Q:  Short Sale definition.  What is a Short Sale?

Answer: In ”short”, a shortsale is when the lender agrees to settle the debt owed on the property for less than the full amount of the debt. In most cases “Settled” means the lender writes off the debt. You usually will receive a 1099 after a short sale for the amount of debt forgiven. The bank is agreeing not to go after you for the money they lost by filing a deficiency judgment in the future. The exception is the HELOC loan where they reserve the right to file a default judgment.

Answer: If you have a heavy asset portfolio that would cover the amount above the home’s value then the answer is likely to be no.  Each case is different and would be better answered after a professional review to help learn how to short sale.

Answer:  There is a lot of misinformation on the internet about this. A short sale is recorded on your credit report as “debt settled for less than the amount owed”.  In plain English, this will result in a relatively minor hit to your credit compared to a foreclosure or late payments on your mortgage. A short sale will affect everyone’s credit differently. The more established your credit, the less of an impact it will have on your score.

If you stop making your mortgage payments for 4 months, regardless of whether you do a short sale or not, 4 months of missed mortgage payments will have a significant negative impact on your credit.  A short sale will drop your credit 100 points or more.

If you are already behind on your payments, you have already incurred the majority of the hit that a short sale will have on your credit.  Moving forward with a successful short sale will insure that your debt is settled with your lender.

However, if you are current on your payments and can stay current throughout the short sale process, you will save your credit to a large extent.

When you do a short sale, your lender is agreeing to settle the debt on the property for less than the amount they are owed. As a result the IRS allows them to write off this loss, which is why your lender will send you a 1099-C after the short sale.

The IRS considers “debt relief” to be income for tax purposes. If your lender writes off $20,000 on your short sale, they will send you a 1099-C for that amount, and you would include that when you file your income taxes. The “C” stands for “Cancellation of Debt” and the law says canceled debt is taxable as income.

However there are EXCEPTIONS that most people who do a short sale qualify for, excluding them from having to pay taxes on their short sale.

Thanks to the Mortgage Tax Debt Relief Act that George W. Bush signed into law in January of 2008, homeowners who do a short sale on their primary residence, and have a purchase money loan (in other words, they have not pulled cash out of their home with a cash-out refinance HELOC) pay no taxes on the loss that their lender incurs in a short sale.

What is… pull cash out/Equity?
Answer: Homeowners who have pulled out cash from their home but have put that money back into their home to “substantially improve” their home, also are excluded from taxes on the short sale.

All other short sale scenarios – if you pulled cash out on your primary residence and spent it on something other than upgrading your home or if you are doing a short sale on a second home or investment property – result in a taxable event unless you qualify for the “Insolvency” exclusion.

The IRS does not require you to pay taxes on the loss the lender takes in a short sale if, at the time of the short sale, you are insolvent. “Insolvency” means your debts (including your mortgage) exceed the value of all your assets. In other words, if, at the time of the short sale, you have more debt than you do money or assets, you are considered insolvent.

Many people who short sale are insolvent and excluded from paying taxes on a short sale. I recommend you check with your accountant or  IRS form 982, which is the IRS form for debt relief and short sales. The IRS gives an explanation of “Insolvency” on this form.

Answer: California has passed its own version of the federal Mortgage Tax Debt Relief Act. It is Senate Bill 1055, which conforms to the federal law described in detail above, but applies to California state income taxes on a short sale.

There are differences between the state and federal law.

The term of the California law was only until the end of 2008. As of Jan 2009, this law is no longer in effect.

However,  CA, Tax Code Section 17131 provides that, unless there is some specific California statute to the contrary, California law tracks federal law on what income is excluded from taxation. Since there is currently no specific California law on this issue, short sales do not produce taxable income under California law as long as the Federal Mortgage Tax Debt Forgiveness Act is in effect (until the end of 2012).

I recommend you speak with your accountant and have them answer any tax questions that you have. I am not a tax accountant and do not give tax advice.

Answer:   The whole point of a mortgage short sale is to get out from under the debt of the mortgage. Your lender cannot write off their loss on their corporate taxes, send you a 1099-C, so you have to pay taxes on the loss, report the short sale as a “settled debt” on your credit and then turn around and go after you for the money.

This is why your lender will send you a 1099-C after the short sale. The “C” in “1099-C” stands for “Cancellation of Debt.”

Hiring an inexperienced short sale consultant or negotiator who does not negotiate a FULL release from your lender, could result in the liability becoming yours for the money the lender loses in a short sale or you could find yourself being forced to sign a promissory note to close escrow.

Answer: In most cases where people have a first and a second loan, they often are with 2 different lenders. For the short sale process to close escrow, both lenders have to agree to the short sale and agree to settle the debt. Thankfully, both lenders have a vested interest in doing this. The lender with the first loan does not want to foreclose, and therefore is willing to give a little money to the second in order to get them to agree to the short sale.

The second lender will get nothing if the first mortgage forecloses.  The attitude that something is better than nothing is becoming more prevalent.

The difference between these two loans is that in a “recourse loan” the lender has recourse to go after the borrower for the money they lose in a foreclosure, technically.  For this to take place, the lender has to file a judicial foreclosure, which is rarely done in CA.

The majority of foreclosures in CA are “non-judicial” foreclosures, where the property is sold at a trustee sale.

Answer: You will know that you have been released from the debt right on the front in plain English. “releasing the lien”, “accepting a short payoff to satisfy the lien”, “reporting the sale as a settled debt to the reporting agencies”, “issuing a full satisfaction of the mortgage”, “not pursuing a deficiency judgment”, or some other variation that states they are settling the debt for less than what they were owed.

More importantly, your bank will issue a 1099-C to you, the borrower, after the short sale, confirming that the debt has been written off and is settled. Your lender cannot write off the debt, issue a 1099-C and subsequently go after you for the deficiency.

Answer: Many people ask this question: The primary advantage is that in a short sale, the debt is settled and you no longer owe the bank any money. If you foreclosure, you may still be liable for the deficiency in the event that the bank files a judicial foreclosure.

Secondly, in a short sale, your credit takes much less of a hit compared to a foreclosure.

Finally, Fannie Mae & Freddie Mac revised their guidelines in August of 2008 with regard to how they view borrowers who have filed bankruptcy, gone through foreclosure or done a short sale. Through these new guidelines, they are in effect severely penalizing those who go the route of foreclosure or bankruptcy, and rewarding or encouraging those who do short sales, which they view as the borrower doing the responsible thing in light of the circumstances.

Recent Fannie Mae / Freddie Mac guidelines stated borrowers, filing bankruptcy or foreclosure, may have to wait up to 7 years to buy another home.

In contrast, the new guidelines stipulate only a 24 month period after a short sale.

Answer: I have yet to hear a good premise for letting your home go to foreclosure vs. short sale. Depending on whether you have recourse or non-recourse loan, when you let your home go to foreclosure you either run the risk of being liable for the deficiency amount or liable for the income taxes on that loss.

Secondly, your credit will drop up to 400-500 points and you will not be able to buy a home or obtain respectable credit for up to 7 years.

Comparison: With a short sale, the lender agrees to SETTLE the debt for less than the amount owed. If you have a recourse loan, you may be liable for income taxes on the lender’s loss (just as in a foreclosure) but you will not be liable for the deficiency (and if you qualify for the “Insolvency” exclusion, you will avoid the income taxes as well).

Furthermore, the loss that the lender takes in a short sale will be MUCH LESS than the loss the lender will incur following a foreclosure. The foreclosure process takes months & months, at the end of which the lender has to process the property through its overwhelmed system (another 3 -5 months) and then put the property back on the market, all while the market forces move against them.

Most importantly, the impact on your credit from a short sale will be significantly less than with a foreclosure and you will be able to buy again within 2 years, in most cases, compared to a 7 year waiting period to buy a home following the path of foreclosure.

Answer: Nothing –lender pays all closing costs, escrow fees, commissions etc. The lender may also pay any outstanding property taxes if negotiated properly.

Answer: The short sale process typically takes from 2-4 months, start to finish. It can take longer depending on the subject lender, the abilities of your chosen professional and your personal level of determination. You can choose to live in the property for the entire duration of the short sale or you can simply move out whenever you wish.

Answer: No, however lenders are known to be more motivated if you are not making payments or behind.   If you have a forbearance agreement it should not affect the commencement of a short sale.

Answer: You will be better represented in a short sale by an experienced Realtor who practices real estate sales on a daily basis.  A Realtor is an integral part of the short sale and possesses the experience to market your property aggressively in order to attract, screen and deliver buyers to successfully execute the sale.

With that said a word of caution.  Many attorneys seem to be preying on the fear and desperation of people facing foreclosure. Their websites use scare tactics to make people think that they would be crazy to do a short sale without first hiring an attorney.  They wrongly attorneys as the only people qualified to interpret a short sale approval, and that hiring an attorney is normal and an accepted part of doing a short sale, like hiring an attorney for divorce proceedings.

The overwhelming majority of short sales are conducted by real estate brokers who are experienced at negotiating with the lenders and charge NO UPFRONT FEES for their services.   You can hire a realtor who employs a team of professionals that include an advising attorney to help.

The California Foreclosure Consultant Act (July 1 2009) applies to foreclosure consultants – those who collect an advance fee for modifying loans or helping borrowers avoid foreclosure in situations where a Notice of Default has been filed on the property. This Act has an exclusion in it Realtors
Per CA Civic Code and the CA Assoc of Realtors, The California Foreclosure Consultant Act does not apply to real estate agents facilitating a short sale except in the extremely unusual event that an agent is 1) Making a direct loan for a residence in foreclosure, 2) Acquiring an interest in a residence in foreclosure, 3) Receiving an advance fee before performing services for a residence in foreclosure, or 4) Assisting an owner in obtaining the remaining proceeds if any from a foreclosure sale of an owner’s residence.

Chapter 13 encompasses setting up a 3-5 year repayment plan to repay debts. It requires you have a steady income, as you will be repaying all of your debt. Both have a very negative impact on your credit and remain on your credit report for 10 years.

Due to the new 2005 bankruptcy law, which raised the bar for people to qualify for Chapter 7 “fresh start” bankruptcy proceedings, fewer and fewer people pass the “means” test to qualify for Chapter 7 and for this reason can only qualify for Chapter 13 bankruptcy (a 3-5 year repayment plan).

Chapter 7 Bankruptcy, in a foreclosure stay process, allows the bank trustee to choose the Realtor and the price for the impending bankruptcy sale of your home.   While a Chapter 13 allows you to have some control of the sale of your home and who you employ.

Unfortunately, both Chapter 7 and Chapter 13 temporarily delay foreclosure proceedings, neither allows you to keep your home unless you can bring your mortgage current.

Answer: NO. Many agents have no interest in doing short sales because they require a tremendous amount of time and expertise. If you don’t know what you are doing, they often go to foreclosure.   93% percent of short sales do not sell due to poor representation.

You get one shot at doing a short sale – if your Realtor has not learned the many strategies, necessary, through experience, you will likely find yourself in a foreclosure proceeding.

Tip:  Taking  action quickly will serve you well in preventing foreclosure through the short sale process.

Our Short Sale team is qualified to provide professional advice and the ability to secure short sale approvals  in all 151 counties in California and refer other tested professionals throughout the Nation upon request.

this faqs document created in collaboration with Justin DeCesare SdHomeGuy.com

In Real Estate we call it a Short Sale.   Alternatives are bankruptcy, foreclosure or granting a deed in lieu of foreclosure. I prefer a mortgage short sale.

Does your home resemble a non-performing asset?

The Basic steps you will need to accomplish The Short Sale process Start here.  Execute these simple steps and successful negotiations will follow.

First what is a short sale?  Here is the short sale definition:

In ”short”, a shortsale is when the lender agrees to settle the debt owed on the property for less than the full amount of the debt. In most cases “Settled” means the lender writes off the debt. You usually will receive a 1099 after a short sale for the amount of debt forgiven. The bank is agreeing not to go after you for the money they lost by filing a deficiency judgment in the future. The exception is the HELOC loan where they reserve the right to file a default judgment.

Step 1

Contact your mortgage lender. Don’t just call or email customer service or the “loan work out” department. You need to speak with the manager of the problem loan department or another individual who has the authority to approve a short sale request.

While mortgage lenders can be sympathetic to these problems, they are never anxious to allow a short sale. If you are uncomfortable in this role, let your lawyer or Realtor negotiate with your lender.   This article clarifies the latest trends.

Step 2

Write a letter authorizing your mortgage lender to disclose your loan information to real estate agents, lawyers, title companies, or other interested parties. Your loan information is subject to privacy laws so your lender needs your written authorization to release this data to anyone.

At a minimum, this letter should include the property address, your name, your loan number (or other identifying data), and, if appropriate, a list of the parties for whom you wish this information to be given.

Step 3

Compile some preliminary financial information (sometimes called a “Net Sheet”) about your prospective short sale. A HUD 1 can be produced by your local  Title Company. It should include the expected sales price and all costs that might be attached to the sale, including your current unpaid loan balance, payments due, real estate commissions, and loan or other fees expected to be payable.

If you’re unsure how to create this document, your real estate agent, lawyer or advisor should be able to produce it for you in collaboration with a local Title Company at no expense to you.

Step 4

Write a serious “hardship letter“, detailing all the surrounding events that have occurred to cause you to arrive in this financial situation. Explain your economic problems honestly and directly ask your mortgage lender to accept a less than full balance payment. While the more dire your circumstances, the better the chance your request will be granted, you should resist the temptation to over dramatize your situation. A concise explanation will be most acceptable.

Step 5

Write up a statement of your current income and all of your other assets for your mortgage lender to evaluate.   This step is usually helps the Lender identify assets to help pay down their loss.

List your other assets, including bank accounts, stocks or other investments, additional real estate, and anything else of value. This information should support your assertion  that you have neither the income nor the assets to repay your mortgage loan in full.

You will often be asked to submit the last 3 to 6 months’ bank statements, also. Your mortgage lender will examine these to learn if there are recent large cash withdrawals or high numbers of checks clearing your accounts. Lenders want some assurance that you haven’t been hiding or diverting funds that might go to them.

Step 6

Compile a current market analysis of real estate sales in your area to emphasize the wisdom of your request for a short sale. This document should show the selling prices of similar homes in your area for the past 3 to 6 months.  In rural areas, with little or no sales activity, a 1 year history will be acceptable. You should also include some similar properties currently for sale in your area.

During times of market value declines, short sales become more “popular” and this comparative analysis again reinforces the need for you to request this consideration. If you’re unsure how to create this analysis, your real estate agent can prepare this document for you.

Step 7

Next?   An interested (patient) buyer is all you need. After you reach common ground with a potential buyer, deliver a copy of your proposed Letter of Hardship Letter, Authorization to Communicate with Third Party, Purchase Agreement, Listing Agreement, MLS Property Report, Hud 1, to your mortgage lender.

Your Realtor should assist you at a very  high level here. They will want to examine the price, terms, and other conditions in the document.  Don’t be surprised if your lender attempts to renegotiate (downward, of course) some features, like real estate commissions or other financial considerations you’ve made.

Assuming your lender accepts the agreement, you can then proceed to bring your short sale to fruition. This is a test of patience for many. If you have hired a Realtor experienced in Short Sale transactions this process will go more smoothly.

download new FHA short sale guidelines

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Short Sales with Countrywide B of A WaMu JPMorgan Chase are going to become more relevant in the coming year. I just got off the phone with Bof A regarding a short sale I am working to a close.  Word has it the short sale departments, at many mortgage lenders, are expanding and preparing for a bumpy 2-3 years.

UPDATE: 12/09 Changes are being implemented, on-line submission is one interesting change.

It may change the outlook in the foreclosure market as these institutions become more aware of their losses with REO’s.  It is obvious they are learning that the Short Sale option is the better answer.

This B of A employee was quite talkative and shared a few things we all need to know.  Fannie Mae (the government agency)  is causing the most trouble for everyone.   I  do not want to absolve all short sale departments from some responsibility here, yet.   Similar to trying to open a bank safe without a combo the banks have seen massive delays and required information changes coming from Fannie Mae in the form of more…..’forms’.

Have you ever been flustered by those pesky government forms?  You may be sympathetic to the bank….I am not!  I want to call a department speak to a ‘person’ and get the business done…Do you agree?

I have read tons of material from people who claim to have the golden key to helping people with short sales.  The problem is that each and every bank and each and every home/seller is different.  There is no one golden key.

Short Sale departments receive over 100000 faxes a day and most of the specialists have  well over a thousand files each.  Hire more specialists ever occur to anyone?  Each person considering a short sale option has very different financial needs, assets and goals.  Not to mention, different mortgage companies.

It is important to know where and how to make your short sale more visible with the mortgage servicer and understand how people work.  Hiring a short sale professional is strongly recommended one with experience and a temperament to fit.

Do banks lie?  Yes and No. The contact numbers are constantly changed, staff is moved around and responsibilities are adjusted all the time from the client bank (the one who hired the servicer i.e. Wells Fargo).  The client bank delegates directives to the servicer to create guidelines used to gain their short sale approval.  Changing the rules of the game.  Is that lying?

This link takes you to my FOX News Interview broadcast Video

Being prepared for these guideline changes, before they are implemented,  will reduce the anxiety in this very frustrating process.  Your chosen professional should have a strategy to employ.

When you are willing to change, bend, search, use good practices and LISTEN the ordeal will come to an acceptable close.

Find a professional to represent you, employ them and prepare for a few bumps.

Hold on turbulence are ahead as change is sometimes not easy.  I am preparing everyday for the next bump.   I have my seatbelt drawn tight.

Update 12/22/2009 New FHA lender rules for short sales

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“How many months is this going to take?”   This question is being asked with great regularity… too much really.   The answer…It depends on who has the mine.  Period.  If the Listing agent  (who has the mine or short sale) is not proactive then it doesn’t matter how hard your Realtor works or how high your offer is…you won’t find any gold.

Your Realtor is your mining pick.   They need to know how to qualify the listing agent’s knowledge, experience and ability or, at least, be willing to work to help the listing agent make progress with the bank who is ultimately going to approve the short sale and…shine the light on the gold.

A successful gold miner will have a map of the gold mine and know how to navigate it.   Your Realtor of choice will need to have a good map and understand the best way to navigate their way to the gold and extract it.   This map is developed through representing sellers AND buyers of  short sale properties, understanding all the pitfalls  and the best practices to avoid them.

More and more short sales will be coming to the market and,  the best homes and best buys available, will likely be short sales.   This is the market condition reality for the next year or longer according to Banking industry experts and Real Estate professionals based on market statistics and economic conditions.

The extremely low interest rates are bringing droves of buyers out and multiple offers on the best homes are the norm in San Jose as well as Los Gatos and all around Santa Clara County, for that matter.  Too many miners and not enough mines.  You can avoid having to compete with these buyers if you realize they are overlooking the opportunity in front of them.  The Short Sale properties.    Agents are avoiding them because they think  that most of them will never close.    Ahhaa!    The key!   Find other mines!  Be a good miner and have the sharpest pick!