If you are looking for short sale information you are probably going through some difficult times right now. I specialize in short sales and assure you that I understand your issues. Below I have compiled some Frequently asked questions so please review them. If you have further questions feel free to contact me at any time. Please remember that time is of the essence so contact me to help you while you still have time and options.

What is a Short Sale?
How much will a short sale cost?
Do I will qualify for a short sale?
How will it affect my credit?
Will I have to pay taxes on the lenders loss?
Will I have to pay state taxes on the lenders loss?
Can my lender come after me for the money they lose?
What if I have a first and a second loan on my property ?
How will I know that I am being released from the debt?
What are the advantages of a short sale vs. letting my home go to foreclosure?
Are there any advantages to letting my home go to foreclosure vs. doing a short sale?
How long will a short sale take?
Do I need to be behind on my payments to do a short sale?
Do I need to hire an attorney to do a short sale?
I found an attorney's short sale web site that talks about a new law in California that, as of July 1 2009, limiting short sale negotiation to attorneys. Is this true?
Who will be negotiating my short sale with the bank?
Should I file bankruptcy? Will it allow me to keep my home? I have heard the lender cannot foreclose if I file bankruptcy.
Can any agent do a short sale?

Q: What is a Short Sale? Back to top

Answer: In a short sale, also known as a short pay, the lender agrees to settle the debt owed on the property for less than the full amount. “Settled” means that the lender is writing off the debt (which is why you get a 1099 after a short sale for the amount of debt forgiven) and that they are not going to go after you for the money they lost by filing a deficiency judgment in the future. That being said, every bank has different policies and procedures for short sales, and every situation is different as well. Are you considering short selling an investment property? A vacation home? This will change the dynamic of the short sale and it is best to call a Real Estate professional to find out what the possible repercussions are.  There are also tax considerations involved so it is always advisable to speak to a tax professional.

Q: How much will a short sale cost me? Back to top

Answer: A short sale costs the seller nothing – the lender pays all closing costs, escrow fees, commissions etc. The lender may also pay any outstanding property taxes.

Q: How will I know if I will qualify for a short sale? Back to top

Answer:     For many people a short sale may not be the best option, everyone’s situation is different.  Call our office and we can tell you over the phone whether you will likely qualify. We can also tell you about other possible options that may be better suited to your needs. The overwhelming majority of our clients are approved for a short sale because 1) we know how to submit the short sale package in such a way that the lenders will approve them and 2) we have a tremendous amount of experience with short sales and negotiating with the lenders.

Q: How will a short sale affect my credit? Back to top

Answer: This is a great question as there is a lot of misinformation on the internet about this topic. A short sale is recorded on your credit report as “debt settled for less than the amount owed”. Compared to a foreclosure on your credit a short sale is relatively minor. The more established your credit, the less of an impact it will have on your score.

The reason you often hear and read that a short sale will drop your credit 100 points or more, is that, many people in need of short selling their home simply cannot afford the payments anymore and have stopped making them. If you stop making your mortgage payments for 4 months, regardless of whether you do a short sale or not, 4 months of missed mortgage payments will have a significant negative impact on your credit. In other words, it is the missed mortgage payments that have the big impact on your credit, not the short sale itself.

With this said, if you are already behind on your payments, you have already incurred the majority of the hit that a short sale will have on your credit. Doing a successful short sale at this point will insure that your debt is settled with your lender.

Finally, there are various credit repair agencies that can repair your credit by removing late payments from your credit report after a short sale.

Q: Will I have to pay federal taxes on the money my lender loses in the short sale? Back to top

Answer: There are several different scenarios with regard to whether or not you will owe federal income taxes on the loss the lender takes in a short sale.

When you do a short sale, your lender agrees to settle the debt on the property for less than the amount they are owed. The IRS therefore allows them to write off this loss, which is why your lender will send you a 1099-C after the short sale.

The IRS considers “debt relief” to be income for tax purposes. In other words, if your lender writes off $50,000 on your short sale, they will send you a 1099-C for that amount, and you would include that when you file your income taxes. The “C” stands for “Cancellation of Debt” and the law says cancelled debt is taxable as income.

There are however a few exceptions that most people who do a short sale qualify for that exclude them from having to pay taxes on their short sale.

Thanks to the Mortgage Tax Debt Relief Act that George W. Bush signed into law in January of 2008, homeowners who do a short sale on their primary residence, and have a purchase money loan (in other words, they have not pulled cash out of their home with a cash-out refinance) pay no taxes on the loss that their lender incurs in a short sale.

Homeowners who have pulled out cash from their home but have put that money back into their home to “substantially improve” their home, also are excluded from taxes on the short sale.

All other short sale scenarios – if you pulled cash out on your primary residence but spent it something other than upgrading your home or if you are doing a short sale on a second home or investment property – result in a taxable event unless you qualify for the “Insolvency” exclusion.

The IRS does not require you to pay taxes on the loss the lender takes in a short sale if, at the time of the short sale, you are insolvent. Insolvency means your debts (including your mortgage) exceed the value of all your assets. In other words, if, at the time of the short sale, you have more debt than you do money or assets, you are considered insolvent.

Many people who find themselves facing a short sale are in exactly this situation and are thus excluded from paying taxes on a short sale. We recommend you check with your CPA or accountant or go to the IRS web site and look up IRS Form 982, which is the IRS form for debt relief and short sales. The IRS gives an explanation of “Insolvency” on this form.

Finally, the time period for The Mortgage Tax Debt Relief Act was originally only slated to go until the end of 2008, however it has now been extended to the end of 2012.
As stated before it is ALWAYS a good idea to speak to a tax professional if you have any questions about possible tax liabilities.

Q: Will I have to pay CA state taxes on the money my lender loses in the short sale? Back to top

Answer: California has passed its own version of the federal Mortgage Tax Debt Relief Act. It is Senate Bill 1055, which conforms to the federal law described in detail above, but applies to California state income taxes on a short sale.

There are differences between the state and federal law. For example, the term of the California law was only until the end of 2008. As of Jan 2009, this law is no longer in effect.

However, CA Revenue & Taxation Code Section 17131 provides that, unless there is some specific California statute to the contrary, California law tracks federal law on what income is excluded from taxation. Since there is currently no specific California law on this issue, short sales do not produce taxable income under California law as long as the Federal Mortgage Tax Debt Forgiveness Act is in effect (until the end of 2012).

With this said, we recommend you review your specific tax scenario with your CPA or accountant and have them answer any tax questions that you have. We are not tax advisors and do not dispense tax advice.

Q: Can my lender go after me for the money it loses in the short sale? Back to top

Answer: The point of a short sale is to get out from under the debt of the mortgage. This is why your lender will send you a 1099-C after the short sale. The “C” in “1099-C” stands for “Cancellation of Debt.” Your lender cannot write off their loss on their corporate taxes, send you a 1099-C so you have to pay taxes on the loss, report the short sale as a “settled debt” on your credit and then turn around and go after you for the money. We have encountered situations where the lender, usually the second, has already “charged-off” the loan due to non-payment. This means they have sold the debt to another party who may still try to collect. Of course, the objective of a short sale is full satisfaction of the lien, but in this case, yes, you could still be liable for the money lost. Some lenders will try to force the borrower to sign a promissory note to close the deal.

We do not ever recommend that our clients sign a promissory note or close escrow without a full written release from their lender(s).

Q: What if I have a first and a second loan on my property with 2 different lenders (or the same lender)?
Answer: We have found that most people that we do short sales for have a first and a second loan, often with 2 different lenders. I won’t lie, a short sale is much easier to negotiate if the first and second are with one lender, but having two different lenders is not going to prevent a successful short sale. In either case, the same thing needs to happen, all lenders involved need to approve the short sale and agree to settle the debt. The first lender does not want to incur the costs of foreclosure and will usually offer the second a small share of the money in order to get them to agree to the short sale. If the first forecloses, the second knows they will get nothing and will therefore usually agree to the short sale to avoid that.
Q: How will I know that I am being released from the debt? Back to top

Answer: Once the short sale is approved it will be stated clearly on the bank’s short sale approval letter. It will be stated in words to the effect of:  they are “releasing the lien”, “accepting a short payoff to satisfy the lien”, “reporting the sale as a settled debt to the reporting agencies”, “issuing a full satisfaction of the mortgage”, “not pursuing a deficiency judgment”, or some other variation that states they are settling the debt for less than what they were owed.

You will also be issued a 1099-C after the short sale, confirming that the debt has been written off and is settled. Your lender cannot write off the debt, issue you a 1099-C & then go after you for the deficiency.

Q: What are the advantages of a short sale vs. letting my home go to foreclosure? Back to top

Answer: The main advantage to doing a short sale is that you will not have a foreclosure on your credit. Another huge advantage to doing a short sale is that the time you must wait to purchase another home is much less as compared to a foreclosure or a bankruptcy.

Per recent Fannie Mae / Freddie Mac guidelines, borrowers who file bankruptcy or go through foreclosure have to wait up to 7 years to buy another home.

By contrast, the new guidelines stipulate only a 24 month waiting period after a short sale, so borrowers who do a short sale can buy again in just 2 years.

Q: Are there any advantages to letting my home go to foreclosure vs. doing a short sale? Back to top

Answer: I see no advantage to just walking away from your home without even attempting to mitigate your losses. When you let your home go to foreclosure you either run the risk of being liable for the deficiency amount or liable for the income taxes on that loss.

Secondly, you will see a huge drop in your credit rating and you will not be able to buy a home or get any decent credit for up to 7 years.

Compare this with a short sale, in which the lender agrees to SETTLE the debt for less than the amount owed. If you have recourse loan, you may be liable for income taxes on the lender’s loss (just as in a foreclosure) but you will not be liable for the deficiency (and if you qualify for the “Insolvency” exclusion, you will avoid the income taxes as well).

Further, the loss that the lender takes in a short sale will be MUCH LESS than the loss the lender takes at the end of the foreclosure process. Statistics show that on average the banks lose about 60k in the foreclosure process. The foreclosure process takes months & months, at the end of which the lender has to process the property through its overwhelmed system (another 3 -5 months) and then put the property back on the market, all while the market continues to drop.

Finally, the impact on your credit from a short sale will be significantly less than with a foreclosure and you will be able to buy again within 2 years, compared to up to a 7 year waiting period to buy a home after a foreclosure.

Q: How long will a short sale take? Back to top

Answer: This all depends on the bank and how backlogged they are. It also depends on how many banks are involved. Most banks are saying they will take about 3-4 months start to finish, (approval, not close of escrow). I have received approval in as little as 2 weeks and as long as 8 months! Typically though, you can live in the property for the entire duration of the short sale or you can move out whenever you wish.

Q: Do I need to be behind on my payments to do a short sale? Back to top

Answer: Again, this depends on the bank. Some banks will understand an impending hardship, others will not..

Q: Do I need to hire an attorney to do a short sale? Back to top

Answer: While I do believe a competent Real Estate agent is all that you need to do a short sale, I would certainly never discourage anyone from seeking legal advice on such an important matter. I can refer you to wonderful RE attorneys, tax attorneys, bankruptcy attorneys and CPA’s etc…, with the firm belief that the more educated you are the better you are able to make an informed decision. That being said, please beware of unscrupulous “professionals” looking to cash in on others misfortune.  It is not necessary to hire an expensive attorney to handle your short sale, and the banks will insist that your home is listed on the MLS by a Real Estate agent. 
 The overwhelming majority of short sales are conducted by real estate brokers who are experienced at negotiating with the lenders and charge NO UPFRONT FEES for their services.

Q: I found an attorney's short sale web site that talks about a new law in California that, as of July 1 2009, supposedly limits negotiating short sales to attorneys ONLY. It says that from July 1 on, all short sales have to be negotiated by attorneys and not realtors. Is this true? Back to top

Answer: No. There has been a good deal of misinformation put out of late regarding this law by attorneys looking to get into the short sale business. We recommend you be very wary of any attorney trying to distort or interpret the law for his or her advantage.

The California Foreclosure Consultant Act (July 1 2009) applies to foreclosure consultants - those who collect an advance fee for modifying loans or helping borrowers avoid foreclosure in situations where a Notice of Default has been filed on the property. This Act has an exclusion in it for licensed real estate agents.

Per CA Civic Code and the CA Assoc of Realtors, The California Foreclosure Consultant Act does not apply to real estate agents facilitating a short sale except in the extremely unusual event that an agent is 1) Making a direct loan for a residence in foreclosure, 2) Acquiring an interest in a residence in foreclosure, 3) Receiving an advance fee before performing services for a residence in foreclosure, or 4) Assisting an owner in obtaining the remaining proceeds if any from a foreclosure sale of an owner's residence.

That's it. 99% of the short sales in CA have always been, and continue to be, negotiated and completed by licensed Realtors, not attorneys.

Q: Who will be negotiating my short sale with the bank? Do you do this in your office or do you sub it out to an outside company? Back to top

Answer: I do not use any outside agency to negotiate my short sales, I negotiate all of them personally.
Q: Should I file bankruptcy? Will it allow me to keep my home? I’ve heard the lender cannot foreclose if I file bankruptcy. Back to top

Answer: There are 2 types of bankruptcy commonly used by individuals – Chapter 7 (“Fresh Start”) and Chapter 13 (“Wage Earner”). Chapter 7 can enable individual filers to wipe away debts such as credit card and medical bills so they can continue to make their mortgage payments.

Chapter 13 involves setting up a 3-5 year repayment plan to repay your debts. Chapter 13 requires that you are earning a steady income, as you will be repaying all of your debt. Both have a very negative impact on your credit and remain on your credit report for 10 years.

Because of the new 2005 bankruptcy law, which raised the bar for people to qualify for Chapter 7 "fresh start" bankruptcy proceedings, fewer and fewer people pass the “means” test to qualify for Chapter 7 and for this reason can only qualify for Chapter 13 bankruptcy (a 3-5 year repayment plan).

While both Chapter 7 and Chapter 13 can temporarily delay foreclosure proceedings, neither will allow you to keep your home unless you can bring your mortgage current.

If you would like more information on whether a bankruptcy is right for you, we recommend you consult a competent bankruptcy attorney, as we are not attorneys and do not dispense legal advice. Call our office – we can recommend several.