Short Sell - Posted by Gerald

Posted by Colleen-WA on April 13, 2002 at 13:55:50:

The gain is the Sellers - not someone else’s. They did not get stuck with having to come up with it themselves or bear the consequence of a foreclosure on their credit. The gain is, also, to the buyer’s benefit. I have not done one of these and I hope someone who has will comment. I, also, would not feel right not telling the seller about this tax consequence to my purchase seeing as I know about it.

And, just for the sake of more knowledge, if a property is FHA there is (or was in 1995) a HUD program in which a seller whose arrears plus principal is more than market value can sell for market value without bearing the tax consequence of a “short sell” . I know because I benefited from it and got $1000 moving costs. I do beleive my house sold for more than the principal due but the program may apply to all circumstances. HUD does not want the hassle of the repos. FMV may be the key word here, though, and as investors, this may not help.

Short Sell - Posted by Gerald

Posted by Gerald on April 11, 2002 at 23:26:38:

I listened to a Real Estate Program with Dwan Best talking about buying property from banks by short selling. It sounds interesting, but I have two questions.

1.) She said in some cases the bank may sell a property at a substantial loss (maybe half) instead of going through the foreclosure process to avoid the trouble and hassle. Why would a bank not want to expend a little more effort to recoup more money on a property instead of letting it go for a greater loss? I’m sure if it went through foreclosure they could get quite a bit more than someone buying it through a short sell.

2.) She also says that she knows the person when talking to the bank and is trying to buy the property to help them out of this bad situation (so as not to come across as an investor looking to make money). But if she suddenly has too many needy friends she’s trying to help wouldn’t the bank would get wise to this?

Thanks for any feedback.

Gerald in Houston

Re: Short Sell - Posted by DavePA

Posted by DavePA on April 12, 2002 at 24:59:30:

Gerald, I believe you are talking about Dwan & Sharon. They have been doing real estate together for a number of years. I actually got to hear them speak at an investor meeting. They both really know how to properly handle a “short” sale. Alot, of times they will then flip the properties they tie up to other investors.

To answer question 1: Banks are NOT in the business of owning properties. If a lending institution has a “bad” debt, the govt. penalizes them. Say, the loan balance was 80K. That bank would not be able to lend 6x-8x that amount for future transactions. Which, in essence the bank would be losing $$$. As much interest that they charge, usually 10-20%, when they only pay the people who save $$ at their bank 2-5%.

Question 2: Yes, it is wise to tell the lender that you are helping the people out of a bad situation. You, do not have to tell them that you are a private investor. Either way it might not matter, but that will depend on the lender!

A short sale is a GREAT way to gain “instant” equity in a property. Usually you want to offer 40-50% of FMV. Right now I am currently working on a short sale with Citi-Financial Mort.
The property has an 84K mort. bal. right now. What I am going to do is get some pics. (the bad ones) of the property, do comps for the area, have the tenants sign a “hardship” letter, and whatever else the lender will need from me.
I have done my homework already, and know the house will only sell for 67-72K. Right then and there, no one else would even touch the property. NO equity right?
This is where the short sale works best. You would offer the lender a low figure. I will probably offer 32K for the property. Most likely they will come up with a higher #. They might say 40K. BINGO, you have just negotiated a price on a house that would sell for 67-72K, and are going to pay the lender 40K!! Right there, you can see that even if you sell below the market value at say: 65K you just made 25K. Or, if you need the CASH FAST, flip it to another investor for 10K and make money that way. You, don’t have to settle for the 40K, you can try and get them down lower. Remember, ALWAYS ask that 1 last important question!!! (Is that the BEST you can do?) They might surprise you and say 35K or 38K, either way you just made more $$$.

Better yet, if you decide to keep the property and sell for yourself using a L/O. You, then get to collect an “option consideration” (earnest money) up front. You, can then raise the asking price to 75-80K and make more money that way.
There are many possibilities on how you control and sell a property. I wish you the best of luck in working on these types of deals. I will tell you, it does take time to make the lender see your way!! BE PERSISTANT!.

Good Luck,

dave

Re: Short Sell - Posted by Gerald

Posted by Gerald on April 12, 2002 at 10:32:01:

Dave,

Appreciate the thorough reply. I had not heard of a short sell until I listened to radio show on the internet, so I have a lot to learn. I have a primary residence and one rental property bought through the traditional process, and am looking to invest further and wanting to learn other techniques.

I read some other archived E-mails on doing a short sell, and have some other questions/comments:

1.) A driving factor to sway the bank is that the value of the property has dropped and that it is in the bank’s best interest to sell at a loss and move on. Take the worst pictures of the property and send to the bank as evidence.

2.) In order to do a short sell you have to be able to come up with the “cash” for the entire amount that is negotiated with the bank. So in some cases that may become a fairly large amount. Wouldn’t this rule out a lot of people from trying this technique?

3.) If the loan/mortgage is insured it will be hard to virtually impossible to do a short sell with the bank. I still don’t see why the bank just doesn’t take it to foreclosure and sell it “as is”. Probably could get more than short selling it.

4.) How do handle the owner? It sesms the owner will get NOTHING out of the short sell except saving their credit. The bank will not let them profit from the short sell, and what about the IRS and taxes owed on the sale of the property? Don’t you have to let the owner know all this up front?

Any further comments are appreciated.

Thanks,

Gerald (Houston)

Re: Short Sell - Posted by Nique(Ga)

Posted by Nique(Ga) on April 12, 2002 at 06:58:01:

Can you send me a copy of that hardship letter and who has the best programs for short sales???

Re: Short Sell - Posted by Craig (IL)

Posted by Craig (IL) on April 12, 2002 at 06:39:44:

Dave,

May I see a copy of your “hardship letter”? Would you either email me a copy or post it here? Thank You.

Re: Short Sell - Posted by linda

Posted by linda on April 12, 2002 at 01:06:31:

Hi Dave,

The negotiating sounds easy enough, but how do you find the right person to talk to at the bank? Most of these loan companies have voice mail programs that make it almost impossible to talk to a real person.

I have two possible short sales and an REO, but I can’t find a person to talk to.

Linda

Re: Short Sell - Posted by Colleen-WA

Posted by Colleen-WA on April 12, 2002 at 15:29:08:

One Comment Re: #4, The owner gets worse than nothing. The Owner will get a “10something or other” from the bank that says they have benefited from the short sale the amount of the shortness, and they have to pay tax on that. I’m sure someone out there knows the proper name of that form.

Re: Short Sell - Posted by linda

Posted by linda on April 12, 2002 at 16:06:21:

Thanks for the info everyone,

My buyers have signed a release to negotiate on their behalf. I guess it would make sense to ask for a bank statement. Why I didn’t think of that before?!!!? I still have to find a person at option 1 on the REO. Maybe I’ll try to fedex a packet to the mitigation department.

Thanks again:)

Linda (Ohio)

Re: Short Sell - Posted by Jim FL

Posted by Jim FL on April 12, 2002 at 02:49:08:

Linda,
Try talking to someone in either the “Foreclosure department”, or the “Loss mitigation” department.
Should that fail, who ever you talk to, ask for a supervisor and work your way up the chain.

HTH,
Jim FL

Taxable Income - Posted by JT-IN

Posted by JT-IN on April 13, 2002 at 15:06:58:

Colleen:

Debt foregiveness is taxable, except to the extent that the taxpayer was insolvent. This is outlined in IRS Publ 544, Sale or Disposition of Assets.

Most short sales do not occur unless the borrower is insolvent, meaning their assets are less than their liabilities, prior to the debt foregiveness. This is usually a criteria prior to most lenders agreeing to do a short sale.

So, the net effect is that even if a 1099 is issued, (and they rarely are), it is still not a taxable event to the person who received the debt foregiveness, if they meet the insolvency definition.

You can also review the IRS Publ 908, opertaining to Bankruptcy, for more info on debt foregiveness and insolvency. www.irs.gov

Just the way that I view things…

JT-IN

Short sale = debt forgiveness= - Posted by David Krulac

Posted by David Krulac on April 12, 2002 at 18:47:01:

taxable income per IRS.

David Krulac
Central Pennsylvania

1099 I believe … - Posted by Jacque - WA

Posted by Jacque - WA on April 12, 2002 at 17:25:14:

Hi Colleen,

Sorry to have missed the meeting Saturday - hope that all is well.

Jacque - WA

Re: 1099 I believe … - Posted by Gerald

Posted by Gerald on April 12, 2002 at 21:53:22:

So if I can ask; if anyone here has done a short sale how did you handle this? Did you mention this to the seller that he would get stuck with paying taxes for someone else’s gain? If you say you do the short sale to help the seller (as well as yourself), in reality aaren’t you are “messing over” (could use a stronger word here) the seller in the long run? I personally don’t think I could do that.

Let me know if I am missing sonething.

Gerald