Front View

2 or 3 Bedroom, 1 Full Bath and 1 Half Bath, Formal Dining, Living Room, all over a full unfinished basement with one car entry. Large fenced back yard.  Needs repair on heat and air unit, wood work under eaves, paint, etc.  Cash As-Is price is $65,000.

Credit report and your score.  Your score known as a FICO score is important.  The “score” determines the price of your home and auto insurance, interest rate on loans and credit cards.  Take control of this number best you can by keeping up with the Bureaus and what others are reporting about your activity.

The truly free place to get your credit report is http://www.annualcreditreport.com .  This site will allow you to obtain all three credit reports one time a year free of charge.  You can obtain your score at http://www.myfico.com .  The only score that you will not receive is Experian.  Resist the ads that pop up on either site asking you to purchase anything.

Blue gets to talk about short sales today on TV with Don Welch.  Don’s program is called “This and That” and can be found online at http://www.newschannel9.com/sections/thisnthat . Short sales benefit the entire community because foreclosures drag home values down.  Lenders save money because the average foreclosure costs lenders over $50,000.  The property owner gets a settled account on their credit history (can be cleaned up in 3 years) instead of foreclosure which stays with your credit for 7-10 years! Short sales are very helpful!

Lenders are very serious about homeowners not recieving any benefit whatsoever from a short sale.  That means you cannot do your own short sale and buy the property from yourself, you can’t sell it to a relative who will then allow you to lease the property back from them.  When you do a short sale, you have to be willing to wipe your hands clean of the property and move on.

What can you do to be proactive?  You may be able to give the short sale process a head start by faxing your lender(s) all of the components of the short sale package, including a current financial statement, a hardship letter, your bank statements, paystubs, tax returns and any other financial documents your lender needs in order to process a short sale request.

Call Blue at 423-558-0381 to help you step through the hoops and get behind what has been a difficult situation.

Blue is an investor as well as a real estate broker.  The combination is your best bet for short sale success.  Short sales have become such common place that the National Association of Realtors® recently noted that “short sales and foreclosures represent the new ‘traditional’ real estate transaction.”

Only Offers Start the Short Sale Process

The short sale process with the lender does not begin until an offer is made on the property.  Homeowners and agents may feel as if they are making progress by sending the bank their financials, a hardship letter or any other hardship package document, but the fact of the matter is that the lender will not recognize the file as a short sale until an actual offer is sent to them for review.  For the homeowner who simply wants to get rid of their property prior to a foreclosure, what they need most is an offer.   Investors provide offers.  Agents provide the service of trying to locate a buyer who can possibly make an offer by marketing the property on the MLS, on the web, in newspapers and in other publications.  Those services are terrific in most situations but distressed homeowners need an offer quickly for a short sale.  Investors make offers and therefore provide the EXACT service a short sale homeowner needs.

Hiring an agent to obtain approval from your lender for a short sale and then listing the property is not the most effective route to success.  Agents who work with active buyers frequently avoid listings with “Short sale” in the remarks section of the listing because the process often takes more patience than the typical buyer has.  That is why the phrase “short sale” on a listing is the kiss of death.  Nothing will scare a buyer’s agent more than “short sale” on the listing description.  So hiring a listing agent not only requires a buyer to bring forth an offer, they are also handicapped by the fact that buyers’ agents are not showing many short sale listings.

Hopefully it is now clear why an investor is the best choice for a homeowner who needs to do a short sale.  It’s not that agents are less qualified, it’s that they have two major disadvantages inherent in their role in the real estate industry which block them from being the best option:

# 1 – Listing Agents don’t make offers, investors do and short sales don’t start until an offer is made.

# 2 – Short Sale Listing Agents have a very hard time obtaining offers because buyer’s agents avoid bringing their clients to short sale listings.

Call an investor that will purchase your home quickly and also has the experience of being a licensed Realtor.

Call Blue at 423-558-0381  today!

DISCLAIMER:  The following is not tax advice.  Please consult a licensed tax professional for any tax related questions.

Unfortunately, there can be tax consequences triggered by a short sale.  The Internal Revenue Service (IRS) has a rule that when any lender forgives a borrower more than $600, the total amount forgiven is to be reported to the IRS in the form of a 1099C Forgiveness of Debt.  When a lender agrees to a short sale, and decides to forgive the borrower what they lost, they are required by the IRS to send a 1099C in the amount of that loss.

There are two different forms of tax liability relief for borrowers who are going through a short sale.  The first “get-out-of-jail-free-card” for borrowers doing a short sale is the Mortgage Forgiveness Debt Relief Act of 2007 which provides a way for borrowers to avoid the tax liability triggered by the 1099C Forgiveness of Debt Form.  The legislation is targeted towards forgiving people who borrowed on primary residences and used the loans to purchase or enhance their primary residence.   There are some additional restrictions that apply so borrowers should always consult a competent tax advisor before assuming they are free from any tax consequences from a short sale on their primary residence.

But what about doing short sales on investment properties, real estate that is not a primary residence?  That’s what the next tax relief strategy covers.

The second way to maneuver around the tax consequences triggered by a short sale is if the borrower can be recognized as “insolvent” at the time the short sale was closed.  This is a little known part of the IRS tax code, “Insolvency,” which allows borrows to avoid paying income tax on any 1099Cs that are triggered from losses so long as they were flat broke when those 1099Cs were triggered.  There are quite a few restrictions to qualify for insolvency so you certainly need to communicate with a tax expert who understands it.  This second tax liability relief strategy is ideal for those who are doing a short sale on a non-owner occupied investment property.  It was originally created to help those who filed bankruptcy and then at tax time would be “kicked while down” and required to pay income tax on the losses the lenders incurred from the bankruptcy.  Smart tax professionals can use this same loophole to help those who have done a short sale on an investment property.

The only way in which a short sale does not trigger any tax consequences is when the lender does not “write off” the loss or forgive the borrower, but instead, opts to hold the borrower responsible for the loss.  This is often the case when a property goes to foreclosure.  That’s one of the many reasons why a short sale is far better than a foreclosure.  If the lender holds the borrower responsible for the loss, a 1099C Forgiveness of Debt form is not issued, but instead, the lender pursues the borrower for the lost money by filing a judgment with the courts, which then makes the situation worse.   The Mortgage Forgiveness Debt Relief Act of 2007 and Insolvency make the tax consequences of a short sale far easier to deal with than when the lender holds the borrower responsible for the difference.  A great way to have a fighting chance at preventing the lender from holding the borrower responsible for the difference is to do a short sale.

The short sale process begins only when offer is submitted to the lender.  Once a lender has an offer in hand, they typically request financial information from the borrower.  Most assume that this request for financial information is used by a lender to prove that the borrower has a financial hardship.  That is true, however, the main reason a lender requests this information is so that they can determine what assets the borrower has (to which they can go after to offset their losses).  There is nothing innocent about a lender’s request of this financial information; they are looking to take whatever they can get their hands on.

Once the lender has the offer from the buyer and the financial information from the borrower, the lender must then determine if the offer fits within their short sale approval formula and guidelines.  In order to make this determination, they need to know the property’s value and marketability.  They accomplish this by either ordering a BPO (Broker’s Price Opinion) that is completed by a local real estate, an appraisal that is completed by a licensed appraiser or in some cases; lenders may order both a BPO and an appraisal.

Once the lender has their property value and marketability data in hand, the short sale process is just about over.  Most lenders don’t actually own the loans they service, they actually have to submit all this information to the loan owner for final approval.  The loan owner responds (in their own time) with the lowest number they will approve.   The lender sends the final approval letter to the prospective buyer.

In the event the offer is too low, most lenders will counteroffer at the property value amount.  The negotiations at this point are based on values pre-determined by the lender as a percentage of appraised value.  Blue knows the best way to negotiate with the lender to obtain a successful short sale closing.

Since Fair Isaac invented and continues to maintain the credit score formula, naturally, we should ask them how a short sale affects a credit score.  The question posed to MyFICO.com was, “How does a foreclosure or short sale affect my score?”  Their response was:

“Credit bureau reports are limited in how they represent foreclosures today, so its generally not possible to tell from the credit report if a reported foreclosure is a short sale, deed in lieu of foreclosure, settled account, regular foreclosure or some other variation.  The FICO score treats all of these descriptions that appear on credit reports as serious delinquencies, so they have an impact on the score similar to the impact from a charge off, tax lien or account included in bankruptcy.”

The credit score itself is not necessarily helped by a short sale over any other seriously delinquent account, such as a foreclosure.  So the initial score decrease will be the same — experts say a ballpark of 100-200 points on a scale of 300 to 850.  And the higher the credit score the greater the fall.

But the report itself looks far better, being that most underwriters agree that a short sale looks better on a report than a foreclosure.  When you’re doing a short sale it shows that you’ve actually done something about the foreclosure, versus letting it go to foreclosure. In fact, FHA has developed a loan program just for borrowers who have had a short sale.

Also, there is one way to minimize your credit score reduction when dealing with a short sale.  Try to avoid allowing the payments to go behind.  That maybe easier said than done and  I know that sounds like an oxy-moron, doing a short sale while keeping the payments current, but it can be done.   The most destructive item to your credit score is the late payments.  When it shows 30 days late, then 60, then 90 then 120+ days late, that’s when the credit score takes it’s biggest hit.  So if you can squeek by and keep the payments from falling 30 days late, you stand to really minimize the damage to your score from a short sale.

After a short sale transaction is complete,  the lender is going to report to the three credit bureaus (Equifax, TransUnion and Experion) that a short sale was conducted on the loan, as opposed to a full payoff.  Although lenders are subject to change their policies on a moment’s notice, we have seen Countrywide report, “settled as agreed”, Litton Loan Servicing report “account settled”,  HFC Beneficial report “settlement in full” and HSBC report, “Account legally paid in full for less than the full balance”.  This terminology is very similar to what credit card companies report when a borrower settles an old collection for a percentage of the total amount owed.

In most cases, the short sale approval letter will specify the exact wording the lender is going to report to the bureaus.  In isolated cases, you may find where the short sale approval letter does not specify how the short sale will be reported and in such cases, you should contact the department handling the short sale to determine how it is going to be handled.  Some lenders fail to report a short sale to the credit bureaus,  and if the account is more than 120 days past due, many times it will automatically show up as a “foreclosure” on the credit report.  Therefore, it is imperative that you follow up with all three credit reporting bureaus a month or two after the short sale is complete to verify with all three credit bureaus that a “foreclosure” is not showing up.  In such cases, you may have to provide evidence to Equifax, TransUnion and Experion to prove that indeed the property was sold prior to a foreclosure.

Short sales are far superior to foreclosures for all.  Short sales offer borrowers more options to keep credit scores higher,  and allows them more forgiveness in deficiency and brings more dollars to lenders and keeps values of real estate higher for the community.

Short sales cause the credit report the language of a “Settled Account” or “Settled as Agreed.”  A short sale is looked upon as a settlement, which usually takes 3 years to clear up.  A foreclosure lasts 7 to 10 years.  With the short sale, although the score itself is not necessarily better off, the fact that the short sale is recognized as a settlement on the credit report, as opposed to a foreclosure, is very helpful to a borrower.  In addition, the borrower has the option to keep payments current in a short sale so that credit scoring is not stung with late payment penalties.

The difference in what is owed to the lender and the amount that is actually collected is called the deficiency.  A short sale deficiency amount is usually far less than with a foreclosure.  When a property becomes a foreclosure, it typically fetches less from buyers because the word foreclosure is attached to the listing.  Buyers interpret a foreclosure as ripe for the picking and purposely offer less.  The less the property sells for, the larger the deficiency and the more the borrower is responsible for paying back.  Ouch!

With a short sale, most lenders do not attempt to collect on the deficiency, opting instead to simply issue the borrower a 1099C Forgiveness of Debt Form.  This is an IRS requirement.  Any lender who forgives debt above $600 must issue the forgiven party a 1099C.  Thankfully, for most borrowers, the Mortgage Forgiveness Debt Relief Act of 2007 is their get-out-of-jail free card when it comes to this 1099 issue.  For a minority of borrowers who have to do a short sale on an investment property, an intelligent professional tax advisor who understands insolvency is the best shot at circumventing the tax consequences of a 1099.  In either case, a 1099 is almost always a better route to take than a deficiency.  If a true deficiency is acted upon, as is common when someone lets a property go back to foreclosure, it can result in a judgment that a court can order to be collected upon through garnishment of wages.   That’s scary.

In summary, a short sale is much better than a foreclosure for three reasons.  The first reason is that most lenders report a settled account phrase instead of foreclosure to the credit bureaus.  Second, the typical short sale result in a 1099 as opposed to deficiency.  And third, the amount the lender loses is usually far more with a foreclosure.  When you combine these three major items, it’s clear to see that a short sale really is better than a foreclosure.