Need Input - I'm New to Short Sales
Hello. I've located a property that is worth approx. 10-15% more than is currently owed on it by the homeowner. The homeowner has filed chapter 7 bankruptcy on the first and second mortgages and owes about 6 months in arrears on both. The mortgage companies are keen to the idea of selling thru short-sale, especially since the homeowner has not maintained the property. I am trying to purchase the property for 30% less than is currently owed.
My question pertains to the difference between the purchase price and how much is actually owed. Bankruptcy will take care of the homeowners problems, but what happens the remaining debt that is liened against the property? Does the bank just absorb the expense? The property is worth what is owed, but I plan to live in this home and want the additional equity to bring the home up to date.
Please help.
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Your question, "but what happens the remaining debt that is liened against the property..." is valid.
The lender who agrees to accept less than they are due will write off the loss. Sometimes, they have insurance to reimburse them for any losses sustained, but not always.
They will also issue an IRS form 1099 to the Seller in the amount of the forgiven debt. The IRS treats forgiven debt as income. The Seller will have to prove insolvency to avoid tax liability. Usually, insolvency is easy to prove, and the 1099 is a non-issue. Usually, but not always.
Thank you!!
How common is it to negotiate that the bank will not issue a 1099 for the amount ot the shortage or file for a deficiency judgement??
thanks,
Chris
Hi Chris,
It is very common to ask the bank to forgive any deficiency judgement against the homeowner. Sometimes they will, sometimes they wont. In my last short sale request, I asked the bank to do this and they said "Absolutely Not". However, we came to an agreement of the short sale price and I asked them to send their agreement in writing . . . they included in the agreement (without me asking again) that they will forgive any deficiency judgement. Go figure . . . .
As of the 1099, I have never heard of that being up for negotiation, that is between the bank and the IRS.
Best of Success!
BAMZ
If, on one hand, the mortgagee will be 'writing off' the loss for tax purposes, the other side must accept responsibility the gain.