Is a Short Sale Right for Me?
In today’s turbulent real estate market, clients facing financial difficulties often ask whether a short sale would be right for them. Be aware that this is a much more complex issue than you may have been led to believe. In some circumstances, a short sale may be the best course of action, but many times you may suffer consequences which put you in a worst position than when you started. Before deciding on a Short Sale, contact The Law Office of Conrad Willkomm, P.A., to explore all of your legal options.
What is a Short Sale?
A short sale is when you sell your home for less than what is owed. For example, you owe your mortgage company $300,000 and you sell your house for $200,000.
How does a Short Sale Work?
The process is similar to a regular home sale; the primary difference being that you, or your representative, will negotiate how much you will owe the bank after the closing.
The amount owed and the terms agreed upon by you and the bank for payback will be formalized in a contract. If you have a second mortgage receiving less than full payment, the rights of the second mortgage holder must also be addressed in this contract.
IMPORTANT NOTE: Please understand your real estate advisor is not trained legal professional and may not understand the legal consequences of the terms of the contract. The contract agreed to before the sale defines what benefit you hope to receive from the short sale. The Law Office of Conrad Willkomm, P.A., can help negotiate your interests in the formation of the short sale contract. It is important to obtain legal advice at the beginning of this transaction. Frequently clients wait until after the contract is signed to contact an attorney, when the terms are unable to be altered.
What is the Result of a Short Sale?
Based on the terms of your short sale agreement, the deficiency can be treated in one of the following three ways, or a combination thereof:
1. Lump sum payment, by the seller, of all or a portion of the deficiency.
2. Repayment plan.
3. Forgiveness of debt
The first two options require money to be paid on the deficiency. The third option, forgiveness of debt, is when the mortgage company agrees you do not need to pay debt.
All of the results above may result in negative tax consequences. If a debt is forgiven the mortgage company then they must issue you a 1099-C. This means, all debt forgiven must be included on your personal income tax return and treaded as ordinary income, unless an exception applies.
You will not have to include the forgiven debt as income if you qualify for one of the three following exceptions:
-The debt was discharged in bankruptcy.
-You are insolvent at the time the debt was forgiven.
-The debt forgiven was owed on your primary residence. (see 26 U.S.C. 108, IRS Form 982, and The Mortgage Forgiveness Debt Relief Act of 2007).
IMPORTANT NOTE: Forgiveness of debt is often the selling point to get you to agree to a short sale. A 1099-C must be issued for forgiven debt over $600 regardless of what someone may promise you. The Law Office of Conrad Willkomm, P.A., can help determine whether you qualify for one of the above exceptions.
What is the Effect of a Short Sale on my Credit?
Often times, short sales are marketed as being less detrimental to your credit than a foreclosure. The truth is the differences are subtle and arguably a short sale is no better for you than a foreclosure in the long term.
Short Sale or Foreclosure?
A short sale is tempting, especially when a realtor is telling you that you will owe nothing, your credit will be better, and you can purchase another home faster if you short sale.
Owing nothing means you have forgiven debt, which again, may have tax consequences. Your credit is negatively affected in both scenarios and any difference is generally slight. Having a foreclosure on your credit report is currently being viewed no differently by mortgage brokers than a short sale.
Also, while working with an attorney, the foreclosure process is delayed (often up to a year) enabling you to live rent free. Even after the foreclosure process you would be able to stay in the premises until an eviction. During this time you may be able to save thousands of dollars and stabilize your financial affairs.
IMPORTANT NOTE: Many people may have a financial interest in your actions. A realtor stands to make thousands of dollars in commissions and fees off a short sale and may desire to pursue this avenue even if your best interest is to live rent free until foreclosure. Contact the Law Office of Conrad Willkomm, P.A., to discuss your options.
What is a Deed in Lieu of Foreclosure?
With a deed in lieu of foreclosure, you give your home to the lender (the “deed”) in exchange for the lender canceling the loan. The lender promises not to initiate foreclosure proceedings, and to terminate any existing foreclosure proceedings. Before the lender will accept a deed in lieu of foreclosure, it will probably require you to put your home on the market for a period of time (three months is typical). Banks would rather have you sell the house than have to sell it themselves.
For a free and impartial consultation with an attorney about all of your options, call Conrad Willkomm at (239) 262-5303 or send us an email.