If there is negative equity in a property (it is worth less than what is owed on it) and the owner is failing to make payments the lender will start foreclosure proceedings. Apart from curing the loan or a loan modification, a short sale is often the only alternative to foreclosure once the process has been started.
A short sale is the quick sale of the property, after getting approval from the creditors, for less than what is owed on it. The bank or mortgage company (and any other lien holders for that matter) settles for less than what is actually due.
Lenders realize they will not win all the time. Changing economic conditions, acts of God, conflicts are some of the causes of unforeseen situations that can turn bad. You only have to see the profits of these institutions to see how well they do in the good times!
A short sale can occur when debtors agree to settle their liens for a known amount of money as opposed to taking a chance at auction. At auction, prices are usually heavily discounted.
Lenders are usually willing to mitigate further risk of loss and time (which is also money for a bank) by making deals before auction. Their business is to lend capital, not dispose of foreclosed properties.
Despite this however, it is not always possible to get the bank to agree to a short sale. It is hard to understand why not, but it can happen and the property can be forced into foreclosure.
Our job is to work as hard as possible to prevent this from happening.
Using a Short Sales Expert
A short sales investor’s job is to mediate a settlement so that all parties are happy and can move on. In a short sale the lender agrees to settle without further claims, and the property owner clears their obligations without the negative effects of a foreclosure on their credit score.
If a short sales investor handles the short sale, they will make money from the difference between what is agreed with lenders for the sale to them and what the property can immediately be sold on for, minus any costs. This profit is their way of getting paid for what they do.
Their job is to have the house sold, salvage the home owner’s credit and free them of the total debt if at all possible. They also prevent the bank from having another REO on their inventory freeing them to loan out more money (which is how they make money of course!).
Deficiency
In both a short sale and in foreclosure the lender has the right to stipulate that any outstanding debt not be forgiven if they feel there are other assets or sources of income available to the debtor. This is known as a deficiency.
Where there are no obvious assets this rarely happens and when it does the amount of deficiency is usually very small and given with easy no interest terms. This possibility is still better than a foreclosure on your record.
See FOX5 Report on Short Sales in Las Vegas
Things You Need to Know
Here are some things you need to know if your offer for a short sale is approved and your house in Las Vegas is sold instead of foreclosed.
You won’t be getting any money at the closing because you owe more than the house is worth but you will not have a foreclosure on your credit record, preventing you from getting a loan on another home for up to 10 years.
Depending on your agreement, you may or may not owe the bank or mortgage company some money. We will ask for the bank to give up their legal right to pursue you in court for the outstanding amount but the final decision is with the bank. The hardship letter and the accompanying documentation will help them decide whether it is worth pursuing a deficiency or not.
In order to save your credit score as much as possible we will negotiate with the bank to record it as ‘paid as agreed’, ‘paid settlement’ or at worse ‘unrated’ rather than ‘loan not paid in full’. The final decision will be with the bank which is why your hardship letter should sound as if you do care about paying your debts and would if only you could.
After the sale of your home, your lender will send a Form 1099-C, Cancellation of Debt. Store it in a safe place. On a short sale you must declare the amount forgiven by the bank on your IRS tax return as it is considered as earned income (1099). The forgiven debt income amount must be reported as “other income” on Line 21 of the IRS 1040 tax form.
However, you will be able to exclude all of this income if the property was your principal residence. Federal guidelines exempt homeowners from federal taxes through 2012 and there are no state taxes of course in Nevada.
You are also exempt from tax if you were insolvent immediately before the discharge (you are insolvent when your total debts exceed the total fair market value of all of your assets which include everything you own, e.g., your car, house, condominium, furniture, life insurance policies, stocks, other investments, or your pension and other retirement accounts) or if the debt was canceled in a title 11 bankruptcy case. See your CPR about any tax issues.
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Tel: 702 416 4812 – Las Vegas 89209
