected as a foreclosure with respect to scoring. The issue here is, there is a settlement but the bank has absorb the difference and the government has allowed forgiveness. this reporting may lead another legal problem as to how the terminology may be stated or is stated. Because a short sale is not a forclosure. And a report indicating a short sale as a foreclosure is wrong. I'm sure I'll get lots of arguements on that but it's true. (Opinions are opinions) The future will determine this. But acording to Equifax this continues to be a problem because generally they cannot make specific differences of a short sale. So when negoitating the short sale ask for a zero balance. Have it in writing. This could mean the difference in being able to buy in a year or so when you get back on your feet again or not being able to buy for 3-7 years.

The fact you are already in pre or foreclosure already means you have negativity on your report. If you are doing this before any negativity reported and can negotiate the hardship ( and it has been done, I did it for a client) you may be able to prevent any negativity reporting.

My point here is negotiations is the key. Seek out a professional, not just a Real estate sales person but someone who is savy in negotiations with short sales. It will make the process smoother and less likely to bite you back later. A lawyer for legal advise, a tax professional for tax advise, a short sale negotiator to make the deal and a real estate pro to sell the house. It's a team to get the job done right. The worst scenario is you get a settlement reported, 2-3 years you get another mortgage because millions of others wee just like you too and it was all due to a national event not just your personal creation. The whole country should be forgiven going forward. Heck the banks are getting their forgiveness by the Fed's with the bailouts.

The information I am providing you is exactly that. So you can be somewhat informed when and if you attempt a short sale. If you hire a pro at least you will have some insight as to how things should work.

Good luck.

I Welcome any comments.

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