January 31, 2007

Get familiar with the term and terms of the "Short Sale". You're gonna be hearing that one a lot now


This basically covers why anyone trying to avoid foreclosure via the short sale route is screwed either way...

A short sale of real estate happens when the owner of the home or property owes more on the property than what it sells for.

This can happen when a home owner chooses to sell when property values have dropped drastically or when an owner has taken out equity loans on top of the mortgage loan and the loans equal more than the value of the home.

A short sale can also occur when a homeowner is forced into foreclosure and the bank sells the house for less than the amount still owed. In any case, when all is said and done, the owner comes out owing money instead of earning a profit after the sale of the property.

The credit implications for a short sale are very different for those voluntarily selling their property and those forced into foreclosure.

If the short sale is due to foreclosure, the property owner's credit could be negatively and severely affected.

Often, the bank chooses not to sue, but to take the loss as a tax write-off. In this case, there would be no deficiency judgment on the homeowner's credit report; however, there is another implication. The $30,000 that the homeowner did not have to pay would be considered by the IRS to be income.

23 comments:

Anonymous said...

Could that be the reason why the stock market may be affected? Looks like the market and hedge funds/housing are tightly intertwined:

http://www.financialsense.com/
Market/wrapup.htm

Anonymous said...

The REAL homework assignment shows up...

buyerwillepb said...

This new era will give the phrase, "Take it in the shorts" a whole new meaning.

Anonymous said...

Debt forgiveness equals passive income realization equals i.r.s. phone call and/or visit next year.

i.r.s. contracted last year with three large collection agencies to go after the tax cheats that they find who owe $25k or less. i.r.s. needs to reserve their on staff "big guns" to go after the really big fish. sheeple, step right this way for your fleecing!

devestment said...

I sold $10,000 short in 1991 after puting 30% down, making payments for two years and doing many improvements.

I remember like yesterday the plain folks bringing their heirlooms in to my antique store for sale.

What I lost in real estate I made up in chattle.

Now ebay has killed the chattle and all that remains of value is oil, gold, and the paper to buy it.

Fed pause in the midst of a international gold rally? I guess paying double for groceries, housing, and energy don't count as inflation.

Detachable Cletus said...

A year ago I kept asking people about the tax implications of short sales and no one would believe that it was possible the IRS would "1099" someone (I think thats the form name - 1099).


Now I gotta find out if we have an equivilent in Canada.

Anonymous said...

I guess paying double for groceries, housing, and energy don't count as inflation.

In your imaginary world what color is the sky?

Double for housing? Hmm here I was thinking housing is crashing. Which is it? Only in HP world can housing cost double and be crashing at the same time.

Double for energy? Oil's down $20 from it's summer peak. Gas is under $2 for morst of the country.

Groceries? I rarely buy any so I can't really comment. See unlike you $8 an our renters, I don't give a damn if milk goes up ten cents.

Anonymous said...

Groceries? I rarely buy any so I can't really comment. See unlike you $8 an our renters, I don't give a damn if milk goes up ten cents.

Wednesday, January 31, 2007 9:12:49 PM


Damn, I wish I could get free fries from my job too... or maybe your doing the out-of-date dumpster diving behind the grocery store. Which makes the price a moot point, right?

Anonymous said...

It is a 1099C Discharge of Indebtedness.

Anonymous said...

Requirements

GO TO THE BOTTOM TO GET TO THE "BIG ONE"

Debt discharged in a business bankruptcy - not personal bankruptcies (so all you Casey Serins with the LLC's get your ears on rubber duck! - Convoy!)

Debt forgiven is principle over $600

Collection Activity discontinued

Expiration of non payment testing - something done on creditor's part in previous 12 months to get the deadbeat to pay

Statute of limitations not exceeded

Debt extinguished in receivership or Foreclosure if the creditor is barred by a court to collect (rare)

Debt extinguised in Probate

and finally, the BIG ONE

Debt Extinguished by Foreclosure Remedies

this is the big one. Some States prohibit the collection of a deficiency balance after a foreclosure. If the creditor is dealing with another state's laws, such prohibitions may trigger the generation of a 1099-C.

Anonymous said...

Attempt to gain a longer view than just what the decline has been from a peak. What was gas 4 years ago? What is it today?
Yes, we have inflation. $8.99 a pound today in a store near me for red peppers! PODUCE not meat! $15 a pound for pecans. This is scary, folks. Wake up and see what the bankers and Fed are doing to our country. The masses have been suckered into a debt trap and the trap has sprung.

Anonymous said...

"Groceries? I rarely buy any so I can't really comment. See unlike you $8 an our renters, I don't give a damn if milk goes up ten cents."

Thank you Mr. Know it All

Rocky the Flying Squirrel

Anonymous said...

Please explain: Why do the ADVERTISE a listing as a short sale? I mean, if someone bought a house nothing down for $500K and the market value has dropped to $300K, what does it matter to me that he's underwater? (other than getting my sympathy) So why TELL me it's a short sale? I'm obviously missing something.

az_mtb said...

Anonymous said...

I guess paying double for groceries, housing, and energy don't count as inflation.

In your imaginary world what color is the sky?

Double for housing? Hmm here I was thinking housing is crashing. Which is it? Only in HP world can housing cost double and be crashing at the same time.

Double for energy? Oil's down $20 from it's summer peak. Gas is under $2 for morst of the country.

Groceries? I rarely buy any so I can't really comment. See unlike you $8 an our renters, I don't give a damn if milk goes up ten cents.


-----------------------------------

Come on man, don't play with his words. You know what he meant. Housing HAS doubled in many of the "bubble" areas compared to 5 years ago. Oil HAS doubled in price as well. Groceries are much higher than when I was in college, which was pretty recently. (~4 years ago)

I am certainly NOT an "$8 per hour renter" as you so arrogantly put it. Actually I make about $20 more an hour than that.

I am a younger professional who entered the workforce just as all this madness was getting underway. I also have a well-paying job, which unfortunately happens to be located in one of the so-called "bubble states". (AZ)

Even with my wife and my six figure incomes, we still can't afford a house here without completely exhausting our personal savings accounts, which I wouldn't dream of doing. Don't even bring up the toxic loans out there, I simply refuse to get one of those.

The rent-to-own ratio here is completely out of whack. There is no way it can sustain current levels, when someone like me can't even afford to buy a home here. I can't imagine what some of the blue-collar folks in this town must have to do just to make their mortgage payments every month.

We are renting a brand new house here for $700+ less per month than it would cost to buy the same house.

You are delusional if you think this is normal.

Anonymous said...

Please explain: Why do they ADVERTISE a listing as a "short sale"? I mean, if someone bought a house, nothing down, for $500K and the market value has dropped to $300K, what does it matter to me that he's underwater? Other than eliciting my sympathy, what does my knowing it's short sale do? I'm obviously missing something.

Anonymous said...

Anonymous said...
Please explain: Why do they ADVERTISE a listing as a "short sale"? I mean, if someone bought a house, nothing down, for $500K and the market value has dropped to $300K, what does it matter to me that he's underwater? Other than eliciting my sympathy, what does my knowing it's short sale do? I'm obviously missing something.

Wednesday, January 31, 2007 10:44:50 PM & Wednesday, January 31, 2007 10:47:03 PM
-------------

There are two implications, one real & one a gimmick.

Real: The bank must approve/accpet the offer. The seller cannot even if they want because the bank has to discharge the remaining balance to extinguish the mortgage (lien on the property so that it can convey). If you have more than one mortgage then the second mortgage must also be discharged. That could be a different dept in the same bank or a completely different bank.

GIMMICK: The short sale could just be an illusory marketing tactic to get you in the door so you think you're getting a good deal. Do not fall for it. Plus even if it is a short sale who is to say that its still a good deal. If the seller took out a 125% mortgage & paid no principle and they cut 10% off the loan amount you're still paying more that the place was, is and will be worth. Do your homework to verify that the short sale is really a good deal & be prepared for the bank to take forever to decide and quite possibly refuse to accept the deal.

Anonymous said...

Last I checked, in the wonderful state of Californication, if the deed of trust was purchase money and there is a deficiency after foreclosure, the lender may NOT try to collect the balance so the debtor will be "forgiven" but then have to deal with the IRS later.

Smug (and getting more smug with each passing month).

Anonymous said...

"So why TELL me it's a short sale? I'm obviously missing something.

Wednesday, January 31, 2007 10:44:50 PM"

For the same reason they dump chum in the water to start the feeding frenzy.

To attract "bargain hunters" to a property listing.

So the potential buyers will forget about 'value' and just concentrate on the "sale."
Like the fliers in the Sunday paper advertising:
Emergency Inventory Reduction
Going Out of Business
Overstock Liquidation

Or the radio ads blairing those things about any of a dozen local car dealers every 9 minutes.

Hope that helps.

Anonymous said...

Man you renters are funny. On the one hand you are against owning a home and a fixed monthly payment for 30 years.

Then you turn right around and compalin about how high inflation is getting.

Geniuses, the best protection against inflation is a fixed payment on debt.

FMW said...

Californication
*******
Red Hot Chilie Peppers, Orlando Arena yesterday.

devestment said...

It sounds like your sky is black and white Mr. Anonymous.

In my world the sky is orange, blue, and crimson peach amidst a swirl of heavenly illuminated atmosphere of golden hue.

When I look into it I know in my heart that there is so much more than what is man made. A feeling of easiness comes over me and I am at peace.

Natural Eyebrows said...

Tax people call the problem "phantom income." If debt is forgiven, your balance sheet improves by that much, and that meets the definition of "income" under the Internal Revenue Code. BUT, if the borrower is already insolvent, there is no phantom income under the IRC. Most homedebtors who just walk away and mail the keys to the bank will be insolvent and have no tax liability. Some speculators could get burned big time.

If you know a homedebtor facing this issue, tell him to get a good CPA to do his tax return for the relevant year. I have nothing against H&R Block, but this is not a job for them.

Bankruptcy also has appeal for the strapped homedebtor. If you discharge the debt in BK before it is ever forgiven, there is no taxable event. This was easier before than now, but anyone facing this problem should investigate the possibility of a bankruptcy solution.

Anonymous said...

"Double for housing? Hmm here I was thinking housing is crashing. Which is it? Only in HP world can housing cost double and be crashing at the same time.

Double for energy? Oil's down $20 from it's summer peak. Gas is under $2 for morst of the country.

Groceries? I rarely buy any so I can't really comment. See unlike you $8 an our renters, I don't give a damn if milk goes up ten cents. "

The above looks like a post from NuttyStenchFart, a well-known troll of the now dead Yahoo Discussion Boads.