There is so much confusion and outright misinformation in the market place with regards to “loan modification”, “short sales”, and “foreclosure”. It is amazing the lack of education the public is receiving. I am going to briefly layout some concepts to clear up some misinformation.
Let me first make it very clear that this is in no way any type of legal or tax advice. Before making any clear cut decisions, one should seek the advice of a professional such as a CPA or attorney.
Unfortunately, it seems that some of them are clearly uninformed. I had a real estate agent approach me regarding loan modification on five properties that she owned. She told me that an attorney had advised against “short sale” and that “foreclosure” was the way to go due to the fact that in a “short sale” the lender would go after her for the “deficiency”…and in “foreclosure” that would not happen. “It had not happened in his 25 years of practice”. I am here to tell you that is just not the case in the state of Nevada. This could vary from state to state…a reason to consult with a “competent” real estate attorney or CPA.
In the state of Nevada…it is pure and simple…“short sales” work! If we cannot qualify you for a loan modification, we recommend “short sale”. In a “short sale” situation, the borrower is close to default and in serious financial trouble. The lender is agreeing to allow the real estate to be sold “short”…for less than the value of the note against it. With a “short sale”, the house is put on the market at market price, and a “short sale” package is submitted to the lender with a letter of hardship from the borrower. The house is sold and the lender agrees to take less to move the property. This process can take up to 6 months to complete. The borrower has stopped making payments during this time. You must understand the lender is agreeing to take less, therefore there is no “deficiency judgment”. Now, let me clarify one thing…this directly applies to only one loan against the property. If there is a second as well, the situation becomes more convoluted, as the second trust deed is an unsecured note. Some lenders are putting clauses into the “short sale” contract stipulating that at a future date, “they may be able to pursue the borrower for that deficiency if they so desire”. This can happen in a second trust deed situation. A good real estate agent will aggressively work on the lender to keep that out of the contract. A good reason to choose a very experienced, aggressive, real estate agent. I have developed a great team of referral affiliates such as asset protection attorneys, CPA’s, as well as real estate agents that I can refer to in the event that loan modification is not the right choice for my clients.
If you choose to go the route of “short sale”, you will most likely get a 1099C sent to the IRS from the lender. Since they are taking the loss, the will write it off and you will see the deficiency as taxable income. According to the “2007 Mortgage Debt Relief Act of 2007”, if it is your primary residence or if you are insolvent…i.e. your net worth is zero or less, you will pay no tax as long as you or your accountant fills out the proper form as noted on the IRS website. Go to IRS.gov. You can read the entire “2007 Mortgage Debt Relief Act” there and see what form needs to be filled out to avoid paying the tax.
In the state of Nevada, if you allow your real estate to be “foreclosed” on…
1.] There is a NRS that allows for the lender to file a “deficiency judgment” against you without going to court. The lender goes to the county and files the papers. They do not have to file a lawsuit and they are doing it.
2.] Fannie Mae and Freddie Mac guidelines will not allow you to purchase a home for at least 7 years. In a “short sale” situation it is 3 years.
3.] The “foreclosure” will remain on your credit for at least 7 years. On a “short sale”, it will remain for 3 years and will show up as a “settlement”.
4.] In a “foreclosure”, the note is immediately devalued by over 50%. The lender will also incur between $20-40K in legal fees to clean up the transaction, along with possible repairs to the property to get it ready to be sold.
5.] In a “short sale” situation, the lender may get 60-70% of the note value, so why would a lender not take a “short sale”? Often times, common sense needs to prevail when we advise our clients…
For some, this will shed some light, for others, they will not take the time to do the due diligence and educate themselves properly. It is your client…it is our economy…doesn’t it make sense to try to do the best thing for our clients and help this economy to rebound?…An Empowering thought!
Feel free to contact email me directly for a discreet consultation…