Hi folks. Richard Zaretsky wrote a great post yesterday titled "Back to Basics...a Review on Short Sales". If you haven't read it please take a few minutes to do so. It is a very good perspective on Short Sales from an Attorney.
Richard's post brought up two very good points for me. Both were light bulb moments.
The first was the 1099 "thingie". Whether you receive a 1099, or not, has no bearing on whether you have income to declare. Well...duh!!! Why would it. All a 1099 does is reports the income to the IRS for you. If it's not done for you....it is still YOUR obligation to report it. A perfect example of this is the way Title Companies, at least in Florida, handle our commissions. They are not required to 1099 me for commissions paid....BUT...I still have to claim the income. So wouldn't the Seller have the same obligation? They certainly may not have to pay any taxes BUT they would still have to claim the income.
The second light bulb moment was the promissory note. Some lenders will require the Seller to sign a promissory note for all of the "short" or part of it. So my thought was, why not sign it if the alternative is a foreclosure? What difference does it make? You would go from having a foreclosure on your credit to having a "no pay" promissory note.
I had a Seller, several months ago, whose property was foreclosed on. She owed $270,000 on a property worth about $139,000. We attempted to get a short sale acceptance at $130,000. The lender agreed assuming the Seller would sign a note for $140,000. I was able to negotiate the note down to $40,000. The Seller's attorney advised her not to sign it and to just let the property go into foreclosure, which it did. By the way, the note would have been interest free and for 15 years.
Was this a mistake? After reading Richard's post I believe it was.
My plan in the future is to just send these Sellers over to Richard. I'll let him handle the heavy lifting. That way I can concentrate on listing and selling. All this other stuff is just more than I need to know. What say you?
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Bryant Tutas
Broker/Owner
Tutas Towne Realty, Inc
Licensed Florida Real Estate Broker
http://www.brokerbryant.com/
***The content of this blog is solely my opinion***
Broker Bryant
So they failed to agree to an interest free note for 15 years which would've cost them about $25 per month, and ruined their credit, only because they chose not to be accountable?
That attorney was (is) and idiot, and I would gladly tell them that.....
I can't wait to see how difficult it will be for that homeowner to clean up her credit....that is just sad to hear.
Yet another thought provoking post on your part.....very cool!
Bryant- We have an inhouse foreclosure defense attorney who we have our sellers retain once they are served with foreclosure complaints. We have him take care of the foreclosure defense even though he also does short sale negotiations. We have a vested interest of the human kind to our sellers so therefore we are much more successful in actually getting the short sale through on terms in the best interest of our clients.
Our attorney will also find all the errors in their loans and that is negotiating power to knock off a lot of what they owe. One person here in Florida got his house for free because of truth in lending violations after he was in foreclosure.
Although I do agree with most of what he wrote, he did not mention that the new debt relief act allows for primary home owners who have lived 2 out of 5 years in the home to NOT be 1099's and ALSO exempt from any IRS reporting of the loss. The other thing is that most of our sellers are insolvent and their tax attorney can prove insolvency and therefor the 1099 becomes almost a non issue in deciding whether to execute a short sale or not if they have not lived in the house for more than 2 years out of 5.
As far as the interest free notes, most of our sellers just file bankruptcy and then the lender suddenly behaves and gives a fully satisfied mortgage release. We only have been offered this on second note holders who will be wiped out in a bankruptcy.
We have closed a lot of short sales and only one of them said it would not be free and clear but at the closing our title company found a mistake they made and our seller got his fully satisfied mortgage. I don't think attorneys can really access the man power that it takes to really stay on the phone pounding these lenders. If you recall it took Nestor and I, 12 hours that one day to stop the sale on the courthouse steps of one of our sellers.
Our attorney told us we went way above our call of duty although he was also helping us by talking to the lender's attorney. There are not many attorneys who can stay on the phone all day like that to get the deal done and so I think they accept less in regards to negotiating. I am surprised that there are so many attorneys who settle for these notes and deficiencies in behalf of their clients when with more pushing the lender will more times than not, see the light and do it your way. Katerina
Good info Katerina, In my area almost all of the short sales are investor owned. So unfortunately the 1099 comes into play most of the time. Maybe I just don't have the patience for short sales. I do have 3 on the market right now but they were all by default......they were listed before they got behind on payments.
There is so much conflicting info on these things. I just prefer to not have to be on the hook for any bad advice.
As always, your opinion and added incite is appreciated.
Bill, A payment on that note is about $222 a month. It was more than she could afford.
Matt, I can't blame you. They can be very frustrating.
Hey Hun, No allowance for you!!!
Okay...
Then I am going to go sell your name to the highest bidder :)
Keep it up and I'll sell myself to the highest bidder as well :)
TLW...ROAR!
Broker B, First of all thanks for the link to Richards post.
I too think as Katerina stated the debt relief act lets the seller off the hook for reporting the forgiveness and any taxes owed as a result of the short sale, under certain circumstances, whether they receive a 1099 or not.
BB,
Richard's post was great, probably one of the best on the issue.
As for your question of..."After reading Richard's post I believe it was"... I would agree with you. At least from the perspective of my state in CA where we do not have deficiency judgements on our purchase money loans on residential properties. Therefore, no reason for a borrower to re-commit financially.
I have found that the lenders call me at lunch and after 5pm. What attorney is working then? If the borrower has given an honest financial statement which shows the inability to repay the difference, the lenders are more understanding on debt relief. Only WAMU has really taken one of my borrowers through the hoops. Bank United, Wells Fargo, Homeq, EMC and a few others have not even mentioned a "buyout" or had the borrower sign a deficiency "unsecured note" Chase asked one borrower to pay out several thousand dollars but we got that way down.
I think if the agent knows how to speak with the lender, this is something you can do when you are working the package. Try working the package yourself. These short sale companies have to charge someone for their service and it is not coming out of my commission. Besides, you can learn more about short sales here on RAIN then in any class.
Thanks for sharing.
Bertha, I think I'm with you. I do believe I would have needed a really compelling reason not to sign the promissory note. I don't remember who said it but in all likelihood it could have been renegotiated down the road. Then again, if you don't have the money $222 a month might as well be $22,000 a month. There are no winners in these situations, that's for sure.
BettyJesseBB,
Any clients that I have that were successful with selling short...I always tell them that they may or may not receive the 1099 but they should consult an attorney and an accountant. The income is still reported and although they aren't getting it they are still being releived of it by the bank. I guess the banks feel that they shouldn't have to pay the tax for the seller. It could be confusing as well.
Rob...
I've been thinking along those lines. In the our efforts to help I can see where we'd be opening ourselves up to litigation.
We're supposed to be telling folks to seek the advice of a 'good' Attorney. When we step in and do the Attorney's job we are crossing the line.
I think many of the Salespeople who are handling short sales need to re-evaluate their position at this point.
But hey...What do I really know? :)
TLW...ROAR!
The foreclosure option would of course ruin her credit- but then again a judgement of any kind would remain on her credit report anyway for 7 years- so it amounts to basically the same thing. Too often, people do not realize paying a judgement does not release the judgement from your credit report.
As for the 40K note, she would have had to carry that fpayment for 15 uears and as you said she could not afford to do that. The foreclosure should have wiped out the debt and she will carry that on her credit report for only 10 years. Basically amounting to a fresh start.
Broker Bryant,
I haven't heard a single REA in Arizona talk about the 1099. Thanks for posting.
Mike in Tucson
Hi...I have a house I currently don't live in. I have two loans on the property through Chase Bank. First loan is about 123K and the second loan is about 25K. Total is about 148K.
After pleanty of open houses, a dedicated website and craiglist links I've received a few offers from 96K-120K.
The 120K was the highest and with minimal concessions. Next door neighbor is still for sale at 118K and comps in the area range around 112K.
My question is the short sale is approved "if" I sign a promisorry note for 138.00 a month for 72 months (10K). Obviously, I should probably sign it and put this nightmare behind me. What bothers me is it took Chase bank 4 weeks (from a loser short sale person who kept asking for the same documnets, thus having some people retractibg thier bid because it was taking so long) to make a decision on the short sale and than on the 13th hour they bring up this promisorry note.
After talking to my real-estate agent they wanted to charge 20K but did the minimum 10K is there any minimum? Should I negotiate this? This house is in Michigan.
When the ARM adjusted in December I've been paying 2K a month. So I've spent 10K already.
Trying to have integrity about this and not being greedy.
Thanks for anyones input on this.
Steve
Hi Steve, You are fortunate to have found a buyer. I've never heard of there being a minimum for a promissory note, however, that could be a Chase thing. Has the 2nd lien holder agreed to release their lien as well? Personally I think you should seek legal advice before signing off on anything.
Signing that note is always a hard decision. But bottom line is they are forgiving quite a bit of your debt to them that you agreed to borrow and pay back. As frustrating as the lenders can be it's not their fault you are now asking for a short sale. Is it?
So seek legal advice first. Then just make a decision on whether or not you can afford that payment on the note. If you can go for it. You can always negotiate it down later if it becomes difficult to pay. I would think the main thing right now is to avoid the foreclosure and get that $2,000 monkey off your back. And get rid of the stress.....life is too short.
I hope this helps.