Posted by ScottE on February 09, 2000 at 23:21:39:
David,
In your original post you stated “I the buyer got a check back at settlement for $20,000”. Then, in your last post you said “I overpaid for the property” and added “I bought it for non-economic reasons and will not make any money on the property”. Do you mean you won’t make any money BEYOND the $20,000 you got at closing? Where did this $20k come from?
Sadly, it appears that you completely missed the gist of my posts. Apparently you haven’t had the ugly pleasure of going to court and thinking you had a slam dunk winner of a case only to get DRILLED by the black robe-wearing, gavel-wielding character on the bench. If you have not experienced such a good time, I can assure you that few other things cause a more rapid and bitter frustration.
It was my original intention, and continues to be my intention to call attention to what looked like a red flag based on the information in your original post.
Yesterday I bought, settled on two properties with two different sellers, both of whom were UPSIDE down. In other words they owed more than I was paying for the properties.
The one owner was able to come up with the cash to settle, but the other owner was severly upside down. My attorney did work above and beyond to get this settled. He negotiated with the mortgage holder, a company not an individual, to release the mortgage from the property for about a 60% payoff. The seller stills owes the balance and intends on paying, but the property is released. Even then the seller couldn’t get the cash to settle and my attorney went back to the lender and got them to settle for 50%.
Perhaps the greates irony is that while both sellers needed to bring cash to settlement, I the buyer got a check back at settlement for $20,000. Not too bad but up until the minute of settlement, I was not sure that either would settle. The second seller talked about bankruptcy as a way out of his problems. For him this is a better solution, as the IRS, property taxes first mortgage holder and a judgement holder all got 100% and the second lein holder got over 50% and will probbably get the rest. Everybody’s happy.
No to rain on your parade, but… - Posted by ScottE
Posted by ScottE on February 08, 2000 at 22:21:22:
How do you figure that “Everybody’s happy”? It sounds like the former homeowner is stuck with one heckuva bill and has nothing to show for it. Depending on how upside down he was, and considering how much cash you took away from the deal, if he decides to file a BK in the next year, it’s possible a BK judge may unwind the whole deal.
Don’t get me wrong- I’m looking to make money on my deals too, but without squeezing every last red cent out of the person I can (unless, of course, it happens to be a bank!).
Perhaps I’m judging you unfairly when I don’t know the actual numbers on your deal. If that’s the case, I apologize. If not, it’s just food for thought.
Posted by NJDave on February 08, 2000 at 20:22:06:
You walked away with a check for $20,000. Imagine if you targeted Sellers who owed more than their homes were worth! Great opportunity! If you want to target that market, I have some experience in short sale administration!
Number 1 there is no bankruptcy. Seller2 talked of bankruptcy but DID NOT do that. He has other assets, but not cash. Number 2 there was NOT a short sale in that 4 of 5 creditors got 100% and the last creditor got about 50% to 60% on a loan that was paid up to date before settlement. Plus the debt is NOT forgiven, the seller2 still owes the money, its just that the lein is removed from this particular piece of real estate. I expect that he will pay. there is NO debt forgiven, so therefore is no 1099 for that. He will get a 1099 for the gross sale price of the property however, but I can’t see any tax obligation out of that. NO capital gain, NO recapture, due to being offset by other expenses, and NO debt forgiveness. HTH.
It was an accident. It was real difficult and the sale was tenative all along. I don’t think that I got any particular bargain price. There were other reasons for buying. I got the lowest price that I could under the circumstances. But my attorney said that particularily with the second seller that perhaps I would be better off waiting for the mortgage foreclosure sale or the tax foreclosure sale which seemed to be inevitable. The seller owed 3 years taxes on the property plus an IRS lein. I was sweating the whole time that the deal would dissolve.
Posted by ScottE on February 09, 2000 at 15:44:00:
David,
I understood that the majority of creditors got paid.
I agree that the seller owed the money on the house, no matter what position (upside down or right side up) he was in.
My point was that the seller COULD still file a BK and a judge could unwind your deal. Your seller is paying for AIR right now. His note has NO asset or value attached to it except for maybe his wanting to keep his credit a bit cleaner. Meanwhile, it appears that you have garnered at least a modest sum at the seller’s expense. If your seller does file BK (perhaps up to 1 year from now), he is sure to include this now UN-secured creditor. Even though the creditor agreed to a lien release, they expected to, ultimately, get paid. If the judge sees that you had a payday out of this deal and creditors can be satisfied by unwinding the deal, he will care less about your profit and make it happen.
Once again, I’m not hammering on you just for fun. I have lost more deals than I care to admit for being greedy.
There is a lot to be said for leaving a penny or two on the table.
Posted by Glenn OH on February 09, 2000 at 14:45:00:
Misunderstood. I thought there was debt forgiveness involved. I must say, that was a very generous creditor to release property, unless seller substituted something else.
Re: short sales could be win, win, win. - Posted by NJDave
Posted by NJDave on February 09, 2000 at 08:31:59:
Selling short is better for the financially distressed homeowner/seller than allowing the prop go to Sheriff’s Sale, or Trustee’s Sale.
Yes the ‘short sale’ will likely be reported to credit reporting agencies, and any forgiven debt will be reported to the IRS. The Borrower will probably receive a 1099 for the amount of the forgiven debt.
That ‘income’ may or may not be taxable and is dependant upon 4 conditions. Check with a competent CPA who has prepared tax returns for financially distressed Clients… Not sure? ASK!
When we provide short sale administrative services for our Clients, we not only help Investors with the discounted purchase of foreclosed, but not yet REO property, we (our CPA) help the Sellers prepare their income tax return specifically for the purpose of addressing, reducing or eliminating the potential tax liabilities resulting from ‘forgiven debt’ income.
The lender who got their 50 to 60% could have very easily got nothing. I overpaid for the property. the real estate taxes were 3 years behind and if it had gone to tax sale in a deed state, here, then the taxes would have been paid, but nobody else. all leins are NOT wiped out by the Tax Sale. If the first mortgage had foreclosed, the real estate taxes would get paid the IRS would get paid and the first mortgage holder would have gotten paid. Plus the lender would have spent about $5,000 to foreclose even if there was no BK, and more if there was. In that senario the seconds lender and a judgement holder would get zip.
If the first lender forclosed they would end up having less than me but more than the property is worth. There is no greed I paid him more than the property is worth and more than he could have gotten at any forced sale. I have been trying to buy this property for about 15 years and I bought it for non-economic reasons and will not make any money on the property.
From that point of view its probably my worst deal ever, and I was not the leeast bit greedy. i have just solved most of the seller’s problems and made them my own. whatever.