Short Selling Your Property Seller Beware
If your property is underwater, not only did you probably reach out for help and examine your options, but you probably also received a lot of unsolicited offers from real estate agents and other “foreclosure consultants” who want to “help” you.
When they talk up all the benefits of a short-sale, they probably mention all these things:
Myth 1: You will be able to avoid personal liability for deficiency (roughly the amount you owe minus what the lender will receive for your house), that you would have if you just walk away and allow the lender to foreclose.
Myth 2: The person helping you with the short sale knows what he/she is doing and will protect you.
Myth 3: If you go through a foreclosure or bankruptcy, you will never be able to buy a house again.
Many folks naively believed that while short sales mostly benefited the real estate agent receiving commission, in most cases they didn’t “hurt” the seller (underwater homeowner). They believed that short sales were a waste of time for most, and better options were available, but that they didn’t make the situation worse. They are wrong!
There is a lot of paperwork involved for the seller in completing a short sale. Even though it can be overwhelming, it really is important not only to pay attention to what is in the paperwork but also to be sure to retain it for possible future defense. This is because of bad consequences that the seller may experience sometime after the sale has taken place.
The best scenario for a short sale is that the seller walks away with no equity, loss of their home and damaged credit! That is bad enough, but there are other potential problems that can show up when all the seller wants to do is forget about the whole thing. One is that the lender, or the lender’s assignee, may continue to pursue the seller for the remainder of the debt. The other is that the I.R.S. may seek tax on the amount of debt that was unpaid.
The first possibility may be in the paperwork that the seller must agree with for the short sale to finally close escrow. The seller may be required to sign a promissory note for the difference between the debt owed and the short sale proceeds received by the lender. Or, a lender may require the borrower to acknowledge that the lender reserves its right to pursue the borrower for this amount at a later time.
The second possibility resides in the fact that, if a debt is forgiven, the borrower may be taxed on the amount he didn’t have to pay back. To be sure, there may be short sales where the debt that is unpaid is not taxable, such as if the home is the primary residence of the borrower. It is against the law for Realtors to advise sellers in these matters.
With a short sale, here’s a horrible consequence that can happen. Not only having to face paying back the debt to the lender by signing a promissory note, but then getting a tax bill for the debt forgiveness on top of it!
How can this happen? Let’s say the bank requires the borrower to sign a note for the difference, or to acknowledge that the bank can collect the difference later. Then the bank sends out a 1099-C, informing the I.R.S. that a certain amount of debt had been cancelled. Same money, two actions. Big contradiction.
How can this happen, you ask? Well, these lending institutions are huge and one processing area of the company quite possibly is not coordinated enough to keep everything straight for every file. Plus there are just so many sellers short selling these days. It is a very chaotic situation.
The lesson is: sellers be sure to keep all paperwork. If there is a document stating the bank may pursue unpaid debt, keep track of it so if a 1099-C form shows up saying that the debt was forgiven (and, therefore, taxable), there will be proof that the 1099-C is incorrect.
Conversely, suppose that there was no specific release of the debt and that the paperwork contained no reference to it. Then, if the seller receives a 1099-C, saying the debt was cancelled, he should keep that, just in case the bank, or its assignee, comes calling a year or so later, trying to collect the debt
Don't ever do a Short Sale on your own!
How does Wilshire effectuate a short sale?
When Wilshire Holding Group, Inc. is the property owner, you Do Not have to prove a hardship. Wilshire will not supply hardship letters, and as a real estate holding corporation negotiates from a position of strength.
You will Never be asked, nor will Wilshire allow you to sign any personal obligation for the Lender's loss. Simply stated, you no longer own the property!
In cases where the seller is an individual, short sales happen when a he can't afford to make their payments and is nearing foreclosure or bankruptcy. The lender's ability to scare you is much greater in that case. In this case, a short sale is only slightly better than the alternatives. You will still lose your house, and your credit is still destroyed just because you've made 4-5 late payments on your mortgage.
By selling your property to Wilshire, you should under no circumstances whatsoever supply any financial information to the lender.
Below is a documented short sale that Wilshire closed as the Seller.
Original Loan - $400,000.00 - Lender Accepted $300,000.00 GROSS
$271,676.00 NET! - Click here to see HUD 1
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