Re: Short sale question - Posted by MatthewMStefanik
Posted by MatthewMStefanik on August 06, 2007 at 13:16:14:
The outcome of the short sale is the same as if it were to go to the auction and the lender lets it go for less, or if the lender takes it back and ends up selling it for less than what is owed, and that is they run the risk of having a deficiency judgment filed or getting a 1099 for the difference. So, if the homeowner is unable to sell the property or otherwise cure the default before the auction, they are no better off.
However, as far as the sellers credit is concerned, the fact that a foreclosure was filed will show up on their credit file either way because it is public record, a foreclosure sale at the auction will show up in their credit file because it is also public record, but a “short sale” will not show up on their credit file because it is not something that is recorded and, therefore, not public record. Also, as long as the lender accepts the short sale offer as satisfaction in full of the mortgage, what will be reported by them to the sellers credit file is an account that is paid and closed by the mortgagor, which is similar to paying off a credit card and then cancelling it. However, if the lender wants the borrower to sign a note for all or a portion of the deficiency and the borrower will not or cannot, then the lender may, within their rights, file a deficiency judgment against the borrower, which will report negatively on their credit file. But, what we do is petition the lender to forego the deficiency judgment, and rather send the borrower a 1099 for the difference. If the defaulted mortgage for which the borrower receives the deficiency judgment was purchase money and not a refi, cash out or heloc, then most likely they won’t have to pay taxes on that amount of the 1099 considering they did not profit from their house. If it was money they pulled out of the house and put in their pocket, then most likely they will have to pay taxes on that money. Advise the homeowner to consult with a CPA.
Depending on how much upside down the homeowner is, it probably won’t make for the best deal because trying to convince a lender, who probably knows nothing about the current state of your market, that home prices are falling down that much is often very difficult. For instance, if the homeowner owes $250k and the house is now probably worth a little over $200, then when you offer somewhere around $140k or less, it’s quite a discount to the lender, and one that probably won’t get accepted. I’m not saying it is impossible because it’s not, but the larger the discount the harder it is to get accepted. Make sure if you do decide to work on this deal, you make certain you have the seller sign a disclosure stating there is no guarantee you will be able to successfully negotiate a short sale and buy their house.
Matthew M. Stefanik