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1. "Can I Make Money In A Short Sale?”
I’ll give you the most concrete answer possible: It depends on your situation.
If you still live in the house, you should qualify for a seller’s incentive or relocation incentive of between $3,000 and $10,000. This incentive will be paid at closing by the title company. We will know how much of an incentive you will get approximately 60 days before the closing date. Unfortunately, the banks never tell us anything at the beginning of the negotiations. If you have tenants, it is sometimes possible to get a relocation amount, but it’s not as certain. We will, of course, try to get you as much money from the bank as possible. If the house is vacant, there’s not much hope of getting an incentive from the bank. An incentive from the bank is the only legal way to get money from a short sale. If anyone offers you money outside of closing, they are committing mortgage fraud, which is a felony.
2. "I have a second mortgage. Can I still do a short sale?"
Of course! In fact, it’s very easy to do a short sale with a second mortgage. The first mortgage actually does most of the negotiating for us. They will offer the second mortgage 10% of the outstanding balance or $6,000, whichever is less. The second mortgage is required to accept the offer. Any portion of the mortgage not covered at the closing of the short sale will be written off and forgiven.
3. "How Long Does the Short Sale Take?”
It’s hard to give you an exact time frame due to the impact of COVID-19, but I’ll do my best. Before the pandemic, we were finishing short sales within 3–4 months after their initiation. Now, 5-7 months is a more realistic short-term Banks have laid off personnel and have been inundated with forbearance and loan modification requests. Appraisers are also swamped with orders for refinances due to the low interest rates. It’s taking up to 30 days, sometimes, to get one completed. Title companies are also swamped for the same reason. All of this is causing delays. Never fear, though; we close 90% of the short sales we start.
4. "What documents will I need to provide in a short sale?”
At the beginning of the process, all you will need to sign is a listing agreement with our realtor and an authorization for her and our chief negotiator to talk to the bank about your mortgage. The bank will eventually want to see some financial documents to prove that you have a legitimate financial hardship.
These will include:
· 2 years of tax returns
· 2 months of bank statements
· 1 month of pay stubs
· Hardship letter
· Financial statement
If you are self-employed, you would need to provide a profit and loss statement.
5. If the property has liens and encumbrances, Can I still sell it or do a short sale?
Absolutely not, and here’s why: In a short-sale negotiation, liens are treated like a mortgage. This means that we will negotiate with the lien holders so that they will take a lesser amount as a settlement. Most lien holders are willing to negotiate and accept a lesser amount because they know that their lien will be wiped out if the house goes to foreclosure auction. Even IRS liens can be removed, usually for a small fee paid by the bank or by the buyer. Note: The IRS will only release the lien from the house. The debt will remain. If there is an HOA lien, the bank will usually only pay up to one year’s worth of HOA dues. The buyer would have to pay the remaining balance.
6. How will a short sale affect your credit?
It's a legitimate question, and one that should help you feel better about choosing this option. A short sale does the least amount of damage to your credit in comparison to doing a deed in lieu of foreclosure, filing Chapter 7 bankruptcy, or letting the house go to the foreclosure auction. This doesn’t mean that your credit won’t take a hit; it will. Right now, your focus should be on limiting the long-term damage to your credit.
You need to remember that you already have multiple 30-, 60-, and 90-day lates on your credit report, not to mention the actual foreclosure filing. The good news is that you will be able to qualify for a new mortgage in 2 years with a short sale. It would take you a minimum of seven years to qualify for a new mortgage if you do a deed in lieu of foreclosure, file Chapter 7 bankruptcy, or let the house go to the foreclosure auction.
7. "Can a friend or my relative buy my house in a short sale?”
Unfortunately, the bank will not allow it. The sale has to be an “arms length” transaction. Every person involved in the transaction has to sign a legal document stating that they will comply with the terms of the arms length agreement. Anyone who violates the terms of this agreement would be committing mortgage fraud, which is a felony. The banks conduct post-closing audits to determine if all parties are in compliance with the arms length agreement. It may be cruel and make no sense not to allow the homeowner to stay in the house after closing, but the banks make the rules, and they have insisted on this for the past 20 years.
8. "What if the bank wants to give me a 1099? I don’t want to owe taxes on the forgiven mortgage amount on a short sale.”
Unfortunately, a 1099 is unavoidable. If any amount of the mortgage is forgiven, the bank is required by law to issue a 1099. By the way, if you do a deed in lieu of foreclosure, you will get a 1099 for whatever part of the mortgage is forgiven.
If you let the house go to the foreclosure auction, the bank will issue you a 1099 for whatever amount is left over from the sale and is forgiven. A short sale is still your best option because it does the least short-term damage to your credit, and you can qualify for a mortgage in 2 years instead of 7. If you include the house in a Chapter 7 bankruptcy, the IRS doesn’t consider forgiven mortgage debt to be taxable income. I’m not a CPA, and I cannot give you tax advice; however, my CPA has told me that he has advised his clients that it is possible to declare yourself financially insolvent in the year the 1099 was issued. Consult your licensed tax adviser for more information.
9. Bankruptcy or short sale?
If you are thinking about filing a Chapter 7 bankruptcy and you are already in foreclosure, you really need to think about minimizing the damage to your credit. If your mortgage is the main source of your debt load, I wouldn’t recommend it. I would suggest doing a short sale instead. Why?
A bankruptcy is much worse for your credit report. It takes a minimum of 7 years to requalify for a mortgage, sometimes more. After a short sale, you can requalify in 2 years. It also does much less short-term damage to your credit.
Usually, if you take care of the mortgage debt with a short sale, you can make payment arrangements with your other creditors without having to declare bankruptcy. A bankruptcy should be your last resort.
10. Is a short sale safe?
Actually, a short sale is one of the safest transactions you’ll ever be involved with. The bank will issue you a written agreement 60 days before the potential closing date. All of the terms will be there. The agreement will state the price and the buyer. It will state that the bank will pay all of your costs and that they will write off and forgive any amount of your mortgage not paid off at the closing. You can take the short sale agreement to an attorney to give you peace of mind that you will not be hurt, or “screwed.” You have the right to cancel the listing agreement and/or the purchase agreement at any time during the transaction without penalty. The bank’s short-sale agreement will give you up to 60 days to move out and close the transactions.
11.“Can I Stay In The House After The Short Sale?” “What If I Rent It From The New Buyer?” “Could I Buy It Back In A Couple Of Years?”
Unfortunately, the bank will not allow you to do any of these things after the sale is finalized. It’s stupid, but the banks make the rules, and they insist that you move out at or before the house closes. You can’t have a secret understanding or agreement that you will buy the house later. Everybody has to sign an agreement that prohibits that.
It's called an arm’s length agreement. It covers these kinds of issues. If anyone in the transaction doesn’t comply with the agreement, they will be committing a felony—mortgage fraud. The banks do post-closing audits, so it doesn’t make any sense to risk your freedom. My suggestion is that it's best to just take a clean break and start fresh.
12. “Should I Maintain The House During The Short Sale?”
Absolutely not! I know that this may seem counter-intuitive to you. After all, you’ve been trained by all the TV shows that the house should look amazing in order to sell it.
Short sales are the “bizarro” world of real estate. Down is up. Up is down. Remember, we want your bank to appraise the house at a lower price in order to facilitate its eventual sale. It makes sense to have the house make the worst possible impression when the bank sends out its appraiser. Plus, why spend any money on the house? You would just be throwing good money after bad. It’s no longer your responsibility. Save your money! Please reach out to us so that we can talk about what options are best for your unique situation.
If you do not find the answer to your question here, feel free to call or email us today for help!
DISCLAIMER
I am not a CPA, attorney, insurance contractor, lender, or financial advisor. The content in these guides shall not be construed as tax, legal, insurance, construction, engineering, health & safety, electrical, financial advice, or other and may be outdated or inaccurate; it is your responsibility to verify all information yourself.
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