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REPO AND SHORT SALE HOMES INFO
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Orange County Short Sale This is not meant to be a complete or exhaustive site about Orange County Short Sales or Orange County Foreclosures. Nor, are we giving legal advice in anyway. All the details and nuances about Short Sales and Foreclosures would require hundreds of web pages and we encourage you to do additional research about the subject and professional advice if possible. After you read the Short Sale FAQ, if you do have additional questions about the Short Sale process or if you need help with your specific case please contact us directly.
Orange County Short Sale FAQ Common Questions for Orange County Short Sales
1. What is a Short Sale?
- A short sale is the process by which a homeowner can sell a house for less money than he actually owes on the mortgage(s). This is done by the seller and the listing agent providing proper documentation to the mortgage lender(s) to convince them to reduce the mortgage balance to allow the sale. The mortgage lender (or bank) actually takes a loss (or write-off) on the mortgage because the value of the home has fallen below the mortgage balance AND the homeowner is in poor financial condition that will not allow him to continue to pay on time. If the bank approves the discount on the mortgage, the home can be sold for a lower price without the seller having to come up with cash to cover the shortfall, and the mortgage is satisfied and the foreclosure process stops.
2. What type of situation is the short sale best for?
- Most short sales are done on properties in foreclosure. This means the homeowner is at least 3 payments behind and the foreclosure suit has been filed by one of the mortgage lenders. Recently, more mortgages that are simply behind or “in default” are considered short sale.
3. How does a homeowner benefit from a short sale?
- First and foremost, it relieves the stress of being in foreclosure and being hounded by the mortgage lender; and it allows homeowners to get rid of their big mortgage payment and move on with their lives. A short sale allows you to stop the foreclosure and get a fresh start. In our experience, this is the primary benefit to homeowners. They are tremendously thankful to just relieve the burden that their home and mortgage have become. A short sale also prevents additional damage to your credit. Having some late payments and a foreclosure filed has already done damage to your credit. However, a completed will do much more damage and lower your credit score tremendously. Obviously, if you have to declare bankruptcy, that is a huge black mark on your credit. A short sale results in the mortgage actually being paid off, which reflects positively compared to a foreclosure.
4. Why would a bank or mortgage lender want to do a short sale?
- A common saying is that banks are in the business of lending money and do not want to own real estate. This is slightly misleading but is essentially true. When a bank takes a property back via foreclosure, it is a long and expensive process and often results in holding the property in their inventory as a non-performing asset. Banks have a limit to the amount of non-performing assets they want to hold. Once this limit is exceeded, they have a strong incentive to get rid of the properties at discount prices. For a lender, doing a short sale avoids many of the costs associated with the foreclosure process. Attorney fees, delays from borrower bankruptcy, damage to the property. Costs associated with resale, property tax, insurance, etc. All must be paid by the bank during a foreclosure. In a short sale scenario, the lender is able to cut its losses by getting rid of the property faster.
5. Will a short sale “save my house”?
- IT IS DIFFICULT TO DO A SHORT SALE. Lenders need to see that you simply cannot pay the bank before they will take on a short sale. On the real estate side, if you need help to try to "short-sell" your home, you need to demonstrate a Financial Hardship or be in default on your mortgage. If you don't have one of these, we will not attempt a short sale.
6. Who owns the house after a short sale?
- The purchaser of the house is the owner after a short sale just as in a normal sales transaction. The mortgage lender is paid off and the previous homeowner moves to a different home.
7. What do I do about my back property taxes when I do a short sale?
- Just as in a normal home sale, property taxes are the responsibility of the homeowner until the date the sale is closed. Then they became the responsibility of the buyer or investor. If your property taxes have not been paid, this will affect the negotiations between the buyer and the bank, so you must inform us or any buyer of those taxes owed.
8. Can I "short-sell my own house?
- No, this would be illegal. A short sale must be an “arms length” transaction. You cannot short-sell your own house not even close family members nor friends can perform a short-sale for you either. In a short sale, the lender is agreeing to discount the mortgage amount due to legitimate hardships; but not so that the homeowner can make a profit. No money from a short sale transaction can be paid to the homeowner (seller). Lenders will NOT approve any short sale in which they suspect the foreclosed homeowner will profit.
9. Can't I just go down to my branch or mortgage broker and talk to them about reducing my mortgage?
- Unfortunately, things don't work that way anymore in the banking business. Once you obtain a mortgage, it typically gets bundled with other mortgages and sold to other banks or investors. Oftentimes, the company to which you make your payments is not even the one who holds your mortgage; they are simply paid to “service” the loan. Also, once your mortgage lender begins the foreclosure process, the file is turned over to a loss mitigation company so the “lending” departments or the branch no longer have anything to do with the loan. All negotiations regarding the short sale are done between the listing agent and whatever loss mitigation or asset management company works for the lender.
10. Do you handle houses in my area?
- Our focus is in Orange County, Los Angeles area and the Inland Empire areas; however, we will consider listings in other areas of Southern California. In addition, we work with other short sale specialists in the region and can often refer your case to another Short Sale Realtor if we cannot help you. We typically need to have some knowledge of the local real estate market you are in to be able to make a convincing case to a lender to short sale your mortgage. To see if we might be able to handle your short sale. Please, email us at email@example.com
11. Do you handle duplexes, apartment buildings, condos or commercial property?
- We do handle all residential properties in all price ranges within our locales and specialties. However, we'd first need to evaluate what type of property, location, condition and type of ownership. We'd need to know if it is Commercial, Residential OR Mixed-Use (Owner / Non-Owner Occupied) and whether it is sellable or if certain repairs & improvements must be made.
12. My house is already listed for sale on the MLS but isn't selling. Can I do a short sale?
- Yes, you can and it is relatively common. Some lenders even require that a house be listed for sale BEFORE approving a short sale in order to show that a discount is necessary. As described in an earlier answer, a typical short sale situation is the one like this:
1) Homeowner purchases a home for $600,000 in 2004 with 5% down payment.
2) In 2005, value has increased and interest rates have declined so the homeowner refinances to pull cash out. Home value $660,000, new mortgage $660,000.
3) In 2006, homeowner gets laid off and continues to make payments from savings.
4) By 2007, savings are gone and still no job. Homeowner begins to miss payments and decides to sell home for the former appraised value of $660,000.
5) As the months pass, the home is not sold because values have fallen to $600, 000 and after 3 missed payments, the foreclosure process has begun. The Real Estate Agent presses the homeowner to lower the selling price, but that would require the homeowner to come up with cash at closing to cover the mortgage shortfall.
6) Homeowner is stuck n the house. He can`t sell and can`t catch up with the payments, and the foreclosure is proceeding toward eviction.
13. My house is really nice, why is the short sale offer so low?
- Sellers often have an emotional attachment to their home and may feel an investor’s short sale offer is too low. Sellers are often in denial about how bad the housing market really is - especially, how far the value has declined.
14. What if a bank doesn't accept the short sale?
- Again, if the bank does not accept the short sale offer, there is no transaction and the home is still owned by the foreclosing homeowner and the foreclosure process continues.
15. How long does a short sale take? - I need to get out now!
- A short sale takes approximately 60 days to complete and sometimes longer. This is very important. This complicated process takes time so to have the option of a short sale, you must act soon. If you wait until 1 week before eviction, no one can help you do a short sale. It is simply impossible. DO NOT WAIT.
16. Do I have to sign a Borrower's Authorization?
- In order to both determine if your lender will consider a short sale and then to actually negotiate the short sale, we'd need to be able to speak to your lender about the mortgage. The lender will only speak to those you have authorized them to speak with.
17. How does Real Estate Brokerage make money on a short sale?
- We make a standard real estate sales commission that is paid by the lender only in the event of a successful short sale. It gets properly declared on the closing statement with utmost transparency.
18. If you expect to make money on my short sale, can I get some of it?
- Yes, though it can make the process more difficult because the price must be substantially lower. The key is to be able to show the bank`s appraiser all the work that needs to be done. Let us know if this is the case with your home.
19. Can you do a short sale on my house?
- If you think a short sale may be appropriate for you, the first step is to Email us at firstname.lastname@example.org
20. I have more than 10% equity in my house. Can I still short-sell?
- Probably not. You are much better off seeking our services for a normal open market sale or a refinance.
21. My husband/wife/brother is also on the deed with me but doesn't want to sell. Can I still do a short sale?
- No. All parties listed on the current deed or mortgage must sign the short sale purchase agreement. There are no exceptions to this.
22. I have other liens (i.e. taxes, mechanics, IRS, court judgments) on my house. Can I still do a short sale?
- Yes, but again, it gets much more complicated and will take longer. If this is the case on your home, be sure to COMPLETELY list all potential liens you have. Each lien holder will have to be negotiated with individually (and consult with a licensed attorney if you have to). A short sale in this circumstance will take longer than 60 days.
23. I am an heir to an estate that has a mortgage that I can't afford to pay. Can I do a short sale?
- Yes, this is common. When you contact us, make sure to note the homeowner is deceased and have all the other paperwork necessary for substantiating the validity of the inherited property.
24. I have 2 or 3 mortgages on my house. Can I still do a short sale?
- Yes, each mortgage or Line of Credit (HELOC) can be negotiated individually. It is important to know which mortgage filed the foreclosure or if more than one are in foreclosure. For instance, which mortgage was filed first?
25. Is my house a good candidate for a short sale? - I have gotten dozens of cards and letters saying they can help me with my foreclosure, but they never do, how is this different?
- There are many different types of people who work in the “distressed property” area. Some are legitimate, some are not. Many claim to be able to work miracles on your credit or save your house. Most will either charge high upfront fees or cannot really help you. Most will only “help you” if you have a large amount of equity in your home. They will use several techniques to get you to sell your house to them and take some of your equity. Try your best to avoid them.
27. I have already declared bankruptcy. Can I still do a short sale?
- Yes, but it is more difficult. If the property is currently involved in a bankruptcy, the lender is not the only one who has to approve a short sale. The bankruptcy trustee will also have to approve it. This creates an additional layer of oversight and and an additional party which wants to squeeze all it can out of the homeowner. It can still be done, but all conditions have to be perfect. If you are considering bankruptcy as a way to stop the foreclosure, be sure to get good legal advice, since it is possible that a bankruptcy may not completely stop a foreclosure. Lenders often can get the bankruptcy set aside to continue to pursue a foreclosure. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for this relief. The exclusion doesn’t apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition. The amount excluded reduces the taxpayer’s cost basis in the home. More details. Further information, including detailed examples, can also be found in Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments. The questions and answers, below, are based on the law prior to the passage of the Mortgage Forgiveness Debt Relief Act of 2007.
28. What is Cancellation of Debt?
- If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes, depending on the circumstances. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven, the amount you received as loan proceeds is reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.
Here’s a very simplified example: You borrow $10,000 and default on the loan after paying back $2,000. If the lender is unable to collect the remaining debt from you, there is a cancellation of debt of $8,000, which generally is taxable income to you.
29. Is Cancellation of Debt income always taxable?
- Not always. There are some exceptions. The most common situations when cancellation of debt income is not taxable involve: Bankruptcy: Debts discharged through bankruptcy are not considered taxable income. Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value of your total assets. Insolvency can be fairly complex to determine and the assistance of a tax professional is recommended if you believe you qualify for this exception. Certain farm debts: If you incurred the debt directly in operation of a farm, more than half your income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your cancelled debt is generally not considered taxable income. The rules applicable to farmers are complex and the assistance of a tax professional is recommended if you believe you qualify for this exception. Non-recourse loans: A non-recourse loan is a loan for which the lenders only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income. However, it may result in other tax consequences, as discussed in Question 30 below.
30. I lost my home through foreclosure. Are there tax consequences?
There are two possible consequences you must consider:
1) Taxable cancellation of debt income - (note: as stated above, cancellation of debt income is not taxable in the case of non-recourse loans) - A reportable gain from the disposition of the home (because foreclosures are treated like sales for tax purposes) - Note: Often some or all of the gain from the sale of a personal residence qualifies for exclusion from income.)
2) If you have owned and used the home as your principal residence for periods totaling at least two years during the five year period ending on the date of the foreclosure, you may exclude up to $250,000 (up to $500,000 for married couples filing a joint return) from income. If you do not qualify for this exclusion, or your gain exceeds $250,000 ($500,000 for married couples filing a joint return), report the taxable amount on Schedule D, Capital Gains and Losses.
31. I lost money on the foreclosure of my home. Can I claim a loss on my tax return?
No. Losses from the sale or foreclosure of personal property are not deductible.
For example, a borrower bought a home in August 2005 and lived in it until it was taken through foreclosure in September 2007. The original purchase price was $170,000, the home is worth $200,000 at foreclosure, and the mortgage debt canceled at foreclosure is $220,000. At the time of the foreclosure, the borrower is insolvent, with liabilities (mortgage, credit cards, car loans and other debts) totaling $250,000 and assets totaling $230,000. The borrower figures income from the foreclosure as follows: Use the following steps to compute the income to be reported from a foreclosure:
32. I don’t agree with the information on the Form 1099-C. What should I do?
- You should contact the lender. The lender should issue a corrected form if the information is determined to be incorrect. Retain all records related to the purchase of your home and all related debt. You can also consult with a neutral party financial/tax adviser.
33. I received a notice from the IRS on this. What should I do?
- The IRS urges borrowers with questions to call the phone number shown on the notice. The IRS also urges borrowers who wind up owing additional tax and are unable to pay it in full to use the installment agreement form, normally included with the notice, to request a payment agreement with the agency.
34. Where else can I go to get tax help?
- If you are having difficulty resolving a tax problem (such as one involving an IRS bill, letter or notice) through normal IRS channels, the Taxpayer Advocate Service may be able to help. For more information, you can also call the TAS toll-free case intake line at 1-877-777-4778, TTY/TDD 1-800-829-4059. In some cases, you may qualify for free or low-cost assistance from a Low Income Taxpayer Clinic (LITC). LITCs are independent organizations that represent low income taxpayers in tax disputes with the IRS. Find information on LITCs in your area. Morgan Realtors 1-888-706-1700 Related Items: Publication 523, Selling Your Home Publication 544, Sales and Other Dispositions of Assets Publication 908, Bankruptcy Tax Guide Form 1040, U.S. Individual Income Tax Return Form 1040, Schedule D, Capital Gains and Losses Form 1099-C, Cancellation of Debt Form 9465, Installment Agreement Request... Moreover you are strongly encouraged to seek advice from your attorney and/or tax consultant.
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