About Short-Sale

Here are some things to keep in mind in a short-sale transaction in a pre-foreclosure process:

• Buyer and Seller must be patient:  Lenders are usually inundated with many of these cases especially because of the current credit environment.  The offer you will receive on your property will have to be considered along with many others.  Thus, you have to wait for your turn.  You are not dealing with a person who is dealing with only one sale.  Never expect to receive a response in a day or two.  It could take as long as three to four weeks (recently, it has been taking certain lenders six to eight weeks because of increased volume of transactions) before you get an answer (hopefully, an approval) from the lender.  Therefore, the usual term of response required within 24 hours is useless and is ignored in a short-sale transaction.
• Price it right:  The property must be priced right to ensure that an offer is received and that the offer price is close to it.  Remember that lenders will be losing money, and the lower the offer, the greater lender's loss is going to be.  By pricing it right, Buyer should consider offering a full price.
• Inspection Contingencies (repairs, etc):  Unless buyer is writing a full-price offer, do not expect a lot in terms of concession.  Although short-sale don't like home inspections, buyer should still do the usual inspections, but any negotiations on insignificant item will only cause a delay due to the approval process involved in a short-sale.  The mortgage loan release the lender will give seller will be exact to the penny.  Any deviation from this, no matter how small, will result in a delay.  Thus, buyer must understand the lender approval process, how it works, and be realistic with the expected result.  Said another way, don't even think of concession unless there is something really wrong with the house!
• Remember that in short-sale, the seller is no longer in control; it is the lender.  Usually, the buyer's agent will be dealing with the seller's agent who is dealing directly with the seller's lender.  The seller's role will be to simply sign the paper work and move on.  Seller will usually not receive any money out of the transaction.
• Seller may not be completely out of it.  Depending on seller's financial position, the bank could ask seller to pay for some of the loss incurred in the short-sale.  Also, you must check with your tax accountant regarding the taxability of the debt that is "forgiven" by the lender.  Can you imagine paying the tax on money you never received?

Taxability of Short Sale

Like a foreclosure sale or a voluntary conveyance of the property to the creditor, short sale of property is treated as a sale of the property.  For illustrative purposes only, this is how you may be subjected to tax.  This illustration is simplified, and your actual situation could be more complex.  Therefore, you must consult with your legal and tax advisor before acting on any matter contained in this section.  The rules are complicated, and there are always exceptions to the rules.

Assume that you purchased your home for $250,000, and that you spent an additional $100,000 in improvements.  Your total tax basis is $350,000.  Through refinancing over the years, your current mortgage balance is $530,000.  You then experienced financial difficulties at the time when real estate values are coming down, such that you can only sell your house for $450,000.  Due to your financial situation, the lender allowed you to sell your house, and they agreed to accept a lower payoff amount of $450,000.

• Your gain is the difference between your tax basis of $350,000 and the $450,000 selling price of the property, or $100,000.  If you meet the requirements, you may be able to avoid paying tax under the $250,000 (for single) or $500,000 (for married) exemption on the sale of personal residence.  If this is an investment property, and you meet the requirements, it may be subject to capital gains tax rate.
• In addition, you also have ordinary income for the difference between the cancelled payoff amount of $530,000 and the $450,000 fair market value of the property, or $80,000.  In general, your lender would issue a Form 1099 for the $80,000 difference between your debt payoff amount and the amount realized in the sale.  Note, that the payoff amount could be higher than the mortgage balance because the payoff amount would include prepayment penalties.
• In many cases, you are able to justify the short-sale because you are insolvent (i.e., your liabilities exceed your assets).  If that is the case, you may be able to escape taxation.  However, you have to prove this insolvency to the IRS when filing your tax return.  Again, seek advise from your tax professional now, and do not wait for the time when your tax return is due to be filed.

On December 20, 2007 President Bush singed a measure to provide financial relief for financially strapped homeowners facing foreclosure.  The bill gives a tax break to homeowners who have mortgage debt forgiven as part of a foreclosure or renegotiation of a loan.  NO TAXES WOULD BE OWED ON THE VALUE OF ANY DEBT FOREGIVEN OR WRITTEN OFF.  This tax relief is temporary and due to expire in 2010.  Click here for complete article.  Always consult your local CPA for further information on this matter.

Avoid Equity Skimming

Equity skimming is illegal in all 50 states of the United States.  It is a federal crime punishable by a fine or imprisonment.  To illustrate how Equity skimming works, here's an example of how a Scam Artist operates:

A homeowner falls behind on his mortgage payments and enters foreclosure.  A Scam Artist comes in and offers to rescue the homeowner from foreclosure by offering a "miracle refinancing."  At closing, the homeowner transfers title (possibly unknowingly) to the Scam Artist.  The Scam Artist pays off the amount owed in foreclosure to acquire the deed, and inherits any portion of the homeowner's remaining equity. The Scam Artist will re-convey the property back to the homeowner in the form of a lease or contract-for-deed.  The homeowners remains in the home and pays rent or contract-for-dead payment (often higher than their previous mortgage payments).  They inevitably fall behind, and are evicted from their homes with very little, if any, of their equity.  The Scam Artist takes possession of the home and all its equity.

Don't fall for it!

Quiz

Here's a short quiz to check your understanding, knowledge, or perception of what foreclosure is all about.  This was printed in the September 2007 issue of Atlantic REALTOR, a publication for New Jersey real estate agents.  You can do so by clicking here and printing the 11-item questionnaire.  Then, you can click here to check your answers.

About Danny Cachuela

As mentioned earlier, Danny Cachuela is knowledgeable in providing assistance to avoid potential foreclosure of property.  Danny Cachuela, with his financial background as a Pennsylvania Certified Public Accountant (inactive), is uniquely qualified to provide this service.  As a Realtor, he will be able to help you in the sale of your property.  His experience in negotiation working as a former CEO of a multi-million dollar corporation in is invaluable in helping you go through the negotiation of short-sale with your lender (sometimes, multiple lenders).  He is not the so-called "phony counseling agency" that charges a fee for counseling.  He collects his fee in form of commission from the sale of your house, just like a traditional sale by a Realtor.  That means... no sale, no fee.  And if it turns into a "Short-Sale," the net effect is that your lender is the one paying his fee -- not you.  He could explain this further.  To obtain more details, simply call him at 610-356-8347, or his toll-free line at 888-561-8453.  Or, go to Danny Cachuela's website for more real estate information.

If loss mitigation is more appropriate for you, Danny Cachuela is also a Certified Loss Mitigation Consultant for Freedom Foreclosure Prevention Services (FFPS).  If you qualify, FFPS can negotiate in your behalf to avoid the foreclosure of your home.  For more information on this, go to www.ForeclosureAvoidanceHelp.com.

Note that there is no business relationship between Prudential Fox & Roach Realtors and Freedom Foreclosure Prevention Services, LLC, although Danny Cachuela represents both separately as an Associate Broker and as Certified Loss Mitigation Consultant, respectively.

IMPORTANT:  The information provided on this website is designed for general information only.  The specific information discussed is over-simplified and may not apply to you.  Before acting on any matter contained herein, you must consult with your personal legal counsel, tax and financial counselors.

Danny Cachuela, CPA, ABR
Associate Broker
Prudential Fox & Roach Realtors
3409 West Chester Pike
Newtown Square, PA 19073
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Toll-Free: 888-561-8453
Office: 610-353-6200, Ext. 385
Direct: 610-356-8347
Cell:  610-213-6771
danny@CachuelaTeam.com
www.ShowMeTheHome.com