It all starts with some kind of financial hardship! You and your family struggle to make the mortgage payment. Maybe this month you scrape by, but it will be nearly impossible to pay next months bills. To make matters worse, you owe as much or more than your home is worth. You go to your local bank and ask about a refinance, but you are turned down. No bank is going to lend money on an overleveraged house, plus, you credit isn’t all that good. You think to yourself…I am just going to let the house go to foreclosure and go rent somewhere. Well, what if we told you there was a better way?
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Introducing The Real Estate Short Sale: An Amazing Exit Strategy!
A Real Estate Short Sale refers to a lender(s) accepting a sales price that is less than what is currently owed plus all related sales expenses. So basically, a potential buyer can make an offer on the home for thousands less than what is currently owed, and get it accepted by the bank! This is common in a declining housing market and can be a win-win for both the bank and the homeowner. Normally a bank will begin to look at the short sale option only if the homeowner is behind on payments and begins to face foreclosure, but not always. In rare instances, the bank will still accept a short sale if the mortgage payments are current. The process to end up at the short sale options typically works like this:
- The homeowner(s) begin to miss payments
- The lender(s) try to arrange a repayment plan
- The repayment plan fails or is never attempted and the bank mentions a short sale
Requirements for a short sale are:
A proven financial hardship
- Behind on payments (In most circumstances)
- You owe as much or more than your home is currently worth
- The homeowner requests a short sale packet from their lender(s)
- The bank notifies the homeowner(s) that they can’t turn in the short sale packet until they have a signed purchase contract
- The homeowner(s) have to decide what to do next…hire a Realtor, or find a company like Sell Quick For Cash, LLC (Investment Company that specializes in Short Sales)
Okay, We Qualify For A Short Sale…What Do We Do Next?
First, you want to find a person or company that specializes in short sales and has a proven track record. This is very important, because you only have one shot to get the job done! If your short sale does not work, and the foreclosure auction is not postponed, you run the risk of loosing your house to foreclosure and having it on your credit record! So take your time while interviewing prospective companies or short sale Realtor before you do your short sale. Below is a list of questions we expect to be asked when being interviewed to run a real estate Short Sale:
- How long have you been negotiating Short Sales?
- How many Short Sales have you completed?
- Do you have any past clients (referrals) that we can talk with?
- What is the average time it takes to complete a Short Sale?
- Do you charge anything to facilitate my short sale?
- Are you just listing my house, or are you actually putting in an offer to buy?
- What are the chances a Short Sale will not work?
Now We Have Chosen A Reliable Company…What Is Needed To Begin The Short Sale?
Every real estate Short Sale begins the same way with the building of a Short Sale packet. The lender(s) need certain documentation and a proof of hardship in order to complete a Short Sale request. Below is a list of items commonly found in a Short Sale package:
- Hardship Letter. A handwritten letter explaining the borrower’s situation and requesting a Short Sale. It should describe why the borrower cannot make their mortgage payments and their fear of possible foreclosure. It should be a plea for the lender to consider a short sale!
- Two Years Tax Returns And W-2’s.
- Letter Of Authorization (LOA). This gives your Realtor or chosen Investment Company (SellQuickForCash.com) authority to talk with your lender(s) on your behalf.
- Two Most Recent Bank And Retirement Account Statements.
- Two Most Recent Pay Check Stubs.
- Current Financial Statement.
- Any Documents Supporting The Hardship.
- Current Market Analysis (CMA). Typically from a Realtor or appraiser.
- Estimated Net Sheet Or HUD-1 (Your Realtor or investment company will provide this document.
- A Copy Of The Executed Sales Contract With Buyers Proof Of Funds Or LSR.
Are There Any Factors That Affect Me When Running A Short Sale?
Now, I live in Arizona, and happen to be an expert on conducting Short Sales in Arizona! The following factors are going to be geared towards Arizona’s Foreclosure Laws, Rules and Regulations. You will want to check with your states Foreclosure Laws and speak with a board certified Attorney for legal advice. Plus, it is always a good idea to speak with your CPA or Accountant to validate the tax affects a Short Sale could have on your tax returns! Now, the following three main factors can affect a homeowner when conducting a Short Sale:
1. Credit Issues
A short sale may adversely affect a borrower’s credit rating because a lender can report for seven years that a loan has been “settled” for less than its balance. Although a lender is unlikely to change what it reports to credit bureaus, a borrower may attempt to negotiate this issue when arranging the short sale or request a letter from the lender detailing any extenuating circumstances surrounding the short sale. We use http://www.genesiscreditgroup.com/ when dealing with any credit concerns, and advise you to begin credit repair immediately after the Short Sale is completed!
2. Deficiency Judgment
In order to recoup any shortfall in the final sales price, including attorney’s fees, court costs, and accrued interest charges, the lender must file a deficiency judgment. A deficiency judgment is defined as a judgment that has been issued when the collateral for the loan is inadequate to satisfy the lender’s debt completely. Arizona is a Non-Deficiency State meaning that most single family residences are not at risk to cover the difference between the amount owed, and the amount accepted from a Short Sale. According to
http://www.azleg.state.az.us/ars/33/00814.htm the law is as follows:
33-814. Action to recover balance after sale or foreclosure on property under trust deed
F. A deed of trust may, by express language, validly prohibit the recovery of any balance due after trust property is sold pursuant to the trustee’s power of sale, or the trust deed is foreclosed in the manner provided by law for the foreclosure of mortgages on real property.
G. If trust property of two and one-half acres or less which is limited to and utilized for either a single one-family or a single two-family dwelling is sold pursuant to the trustee’s power of sale, no action may be maintained to recover any difference between the amount obtained by sale and the amount of the indebtedness and any interest, costs and expenses.
Lets Recap:
Arizona is a non-deficiency state and as long as your home qualifies under the above foreclosure laws, you do not have to pay back the difference between what you owed, and what you finally sell your home for! Just to be safe, a good Realtor or Investor should negotiate for the lender to put in writing to waive their right for a deficiency.
3. Tax Complications
When completing a Short Sale, possible tax issues can arise for the homeowner. As such, an owner considering a Short Sale should be encouraged to discuss these issues with an attorney, accountant, or other appropriate professional. From my understanding, the debt forgiven by a lender is generally taxable to the borrower as “debt discharge income.” When a taxpayer receives proceeds from a new loan, those proceeds are not taxable income because there is an offsetting obligation to repay. However, if the debt is cancelled, there may be debt discharge income. This basically means that if you owe $200,000 and Short Sale the home for $150,000, on your next tax return it could look like you have $50,000 worth of earned income from the sale of your residence and would be treated as taxable income. IRS Form 1099-C: Cancellation of Debt will be sent to you at the end of the year.
BREAKING NEWS! H.R. 1876: The Mortgage Forgiveness Debt Relief Act of 2007 would eliminate the tax owed on any forgiven mortgage debt. This bill has been passed and signed into law by the president! The bill permanently eliminates tax on up to $2 million of debt for a principal residence. The best part about this bill is that it is retroactive to January 1st, 2007. This means that any Short Sale conducted after that date automatically is protected from any tax implications! For more info, please visit http://www.whitehouse.gov/news/releases/2007/12/20071220-6.html
Let’s Recap:
The bank accepts a Short Sale, your foreclosure is canceled, and you sell your home for less that what you originally owed. The new House Bill H.R. 1876 should protect you, but if you do not qualify, and you receive a 1099-C: Cancellation of Debt at the end of the year, you still have options! Ask your accountant about the IRS Form 982: Reduction of Tax Attributes Due to Discharge of Indebtedness (http://www.irs.gov/pub/irs-pdf/f982.pdf). If you can prove your insolvency (your expenses outweigh your income) then you should qualify for an exemption and not be taxed on the deficiency.
Now The Fun Begins…Negotiating With Your Lender(s)
Negotiating Short Sales is an art and very difficult to do. It could take 2…3…4 or more months battling it out with your lender(s) depending on many factors such as where you are in the Foreclosure Process, how many liens you have on your property, and how much you currently owe. This period is difficult for most homeowners because they are just sitting around waiting for an answer. It might seem like not much is going on, but in fact if, you have chosen wisely, your Short Sale coordinator is negotiating daily on your behalf! A good Short Sale Company will give you updates weekly on the status of your file. Influencing the Brokers Price Opinion (BPO – basically a Realtor that estimates your houses value), as well as providing supporting evidence as to why the bank does not want to own your home is all part of the negotiators job. If done correctly, the bank will finally listen and the short sale will be accepted. The bank wins because they get a non-performing asset off their books, you win because you are out from underneath a huge housing burden, and your Realtor or Investment Company wins because they either get a commission, or a house at below market value!
The Best Part About All Of This Is That You Get To Live In Your House For Free During The Short Sale Process!
That’s right, so if the short sale takes four months to complete, that is four months you were able to save your money and live mortgage free! This is a great time to start paying off your other bad debts or just put some money away for a deposit on your next rental. This ability to save some money is just the beginning of regaining control of your situation and getting back some peace of mind. Once the Short Sale is completed, you will be able to move on with your life and put this mess behind you. That is the amazing power of a real estate Short Sale! It truly is an amazing exit strategy in today’s tough market.
About The Author:
WWW.SELLQUICKFORCASH.COM has a team of highly trained short sale experts who have established fantastic relationships with most banks. We will handle your short sale transaction for you giving you the peace of mind you are searching for. The short sale process is NOT a “do it yourself” project. To successfully negotiate a short sale with a bank takes an experienced and highly trained real estate agent as well as a skilled negotiator. Our advanced process is extremely organized and we conduct these short sales in the quickest time possible relieving you of the fear of foreclosure! We are Arizona’s #1 Short Sale and Foreclosure Experts! Also, if you need to find homes for rent after you short sale your home you should check out GoRenter.com. They are a property management company that helps potential renters find a rental home that meets their criteria. Their website is extremely user friendly and has an interactive rental map that makes searching for a rental home online fast and easy.
