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Jack J. Lanners
RE/MAX Achieve Realty
Naples, Florida
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What is a Short Sale?

No one wants the stigma attached to having a home repossessed by the lender through foreclosure, or the black mark left on one’s credit history for every creditor to see in black and white. And it can stay there for as long as 10 years.

Many homeowners who bought around the top of the market, back in 2004 through 2006, are now stuck with having purchased more home than they could afford. Through the ease of obtaining exotic adjustable rate mortgages during those years, homeowners found themselves over-encumbered with debt, having financed as much as 110 percent of the sales price of their home.

As a result, they are now finding themselves with a monthly payment that is unaffordable as interest rates adjust to higher rates, thus bringing the new payment to as much as 25 to 50 percent higher than the initial payments they made.

Now they are left looking for a way out of a dire financial situation without the stigma left over. For distressed homeowners one possible option is the short sale. Selling a home via a short sale is a legitimate method for stopping the foreclosure process, allowing the homeowner to get on with life and without the ding to the credit record.

What’s the catch? By definition a short sale is literally the sale of a home for less money than is currently owed the lender on the outstanding mortgage being foreclosed on. In other words the home is “upside down“ from a financial aspect. Therefore, the catch is that in order to successfully conduct a short sale, the foreclosing lender has to agree to it, essentially agreeing to accept less money than it is owed on the loan secured by the house.

A short sale is not a vehicle normally seen during a seller’s market when multiple offers are lining up at the door competing with each other for the house. Short sales are most widely accepted during a buyer’s market when home sales are dragging, home values are declining, and inventories of available properties are growing to the point that the lender basically is just throwing up its hands and saying some money for the house is better than no money at all.

Lenders are not in the business of owning real estate. They get upset when they have too many properties on their REO (real estate-owned) books instead of out in the market making it a profit through monthly mortgage payments. Plus, the foreclosure process is not free. Every house they foreclose on costs them thousands of dollars. So, in some instances, agreeing to a short sale is in the lender’s best interest.

And it is up to the homeowner to convince the lender that this is one of those circumstances where it’s better to fish and cut bait. It’s a matter of numbers and economics. The homeowner needs to demonstrate to the lender hard numbers that will lead the lender to conclude that selling via a short sale is going to benefit them more than the amount they would garner from foreclosing on the property and then selling it as an REO.

Keep in mind there is one major downside to a short sale, however. As much as the lender wants to keep the property off its books, it also wants the money it’s owed. In many situations the lender will make it a condition of agreeing to a short sale that the homeowner sign a promissory note to make up all or part of the difference between the proceeds from the short sale and the amount owed on the original debt. This is why it is important to have a knowledgeable Realtor that will make sure that you are released from any obligation.

On December 20, 2007 the Mortgage Forgiveness Debt Relief Act became Law and is effective through the year 2010.
Prior to that most homeowners didn’t realize that when they decided to go the short sale route, that any amount of the debt that the lender forgives is considered to be taxable income by the Internal Revenue Service. The lender would submit a 1099 form to the IRS stating the amount of debt forgiven, so the tax man can be waiting for the homeowner when April 15 rolls around next year —if any of the debt was indeed forgiven. Now that amount is not Taxable if it is on a Primary Residence. If the Short Sale involves Investment properties you better be prepared to pay the Tax Man!

So for homeowners looking at all their options to stop foreclosure and save their home, the first step should be to contact their lender right away to try and negotiate a workout plan to temporarily lower payments, or to refinance to a fixed-rate loan.

After those and all other options have been exhausted, ASK JACK! you need to seek my assistance as a real estate professional who is well versed in short sales. Not all real estate brokers or sales agents know how to conduct a short sale or how to work with lenders in negotiating one. Possessing a real estate license does not make them an automatic expert in short sales. It calls for extra training not all real estate professionals have.

Remember: You want the most qualified representation possible when it comes to stopping foreclosure and saving your home.

Benefits of a Real Estate Short Sale

The first and most obvious would have to be that you will not have a foreclosure on your credit report. This is a definite plus. As an experienced short sale Realtor we will be able to help you sell your home and eliminate the debt from a mortgage you may not be able to afford. You need a Realtor that is up for the challenge because there are many real estate agents that will not even know where to begin because they don’t have experience doing short sales. It’s unfortunate but many Realtors can’t even explain the foreclosure process. Another benefit of a short sale may be that it will allow you to avoid a bankruptcy. One option that many people consider to give them additional time in the foreclosure process is to file a bankruptcy but this option depends on the state you like in. One misconception of a real estate short sale is that you will have to pay the real estate commissions out of your pocket if you are approved for a short sale. If your property is accepted as a short sale and the deal is able to close, you won’t have to provide closing costs to close the deal. The bank will pay all of the closing costs and Realtor commissions when they approve a short sale. Often they work the agents down on their real estate commissions but this item is not something you will have to pay or worry about. All of the items paid in escrow at closing are factored into the banks expense when they decide to approve a short sale.

If the short sale is approved I may be able to save you from having a Deficiency Judgment issued against you for the short fall in the amount collected from the short sale and the final balance of the Summary Final Judgment.

Let me state this once again about Short Sales. I get his question in regards to Taxes the most! Congress has recently passed new laws that will eliminate the short sale amount from being taxed as ordinary income. In the past borrowers that completed a short sale would receive a 1099 at the end of the year for the amount of money that the bank took as a loss. Under the Mortgage Forgiveness Debt Relief Act of 2007 (H.R. 3648) homeowners that do a short sale on a primary residence will not have to pay taxes on the short sale amount. This does NOT apply to investment property. This new Mortgage Forgiveness act is only for Primary Residences.

The Short Sale process is considerably more involved then a typical real estate transaction from my perspective. We can help make the whole process result in putting your mind at ease during this trying time and produce an end result that will be far less damaging to your credit then taking other drastic measures.
Bankruptcy a temporary stop to Foreclosure There's not enough money at the end of all the bills you have to pay. You need one more paycheck to make ends meet. Costs of living keep going up and your monthly paycheck isn't keeping with the price of gas, the cost of food and everything else you value in your life. You can't save anything because all your money goes to paying bills and supporting yourself and/or your family. And then . . . One day you receive a piece of paper in the mail called a "Notice of Default" or a process server hands you a "Lis Pendens." Either way, both are bad news because they mean your lender has initiated foreclosure proceedings against you (in either a non-judicial or a judicial foreclosure state respectively) because you owe back payments — typically three months worth. . . or more. And then you start thinking, "Maybe I could cheat fate by filing for bankruptcy. That will wipe out all my debts. I can stop the foreclosure, keep the house, and the lender can't do anything about it." Well, think again! If you file for personal bankruptcy under Chapter 7 a so-called "automatic stay" is placed on all your creditors, including the foreclosing lender, by the court. HOWEVER, the stay is only a temporary fix to the situation. Chapter 7 never permanently stops home foreclosure. It only gives you relief from unsecured creditors like credit cards and prevents certain creditors from pursuing collection action against you. It does NOT discharge debts such as taxes, child support, alimony or student loans, nor can it give you relief from other secured creditors — like your lender — whose debt is secured by the home you're living in. In fact the "automatic stay" is only effective so long as the court wants it to be in place. At any time the court can grant your lender's motion for "relief from the automatic stay." Once the court grants that motion the foreclosure against your home can proceed to conclusion.

One viable exception does exist, however, by filing for a Chapter 13 bankruptcy. Under Chapter 13 you are allowed to sit down with your creditors and arrange a payment plan to pay back what you owe them over a given length of time and usually on a lower payment schedule. Once accepted, the creditors, like your lender, must abide by the terms of the plan. Call it financial reorganization or a workout plan, any way you look at it Chapter 13 is a good way to save your home from foreclosure, and can indeed stop foreclosure so long as you continue to make the payments agreed to under the plan until all debt owed is totally paid off.
In essence, then, through a Chapter 13 debt reorganization plan you can cure the default and save your home. However, you must realize up front that not everyone qualifies to file for bankruptcy. There are certain threshold qualifications that must be met which were tightened up when the U.S. Bankruptcy Code was revised a few years ago. Additionally, there are court costs to be paid, AND, of course, the homeowner must hire an attorney who is going to want to get paid too!

Foreclosure Process What is Foreclosure? Foreclosure is a process that allows a lender to recover the amount owed on a defaulted loan by selling or taking ownership (repossession) of the property securing the loan. The foreclosure process begins when a borrower/owner defaults on loan payments (usually mortgage payments) and the lender files a public default notice, called a Notice of Default or Lis Pendens. The foreclosure process can end one of four ways:

  1. The borrower/owner reinstates the loan by paying off the default amount during a grace period determined by state law. This grace period is also known as pre-foreclosure.
  2. The borrower/owner sells the property to a third party during the pre-foreclosure period. The sale allows the borrower/owner to pay off the loan and avoid having a foreclosure on his or her credit history.
  3. A third party buys the property at a public auction at the end of the pre-foreclosure period.
  4. The lender takes ownership of the property, usually with the intent to re-sell it on the open market. The lender can take ownership either through an agreement with the borrower/owner during pre-foreclosure or by buying back the property at the public auction. Properties repossessed by the lender are also known as bank-owned or REO properties (Real Estate Owned by the lender).

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