Short Sale 101

February 13, 2012

A short sale is a real estate transaction in which the sales price is insufficient to pay the debt(s) encumbering the property, along with the costs of sale, and the seller is unable to pay the shortage.

A short sale is often used to avoid foreclosure to reduce the effect on credit scores. This allows one to buy a home again in the future much sooner than if one went through foreclosure. It is important to know that short sales, just like foreclosure, will result in a negative credit report against you. A foreclosure usually is more detrimental to your credit rating than a short sale, however, if you have several missed payments, when doing a short sale, your credit can be just as negatively affected.

Fair Isaac released a report that says the average points lost on a FICO score are as follows:

• 30 days late: 40 to 110 points
• 90 days late: 70 to 135 points
• Foreclosure, short sale or deed-in-lieu: 85 to 160
• Bankruptcy: 130 to 240

In a successful short sale, the lien holders agree to release your lien (the mortgage, home equity line of credit, etc.) on the real estate and accept less than the amount owed on the debt. Any unpaid balance owed to the creditors is known as a deficiency.

Even if a lien holder agrees to a short sale agreement, this does not mean they necessarily release you from your obligations to repay any deficiencies of the loans, unless specifically agreed to.  Creditors generally require you to prove that you have an economic or financial hardship preventing you from being able to pay the deficiency.

There are many other types of liens and other obligations that may be secured by real estate besides your mortgage loans, such as contractor liens, IRS tax liens, DSHS liens for unpaid child support, HOA assessments or other obligations. The type of debts and type of property will determine what remedies a lender may have if you fail to make the required payments. For a short sale to be successful, all lien holders will need to approve individual applications for a short sale, should they be asked to take less than what is owed.

A short sale in which the debt is forgiven is considered a “relief of debt” and the forgiven debt may be treated as income for tax purposes. The Mortgage Forgiveness Debt Relief Act of 2007 created a limited exemption to allow homeowners to pay no taxes on debt forgiveness; however, the exemption only cancelled debt used to buy, build or improve a principal residence or refinance debt incurred for those purposes qualifies for this tax exemption. For more information on the tax consequences of debt relief, seek professional tax advice and go to www.irs.gov and conduct a search regarding the Tax Relief Act.

The Home Affordable Foreclosure Alternative program (HAFA) was designed to give homeowners alternatives to a foreclosure, which include incentives for completing a short sale. If your home sale can close as a HAFA transaction, you will emerge owing no deficiency. However, it can be very difficult to qualify as a HAFA transaction because all lienholders must agree and often a 2nd or 3rd lien holder won’t agree. For more information on the options available, visit the HAFA program website.

Most large creditors have special loss mitigation departments that evaluate borrowers’ applications for short sale approval. Often creditors use pre-determined criteria for approving the borrowers and the terms of the sale of the properties. Part of this process typically includes the creditor(s) determining the current market value of the real estate by obtaining an independent evaluation of the property from an appraisal or BPO (broker price opinion). One of the most important aspects for the borrower in this process is putting together a proper real estate short sale package. The package should be well organized along with a hardship letter telling the creditor why a short sale is needed. Most agents now work together with real estate attorneys and can help you with this process.

There are many factors you should take into account when considering a short sale on your property: the lender’s policies regarding forgiveness of debt, the tax consequences, your overall financial strength, the lender’s willingness for processing a short sale request, and the number of other recorded liens on the property. It is possible for any one lien holder to prevent a short sale by refusing to agree to negotiate a reduction in their payoff to release their lien. If a Creditor has mortgage insurance on their loan, the insurer will likely also become a third party to these negotiations as the insurance policy may be asked to pay out a claim to offset the Creditor’s loss.

Short sales can have a high risk of failure from inability to obtain agreement from all parties or they might not be approved in time to prevent a scheduled foreclosure date. 

Although the time to process short sales has decreased, it can still take several months to a year for the process to be completed.

A short sale is a very complex transaction that involves numerous issues as well as legal and financial risks. We advise our clients to seek the advice of an attorney and tax professional before proceeding with a short sale, however we are happy to answer any preliminary questions you may have and offer free seller and buyer consultations to review your circumstances.

Kerstin G. Brooks
Brooks & Heinze Team
Skyline Properties, Inc.
Cell: 206.276.5827
www.propertyinseattle.com


Under water? Can’t afford your mortgage payments anymore? Short Sale as Foreclosure Avoidance Tool best for some Homeowners

February 28, 2010

According to yesterday’s issue of the Puget Sound Business Journal, about 16 percent of all residential properties with mortgages were in negative equity at the end of the year in Washington State.

Negative equity means the homeowner owes more on the home than the home is worth.  This  can occur because of a decline in real estate value and/or  an increase in mortgage debt.

In Washington state, there were 3,288 foreclosure filings  in November of 2009, with one in every 835 housing units receiving a foreclosure notice — a 15 percent increase from November 2008.

Today, the Seattle PI reported more bad news about the Labor Market.  According to the PI, it was the second straight week that claims rose unexpectedly.  High unemployment remains one of the biggest obstacles to a sustained economic recovery.

In short, the economy is still shaky and more and more homeowners are struggling to make their mortgage payments and feel stuck because they know they cannot sell their home at a price that will cover their mortgage.  Depressed, scared and uninformed about their options, many wait until the bank forecloses and evicts them from their home.

For some homeowners, a short sale may be the option they are looking for. A real estate agent may be able to sell their home in a short sale which means the bank allows them to sell their home at market value and forgives some of their mortgage debt to make the sale possible.

Each situation is different and there are no guarantees. If anyone says they can guarantee a successful short sale or charges you upfront, nonrefundable fees to negotiate a short sale for you — run!

Generally, a short sale is better for a homeowner than a foreclosure. The ramifications of a short sale on your credit history are much less severe than with a foreclosure. If you are looking to apply for an apartment and you have a foreclosure and bank eviction on your history, you may have a hard time finding a rental. Bad credit will also affect your insurance rates, employment opportunities, etc.

Your eligibility for a new home loan will be affected more gravely with a foreclosure on your record. Underwriting and qualifying guidelines for mortgages change all the time but with a short sale on your record you may qualify for a new loan in a couple of years, whereas a foreclosure may keep you from buying a new home for 6-7+ years.

If you are in the Greater Seattle Area and want to talk to an agent about selling your home as a Short Sale, please contact the Brooks & Heinze Team for a free, no-obligation consultation.

Kerstin G. Brooks
Brooks & Heinze Team
Skyline Properties, Inc.
Ph: 206.276.5827
Email: info@propertyinseattle.com


Houses for Pennies on the Dollar? Really?

February 19, 2010

 Many buyers have heard that Seattle real estate is more affordable than ever. Yes, prices have dropped quite substantially but when I hear people saying or I read articles about “Houses for Pennies on the Dollar” I get a little perturbed.

 We have had a few people contact us with unrealistic expectations about what they can buy. We have had buyers asking us to find them large, updated homes with water views in nice neighborhoods like Greenlake, Richmond Beach, Queen Anne, etc. under $200,000. You’d be hard pressed to find a tiny tear down for that price in these neighborhoods. 

Don’t get me wrong, there are bargains to be had but one must be realistic. Foreclosures and Short Sales can be a good value but they often require work and patience.

Buyers want to look at bank foreclosures, but they don’t want to do any work if it needs repair. They expect all homes should sell at the bank foreclosure prices regardless of whether they need work or not.

The homes that need a lot of work are the ones that sell for bargain prices. So, if you want a steal be prepared to have to do some work.

Many buyers feel the foreclosures set the prices in the neighborhood even though they may be missing a bathroom, have a structural issue and need tens of thousands of dollars in updates. Buyers are quite often dissatisfied with the condition of the distressed properties, but they don’t want to look at a regular home that is all fixed up because it is not a perceived bargain (when they can be).

You could take two similar homes next door to each other, one being a foreclosure and needing $35,000 in repairs and another being a normal sale and in excellent condition. The bank foreclosure might be priced $35,000 below the normal home, but when the buyer sees it they’re turned off.  But then they’re also turned off by the price of the normal home because they feel it should be priced the same as the foreclosure fixer.

In short, there are bargains but be realistic. Either buy an updated home in good condition and get a fair price or get a fabulous bargain for a home that needs a lot of help and needs to be nursed back to health. Buying at a 20-30% discount compared to just a few years ago is a great deal and realistic. Homes for pennies to the dollar? Not in Seattle.

There are some great loan programs available for buying distressed and foreclosed homes that need repairs, such as the 203k FHA rehab loans & conventional construction loans.

For more information on these loan programs contact Michele Catoire at the Legacy Group in Bellevue, WA by email  at michelec@legacyg.com or by phone at (425) 818-5885.

 Michele Catoire

Happy bargain hunting!

Kerstin G. Brooks
Brooks & Heinze Team
Skyline Properties, Inc.
Cell:  206.276.5827
Email: info@propertyinseattle.com

www.propertyinseattle.com


My house was sold at a short sale – do I owe taxes for the forgiven debt?

February 11, 2010

Homeowners who sold their house in a short sale are often cautioned by their lender, escrow officer, real estate agent or other professionals involved in the sale that they may owe taxes on the forgiven debt.

Usually, a homeowner who resided in the home (as their primary residence) sold at a short sale will not have to pay taxes on the forgiven debt thanks to Obama’s “Mortgage Forgiveness Debt Relief Act and Debt Cancellation”

Following is a reprint from the IRS website regarding this issue:

IR-2008-17, Feb. 12, 2008

WASHINGTON — Homeowners whose mortgage debt was partly or entirely forgiven during 2007 may be able to claim special tax relief by filling out newly-revised Form 982 and attaching it to their 2007 federal income tax return, according to the Internal Revenue Service.

Normally, debt forgiveness results in taxable income. But under the Mortgage Forgiveness Debt Relief Act of 2007, enacted Dec. 20, taxpayers may exclude debt forgiven on their principal residence if the balance of their loan was $2 million or less. The limit is $1 million for a married person filing a separate return. Details are on Form 982 and its instructions, available now on this Web site.

“The new law contains important provisions for struggling homeowners,” said Acting IRS Commissioner Linda Stiff. “We urge people with mortgage problems to take full advantage of the valuable tax relief available.”

The late-December enactment means that reporting procedures for this law change were not incorporated into tax-preparation software or IRS forms. For that reason, people using tax software should check with their provider for updates that include the revised Form 982. Similarly, the IRS is now updating its systems and expects to begin accepting electronically-filed returns that include Form 982 by March 3. The paper Form 982 is now being accepted, but the IRS reminds affected taxpayers to consider filing electronically, which greatly reduces errors and speeds refunds.

The new law applies to debt forgiven in 2007, 2008 or 2009. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, may qualify for this relief. In most cases, eligible homeowners only need to fill out a few lines on Form 982 (specifically, lines 1e, 2 and 10b).
The debt must have been used to buy, build or substantially improve the taxpayer’s principal residence and must have been secured by that residence. Debt used to refinance qualifying debt is also eligible for the exclusion, but only up to the amount of the old mortgage principal, just before the refinancing.
Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the new tax-relief provision. In some cases, however, other kinds of tax relief, based on insolvency, for example, may be available. See Form 982 for details.

Borrowers whose debt is reduced or eliminated receive a year-end statement (Form 1099-C) from their lender. For debt cancelled in 2007, the lender was required to provide this form to the borrower by Jan. 31, 2008. By law, this form must show the amount of debt forgiven and the fair market value of any property given up through foreclosure.

The IRS urges borrowers to check the Form 1099-C carefully. Notify the lender immediately if any of the information shown is incorrect. Borrowers should pay particular attention to the amount of debt forgiven (Box 2) and the value listed for their home ( Box 7).

Note: Legislation enacted in October 2008 extended this relief through 2012. Thus this relief now applies to debt forgiven in calendar years 2007 through 2012.

Kerstin G. Brooks
Brooks & Heinze Team
Skyline Properties, Inc.
www.propertyinseattle.com
206.276.5827

The information provided in this blog is for informational purposes only and is not to be construed as tax advise. We are real estate agents and cannot give you tax advice. Please contact your accountant or CPA.

If you are looking for a CPA in Seattle, please contact Eric Kauppila, CPA, MS Tax at Greenwood, Ohlund & Co., LLP at 206.782.1767.


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