a. Defaulting on mortgage payments can be a difficult situation. Many people find themselves falling into default, or are already in default, and don't realize that there are options available before the bank takes the house away. A short sale is an excellent way to avoid foreclosure and can offer time and protection, as long as it is done properly by a qualified attorney.

b. A Short Sale or Short Pay is when the lender agrees to accept a sales price of fair market value for your property despite the loan or loans totaling more than what the property is worth.

c. In this scenario, the lender takes a loss on the property and writes off the difference between what was owed on the property and the final real estate short sales price. In most cases, the lender takes less than what is owed on the property to fully satisfy the loan.

Why would a consumer/borrower want to do a Short Sale?

Short Sales are a benefit to consumers because they stop mortgage foreclosure and prevent the lender from suing for deficiency. Deficiency is the difference between what the lender would have received under the contract and what the property finally sells for. This shortfall can often be more than $100,000.

By entering into a voluntary agreement with the lender, you ultimately stop foreclosure and your credit report does not merit a FORECLOSURE entry. This puts you in a much better position to qualify to buy another property in the future.

Through our negotiation process, the lender agrees to forego suing you for any monies which they write off associated with the Short Sale transaction.

A Short Sale transaction also provides peace of mind and predictability because you know exactly when the sale will close, and thus when you will need to vacate the property. There's no risk that sheriff's deputies will come to your door one morning to evict you.

Why would I hire a real estate attorney to do a Short Sale for me?

Negotiating a Short Sale is a difficult process, generally because the lender will require certain documents and information, but too much information or documents in the wrong format can completely destroy a transaction. Specifically, the lender will require documents demonstrating the property value, and then will verify such value with a broker’s price opinion or “BPO.”

Additionally, the lender will ask for financial information about the borrower. The borrower must now convince the bank that he/she is insolvent and simply can not make the payment going forward. Think of it as a backwards loan application. It is important to give the lender precisely what they want at this stage without lying (often including bank statements and tax returns), but also paint a grim picture of the borrowers financial circumstances.

This stage is the most sensitive because the borrower must prove they do not NOW have the income to make the payments, but at the same time the borrower must be careful not to implicate themselves in mortgage fraud from when they applied for the loan and “proved” to the lender they DID have the income to make the payments. It is critical to be properly represented through this process by a qualified Short Sale attorney…for your own protection!

What are the tax implications of a Short Sale?

The tax situations of individual borrowers are different, but in general, any 1099 income generated by a Short Sale is usually offset by the loss the borrower took on a bad investment. Often, critics of Short Sales look only at the 1099 income without considering the benefit of the offsetting deduction for the loss on the property.

The bottom line on taxes is that the tax year in which the borrower completes the Short Sale is a complicated one, and it is critical to have a Certified Public Accountant prepare taxes for that year. It is easy to miss the deduction. Don't let it happen to you. The Law Offices of Timothy McFarlin, PLC is happy to refer clients to a qualified tax professional who can properly prepare such returns after a Short Sale.