The homeowners will have many a short sale question for you as an investor. They'll want to know what happens before, during and after the short sale. In particular they'll want to know if they will still owe money afterwards. So, I've answered some of the most common short sale questions for you to prepare the homeowner.
How the Deal Goes?
A very common short sale question you'll get from the homeowners is from them wanting to know exactly how the deal will go down. The investor negotiates a purchase price that is lower than the amount of the homeowner's mortgage in a typical short sale deal. The homeowner may still owe $100,000 on the property but you'll negotiate with the bank to purchase that property for $70,000. However, the bank and the homeowners still need to deal with that remaining debt.
The bank has two options for dealing with the remainder of the mortgage debt and neither one of them involves short sale magic. The homeowner will owe money on the short sale, at least on paper.
o The bank can seek to sue the homeowner for that remaining debt by seeking a foreclosure deficiency judgment or
o the bank can send out a 1099 form calling that $30,000 income for the homeowner.
What is a Foreclosure Deficiency Judgment?
It's important to prepare the homeowners for a possible foreclosure deficiency judgment when they start asking you short sale questions. The bank can file for a deficiency judgment against the homeowners after completing the short sale deal. Both the bank and the homeowners must show up in court for the judgment. If the judgment is awarded to the bank, the court declares that the homeowners still officially owes the bank the remaining $30,000. However, it's possible that the court may not award the judgment to the bank.
Also tell the homeowner that you may be able to work your short sale magic on the bank during negotiations and get them to opt not to file for a foreclosure deficiency judgment. You'll spend a lot of time putting together packets that show evidence of the homeowners' financial hardship and most banks don't want to kick the homeowners while they're down.
So, if you can prove financial hardship the bank usually agrees not to file for a deficiency judgment.
You can work that short sale magic and get the bank to sign a waiver showing that they'll send out a 1099 form instead of filing for the judgment. This will certainly help put the homeowners' minds at ease. Most banks will not put anything in writing but will make a verbal promise not to go after the homeowner.
How to Deal with a Judgment?
Let the homeowner know when answering their short sale question that it may be possible for the homeowner to work a little short sale magic to deal with the remainder of their debt. The homeowner might be able to negotiate another short sale deal with the bank on that deficiency judgment, so the bank would accept a partial payment and call it 'payment in full'.
The homeowner may also be able to file bankruptcy and have the deficiency judgment removed from their credit history. You must make the homeowner aware that they'll have a bankruptcy listed on their credit history for the next 7 years instead.
What is the 1099 Form?
Short sale questions aside you should make sure to tell the homeowners about the 1099 Form. You should be able to get the bank to send out the 1099 form instead of filing for a foreclosure deficiency judgment. Tell the homeowner that the amount on the 1099 Form has to be reported by the homeowners to the IRS as income.
The homeowners will need to pay taxes on that income listed by the 1099 Form. You should always recommend to the homeowner that he or she speak with an accountant before they go through with the short sale.
Many times the homeowners have been living in enough financial hardship that they won't have to pay taxes on their 1099 Form. Meaning that even with the 'profit' listed on that form, their income is so low that they won't have much in the way of taxes, especially after they take all of their deductions. The homeowners may even qualify for an exemption based on the sale of their property or their hardship.
In addition, homeowners may never receive the 1099 form from the bank. Often the banks are so busy and tied up with red tape that the 1099 form is never sent out. However, I wouldn't recommend telling them to count on this possibility.
The homeowners will end up being responsible for the remaining debt on their mortgage when you complete that short sale deal with the bank. This doesn't mean they'll end up paying back that amount to the bank, but the homeowner may have a foreclosure deficiency judgment on their credit or they could pay taxes on that remainder.
Even after you answer every short sale question good or bad, the homeowner can come up with you'll find that they usually wish to continue working on the deal. You definitely won't have to work any magic to convince them, since this short sale is their best option.
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