Short Sale FAQ's
Note: This FAQ is meant as supplement to the full article " The Definitive Guide To Short Sales". Most questions will be answered in that article.
[Will I have to pay capital gains taxes if I sell a property as a short sale?
No. If your bank suggested that, they are ridiculous. Capital gains would indicate that you are in some way "better off" financially because of money you have made. In a short sale, you lose and owe money.
[We are about to buy a short sale from the bank and are wondering if the bank is responsible for ridding the house of mold or are we?
First of all, if you are buying a house from the bank, it's not a short sale. Second of all, in almost every case where there is a bank-owned property, it will be sold AS-IS. Check the verbiage of your purchase agreement with the bank (or seller). Any purchase agreement should contain a clause referencing who is liable for what. If you signed a purchase agreement that didn't reference the mold or "items required by the home inspection to be completed," then you will be liable.
[If I pay mortgage insurance and default on my loan, why wouldn't that cover the deficiency amount?
In some cases it will and in some cases it won't. It depends on the amount of the deficiency. Usually the mortgage insurance only covers a certain amount. Moreover, the lender will try to collect from you before they file a claim with the mortgage insurance company. The mortgage insurance is not there for your protection, just the lender's.
[We had a first and second loan and went through foreclosure. The first was paid off and we were told the second would be forgiven. Now a collection company is coming after us for the second, what do we do?
First of all, read this article. The bank will never forgive one dime of debt unless it is explicitly stated in writing and you have it reviewed and confirmed by an attorney. The fact is they probably lied to you verbally. You're only recourse now is to engage in a legal dispute against them or file bankruptcy.
[What are the implications of unpaid judgments?
Worst case scenario, your wages can be garnished.
[How long does the foreclosure process take?
Complicated question depending on what you consider the start of the "process" to be. Generally, the Bank will send and NOD (notice of default) to the title company and trustee. From that time it takes between 3-9 months for the house to go up for auction, during which, you can pay the delinquent amount to "cure" the foreclosure proceedings.
[Will I still have to pay taxes if I do a short sale?
This is a broad question depending on whether we're talking about property taxes or federal income taxes. You'll always have to pay extra income tax if the bank sends you a 1099 for the deficiency. SOMEONE will always have to pay property taxes. Whether its you or the lender depends on their policies and the specific agreement you reach while negotiating the short sale.
[I owe more than my home is worth. Am I eligible for short sale or is my only option foreclosure or bankruptcy?
Always consult your lender as to what your options are. They are usually short sale, deed-in-lieu of foreclosure (basically an accelerated voluntary surrender), and foreclosure. The banks like to prevent foreclosure when at all possible. They've even been known to lower people's rates and payments because of all the new defaults in '06 and '07. Either way, your first stop should be to get information from you lender on what options they provide.
[Does a good credit score help the seller trying to do the short sale?
Only inasmuch as their credit score will stay high as long as they don't make any late payments leading up to the short sale. Some lenders may call the deficiency a judgment though, which will hurt the score a bit.
[Where can I get information on investing in short sales and foreclosures?
First of all, there is no magic listing place for short sales. If a seller has gone to the trouble of asking their lender if they can do a short sale and the lender has given them a verbal approval, then the short sale will show up much the same as any other property for sale, only it will take you five times as long to close it.
Foreclosure investing is a whole different ballgame. There are numerous theories, books, websites, and other forms of media, often that charge you for their knowledge. It's mostly garbage. The only real way to get a leg up in the real estate investing marketplace is to align yourself with other people that are doing the same thing and are successful at it.
You have to ask yourself, if there are secrets to making money in foreclosure investing, why would someone give them away? Offer yourself as an apprentice to real estate investors. The good ones start to get overloaded and could use the help. Then you have better education than any book or article could ever give you. I could tell you exactly how a client of mine built her net worth by 2 million dollars in two years, but there is no guarantee the same strategy would work for you. Furthermore, if I really do know strategies that allow people to increase their net worth 2 million dollars in one year,
I wouldn't sell my course, or ebook, or whatever for $39.99. I'd charge well over $1000.
Bottom line. Learn by doing. Expect mistakes. Try to connect with PEOPLE not with books and articles. Just be sure the people you connect with really are successful. That's why I suggest the apprentice pitch. No one could afford to hire an apprentice unless they were making enough money to do so.
[Is a short sale still an option if a foreclosure has taken place?
By definition, no. However, if depends what you mean by "taken place" and whether you are the owner or the buyer. If you are the owner and you haven't been evicted yet, there is always a dollar amount called " cost-to-cure" that, if received by your lender, will cure you default. If you're a buyer, it's all the same to you. All you do is make an offer.
[How can I get referrals from lenders that have clients wanting to do short sales?
As an investor, it doesn't make sense to browse short sales. If the owner has had to ask the lender for approval on a short sale, it's usually not going to give you a very big equity position if you come in to buy it. Again short sales are usually situations where the owner owes more than the market value. A short sale is not a distressed enough situation to get a good enough deal for an investor. You're looking for foreclosures, distressed homes, bank-owned properties, etc.
[How does a realtor profit from a short sale?
When formally requesting a short sale commitment from the bank, realtor commissions are usually included if a realtor was involved in the deal. The bank may counteroffer to lower the commissions. Realtors can also "hunt" for short sales by talking to clients that have had their homes listed for a long time with no success. The realtor can explain the short sale process and help the owner negotiate with their lender to get it sold and the realtor gets their commission.
[Will I have a higher interest rate on future mortgages or will they be harder to obtain?
It all depends on the arrangement between you and the lender. If you pay them a promissory note for the deficiency, then the damage to your credit will be minimal and you shouldn't have a problem obtaining loans in the future. If the lender shows "settled for less than the amount due" on your mortgage tradeline, some future lenders will look at that as a foreclosure. Some lenders even report short sales as foreclosures. Here's what to do: Obtain, in writing, your lenders policies on short sale credit bureau reporting. Then ask your mortgage broker how that affects your ability to qualify in the future. Generally, when you get a new mortgage, as long as you don't have a foreclosure, bankruptcy, or unsatisfied judgment, your ability to qualify will be the same as it is now (and your credit score needs to stay the same).
[I'm interested in this house, owners divorced and walked away. The bank that holds the second is trying to short sale the house. 2 offers have been placed (500k, 550k). I planned to offer a bit more than the offers, but the realtor called and said the lender (countrywide) will not take any less than the appraised amt that just came in (approx 750k). What next? Does it go to auction? I'm confused why the second mortgage company is doing the short sale and not the primary? Suggestions?
First of all, if the bank owns it, its not a short sale. Furthermore, if they already own it, chances are it has already been up for auction and they bought it back. Second of all, if the bank says they won't take less than the appraised value, they are lying. If their lien is only for 620k for example, they would take it in a heartbeat, unless some loss mitigation manager at Countrywide is absolutely convinced that the house will fetch well over appraised value at auction (which it won't). So make an offer of $560k. Or make an offer of "$10k higher than any other offer up to a s specified amount." The second mortgage company handles the sale because the first mortgage company will be paid off (most likely) by the sale or auction of the home. If Countrywide doesn't agree to any offers by a certain time, and it hasn't already then yes, it goes to auction. The people that bid won't show up, but a representative from Countrywide will. They will bid what they owe on house. If they already own the house, there won't be an auction, it has already been foreclosed, and Countrywide will just try to sell it for as much as they can.
[I want to do a short sale and have a 2nd mortgage, does this make me ineligible?
No. Both of your lenders will need to be satisfied in some way to complete the short sale. If your first lender will be paid off by the sale, then you just negotiate the terms with the second lender.
[I purchased a new home in February, with a first loan of 80% and a second loan of 20%. I listed my old home with the plan of paying my second loan as soon as the old home sold. This home has been listed for over six months and has not sold and the price has been reduced substantially. I have been paying for mortgages on both homes. I am using my savings and I cannot afford to keep paying both. I cannot afford my new home without paying my second loan. Can I short sell it?
You and the rest of the country! Yes! You can do a short sale. The problem you face now is time constraints. Talk to the lender on your old house about their options such as deed-in-lieu of foreclosure. Find out what their short sale requirements and policies are.
[I have put an offer in on a home that is a short sale. It took months to get a preliminary acceptance from Wells Fargo, but they said it doesn't have final approval yet. We are 2 weeks from closing and no one from Wells Fargo will call me or my agent back. Any suggestions to get an answer, so I know if my family has a home?
Great question, and a common problem. It takes a long time for these things to go through usually. You are only two weeks away from closing if Wells Fargo has all their stuff taken care of by then. The only way to get more information is to call the department of Wells that handles short sales and request the information. They probably won't talk to you unless the seller authorizes you to talk to Wells. When my wife went through a short sale, we called up our lender and authorized the buyers to talk to them. Then our lender gave them all the info they wanted and they buyers were actually able accelerate the process. So ask the appropriate party if the sellers will add you as authorized to discuss the progress of the short sale with Wells Fargo.
[Hello, I am interested in purchasing foreclosures for investment reasons. I have been warned of second mortgages being what is foreclosed, not the original mortgage. How can I tell which mortgage is being foreclosed?
Don't buy anything until you get a preliminary title report or Lien and Encumbrance report showing who all has a claim to the property. This way you will know who is expecting to be paid off before you can own it.
Please read the " The Definitive Guide To Short Sales" for more information.
**UPDATE: ** Below you will find an excerpt from the irs.gov website concerning taxes on deficiencies to the lender as a result of a short sale.
The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.
This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.