Panama City Real Estate News

SHORT SALE INFO

Due to plummeting real estate values in recent years, there are record numbers of homeowners who owe more on their mortgages than the market value of their homes.  This is commonly called being “upside down” in the mortgage, and under certain conditions, the homeowner may qualify for a short sale on the home.  A short sale is when the lender forgives a portion of or lowers the loan amount in order for the property to be sold at market value. Simply stated, lenders make the financial decision to dispose of the property in a regular real estate transaction instead of foreclosing on the property if this makes sense from a profit and loss perspective.

Do You Qualify for a Short Sale on Your Home?

In the short sale process, you sell your home and settle your mortgage debt for less than the amount owed. You may be eligible to sell your home in a short sale under the U.S. Treasury’s Home Affordable Foreclosure Alternatives Program (“HAFA”)  if:

• You have a hardship, such as a job loss, divorce or medical emergency You owe more on the mortgage than your house is worth
• You’re unable to afford your current monthly mortgage payment
• You’re unable to modify your current home loan 

If you qualify and want to move forward with a short sale, you should consult an attorney or a professional real estate broker/agent who is experienced in short sale transactions. See the “Basic Steps for a Short Sale” for a general idea of the process…but keep in mind that the steps may vary depending on the lender requirements and/or the advice of the real estate professional who will guide you through the process.

Basic Steps for a Short Sale Transaction

A real estate professional who specializes in short sales and is well-qualified can help you with these steps:

1. Completing a property valuation analysis – lenders will only approve a short sale if the borrower owes more than the property’s fair market value.
2. Contacting the Lender for a short sale application.
3. Collecting all of the financial data and other information required by the lender – including a fact-based letter detailing borrower’s hardship and current financial situation.
4. Listing the property for sale.
5. Receiving and ratifying a purchase contract from a qualified buyer.
6. Sending the purchase contract to the lender, along with all of the lender-required documentation (requirements vary from lender to lender).
7. Being persistent, but patient – ideally, it should take 30-45 days for a purchase contract to work its way through the lender’s system, but the process could take longer.

These steps will need to be done for each lender that is involved and every lender has their own process. Some lenders that are in second position (2nd trust/mortgage) will only start processing their short sale after they’ve received written short sale approval from the first trust. This means that the overall short-sale approval process may take twice as long if there are two trusts/mortgages secured by the property.

Consult an attorney and/or a licensed tax professional to understand all your obligations relating to a short sale.

Resources:

• http://www.move.com/home-finance/mortgages/how-to-avoid-foreclosure.aspx
• http://www.biggerpockets.com/renewsblog/2008/02/12/tips-for-navigating-the-short-sale-process/
• http://www.realtor.org/realtors/short_sales_tips_tools
• http://www.realtor.org/rmosales_and_marketing/handoutsforcustomers/handouts/shortsales_sellers
• Foreclosure Avoidance Resource: http://www.hud.gov/offices/hsg/sfh/hcc/fc/index.cfm
• Bank Resources:
• CitiBank Home Owner Assistance
• Chase Homeownership Center: Short Sale & Alternatives
• Bank of America Short Sale Resource Center
• Wells Fargo Short Sale Center
• ADDITIONAL INFO ON 1099'S

1) The IRS Form 1099 – The 1099 is sent by the IRS when someone receives income but is not an employee of a company. The 1099 states that income has been earned but no taxes have been paid. When an individual receives a 1099 they will be responsible for paying taxes on the 1099 amount noted at the end of the tax year.

When a homeowner sells a property for less than what is owed, their mortgage lender is responsible for sending them a 1099 for debt forgiveness income. In other words, the IRS has traditionally looked at any debt forgiven as income to the homeowner.

Example

$300,000 Mortgage Balance subtracted by

$200,000 Proceeds from a Short Sale or REO sale

=$100,000 Loss to the mortgage company – Debt forgiven and thus taxable under the IRS debt forgiveness rules.

Several places exist in the tax code, which allow the homeowner to legally avoid having to pay taxes on this debt forgiveness income.

The reason the 1099 is a financial trap is that some homeowners let their fear of the 1099 keep them from moving forward. The first thing to know is that it only applies to qualified principle homes, meaning owner occupied. Second, “Acquisition Indebtedness” is no longer subject to taxation.

For example, if a homeowner borrows 350k from the bank to buy a house, lives in it, and then sells it for a loss at 200k, the IRS would say that the homeowner had the benefit of a 150k gain and that he or she needed to pay taxes on this amount; however, if the money was used to buy that property and it was a principle residence, it no longer is seen as a taxable gain.

Acquisition indebtedness can also mean “to build” the property: to buy the land, pay the contractor, etc.

It can also mean money for substantial improvements such as a remodel and rehab.

For most purposes, acquisition indebtedness is covered, unless you took money from a home equity loan, used part to rehab the house and the other part to take a trip to Bali, you now have a tax issue.

How much was used to improve the house? How much was used for the vacation?

The section of the Mortgage Debt Relief Act of 2007 that applies to this discussion is HR 3648. Homeowners in default need to speak to their tax advisor about how HR3648 applies to them.

For those of us in California or in the luxury market, there’s a twist to what was just explained: Up to a million dollars in acquisition indebtedness is covered. That’s it.

Married and filed singly, it’s half a million dollars.

So, a rich divorcee buys a 2 million house at the peak of the housing market, and then ends up having the house sold as a short sale for one million, he or she will only be able to avoid paying taxes on half of the amount (500k).

What’s not included in HR 3648?

a. Non-acquisition indebtedness: If the bank forgives the cost associated with the loan in foreclosure (penalties, late fees, foreclosure costs, attorney’s fees), then the bank may issue a 1099 for that part –– it’s not wiped out by the legislation.

b. If an individual is in a Chapter 11 bankruptcy. Why? Because you get a lot of people who are self-employed that put their house up for collateral on a small business loan. The good news is that these people have another way out (The other way out is that they can still go with proving an insolvency using IRS form 982 and the related documentation to show they were insolvent. Also a bankruptcy discharge, rather than a re-organization, would also eliminate the obligation to pay taxes on any debt forgiveness)…the bad news is that HR 3648 doesn’t apply to them.

Finally, if the lender does file a 1099, the homeowner, regardless of the size of the debt forgiven, simply needs to prove his or her insolvency during the time of the foreclosure.

Additional help in the tax code for a homeowner experiencing debt forgiveness income is IRS Publication 523 and Internal Revenue Code form 982 section 121. Again, please consult your tax advisor regarding debt forgiveness income.

Another point to keep in mind is this: If a homeowner allows a property to go to foreclosure and the lender repossesses it then the lender will turn around and sell the property as a bank owned house. Each month that the lender is not paid will force the payoff balance to increase. Once the lender sells the property, the loss the lender experiences will be greater and greater each month this continues. If the property is then sold the potential deficiency judgment will be higher. In this instance it would be much less damaging if the homeowner had sold the property using a short sale.

2) Deficiency Judgment – In states that use judicial foreclosure (meaning that the foreclosure is handled by the courts) a deficiency judgment is obtained when a property is foreclosed and sold (usually at the courthouse by the clerk of the court) to the highest bidder. In most states a deficiency judgment can be obtained for the difference between the high bid and the higher foreclosure judgment amount. Usually the court determines which value is higher, the high bid or the appraised value of the property on the date of the public sale. The higher of the two is taken to determine the difference from the judgment amount, and this difference is the deficiency judgment (what was owed subtracted by the final sale price).

Deficiency judgments are just that: judgments. They are an albatross around the neck of the debtor/homeowner and can only be removed by paying it off, negotiating it down and then paying it off or by bankruptcy. Furthermore, deficiency judgments usually earn interest until paid. In Florida right now that rate is 11% a year ––better than the bank by far!

If a homeowner is saddled with a deficiency judgment, guess what? They won’t be able to buy anything using credit. New house? Forget it. New car? Forget it.

Another point to consider - if the house goes into foreclosure and is taken back by the bank to be listed as an REO, the meter keeps running on the costs incurred by the bank until the REO department sells the house. This can make the deficiency huge.

NOTE:  The information contained in this document is subject to change and It is highly recommended anyone considering a short sale should consult a CPA or Attorney to determine if a short sale is beneficial to the individual seller. 

    SELLER WILL PROVIDE  ALL DOCUMENTS REQUIRED BY THE BANK TO COMPLETE THIS TRANSACTION.  SELLERS UNDERSTAND THERE ARE NO GUARANTEED SHORT SALES CLOSURES AND THE OUTCOME RESTS SOLELY ON THE BANK ACCEPTANCE OF THE SHORT SALE PROCESS.   FURTHERMORE SHORT SALE MAY TAKE UP TO 6 MONTHS TO CLOSE AND MAY ADVERSELY AFFECT YOUR CREDIT STANDING AND ABILITY TO OBTAIN CREDIT  IN THE FUTURE.  IT IS RECOMMENDED THAT YOU KEEP ALL TAXES, INSURANCE, AND PAYMENTS CURRENT UNTIL SUCH A TIME AS REQUIRED BY THE BANK DURING THE SHORT SALE PROCESS.  IT IS RECOMMENDED THAT SELLER SEEK COUNSEL FOR ANY POSSIBLE TAX, LEGAL, OR ADVERSE RAMIFICATION FROM SHORT SALE PROCESS.  SELLER SIGNATURE ON LISTING AGREEMENT STATES THAT SELLER UNDERSTANDS AND AGREE'S TO TAKES FULL RESPONCIBILITY FOR THE OUTCOME AND HOLDS ALL AGENTS AND BROKERS OF PANHANLE REAL ESTATE, INC and THOM BACHELDER, PA, INC.  HARMLESS.