Short Sales - A Viable Solution?
A frequently heard definition of a short sale goes something like this:
"A short sale occurs when the lender agrees to take less than the full amount required to pay off existing loans in full because the outstanding loan balance is greater than the proceeds realized from the sale of the property."
Like many things in life, simple definitions and answers for complicated issues and questions are not always the best. This is particularly true with issues that involve legal documents, monetary investments and the IRS. Therefore, instead of posturing with my own opinions, I have requested permission to reprint a legal article from the California Department of Real Estate (C.A.R.) that addresses many issues with regard to short sales, deficiency judgments, trustee sales, deed in lieu of foreclosure, and judicial vs non-judicial foreclosures.
In the meantime, I will post the questions addressed in the article.
I. Lender’s Options Upon Borrower’s Loan Default
Q 1. What options does a lender have on a debt secured by California real property if the borrower does not make the payments on the loan?
Loan Workout
Deed in Lieu of Foreclosure
Short Sale
Short Payoff
Q 2. What other options may the lender consider instead of foreclosure when the borrower is delinquent?
Q 3. What is a deficiency judgment?
Q 4. Can a real estate lender obtain a deficiency judgment against a defaulting borrower following foreclosure?
Q 5. Can a lender avoid the foreclosure process and just sue the borrower on the note (i.e., treat it as an unsecured note)?
Q 6. Why would a lender agree to accept a short sale?
II. Effect On Borrowers of Short Sales
Q 7. Does a short sale adversely affect a defaulting borrower’s credit rating?
The short answer to this is yes.
Q 8. Suppose the borrower is late with his/her mortgage payments, causing the lender to begin the foreclosure process by filing a notice of default. Before the foreclosure sale occurs, the borrower pays the lender what is owed on the note. Could these activities appear on the borrower’s credit report?
Q 9. Is the method by which lenders report a short sale a negotiable item?
III. Disclosure Requirements in Short Sales
Q 10. Must a real estate transfer disclosure statement be given to a buyer in a short sale transaction?
Q 11. Must other disclosures be given to a buyer (or seller) pursuant to a short sale?
Q 12. Suppose a distressed seller enters into a contract to sell his/her home to a buyer pursuant to a short sale. Should the listing agent inform the lender if and when other offers are made on the property?
Q 13. Should a listing agent working with a distressed seller attempt to negotiate a future listing agreement with the lender?
IV. Other Issues
Q 14. Are there any tax effects of a short sale?
Yes.
Q 15. What is the process for applying for a short sale?
Q 16. What documentation will a lender typically require?
Typically we lenders ask for the following:
- Hardship letter
- A fully executed purchase contract
- Transfer Disclosure Statement
- Proof of the buyer’s ability to purchase the property, i.e., a completed loan application, pre-approval by another lender, or evidence of cash on hand (bank statement);
- Copy of tescrow instructions
- Preliminary title report
- Estimated net/closing statement certified by an escrow officer acceptable to the lender;
- Fully executed IRS Form 4506, "Request for Copy of Tax Form;"
- Tax returns for the last two years
- If employed, past two months pay stubs;
- P&L if self-employed
- The most bank statements going back at least three months
Tomorrow I’ll have a follow up to this with answers, or at least legal opinions, that pertain to these questions.
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3 Responses to “Short Sales - A Viable Solution?”
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Due to hardship. Short sale was the only option. Foreclosure maybe the last option because Countrywide has turned down all the potential buyers for short sale. Is it true according to the bank that what ever is their lost on the property, it becomes my gain? There for do i need to pay off all the gains per say (IRS)??Since it is a hardship, is bankruptcy the last option?? Pls. reply.Thank you. Miller
Miller, there are different factors to be considered, such as the type of loan, the state you are in, whether or not the lender is able and willing to pursue a judicial foreclosure, etc.
The following is from an IRS Question and Answer publication on this issue:
3. I lost my home through foreclosure. Are there tax consequences?
There are two possible consequences you must consider:
* 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.)
It is a safe bet that whoever you speak with at Countrywide is not qualified to give you tax advice. You should speak with an attorney about your options, including negotiating a deed in lieu. The attorney is important to make sure that any documents the lender requires doesn’t still leave you on the hook.
If you are in California or Florida, I can give you names of a couple of attorneys.
Bob,
I would like the names of a couple of tax attorneys - I live in Temecula, so anyone in North County? I believe that I would qualify as Insolvent, I owe $580k and it’s listed for $379k. My other assets don’t equal the $200k loan deficiency.