Augusta “Gigi” Krop, ALC, CDPE
Keller Williams Realty
700 NE 90 St.
Miami, FL 33138
Short Sales - Foreclosure - Deed in Lieu - Explained
The homeowner/borrower is short when the current market value of the home is less that the amount of the mortgage plus closing costs and commission.
A short sale happens when the Homeowner and their Mortgage Company or companies enter into a negotiation. The Homeowner provides their mortgage company with financial information to prove that they cannot pay their mortgage and the Mortgage Company agrees to accept less than the full balance of the loan at closing. The Homeowner lists the house with a Realtor experienced with short sales. A Buyer makes an offer which is presented to the Mortgage Company. The Mortgage Company orders a BPO/Appraisal/CMA to determine the value of the property. Based on the value, the Bank then negotiates with Buyer regarding price and terms. This is a sensitive negotiation as the values are often in flux and mortgages are difficult to obtain. Once the Bank/Mortgage Company and Buyer agree on the price and terms, the house goes into contract and standard procedures apply. Buyer closes on the property and a short sale occurs.
In order to ensure that the short sale is consummated it is very important to work with an experienced short sale agent.
In South Florida more than 70 % of the properties that are selling are distressed properties (either a short sale or bank owned property).
In order to qualify for a short sale, a Seller must have a valid financial hardship. A seller without a financial hardship that is upside down on their mortgage and wants to sell is not a potential short sale. This Seller must wait until the market goes back up or bring cash to the closing to make up the difference.
Foreclosure vs Short Sale
There is a lot of confusion regarding the financial consequences of a short sale verses the consequences of a foreclosure.
The major difference is that a foreclosure is a credit blemish that lasts forever, a short sale is not.
A short sale shows up on your credit report as missed payments. If the Seller is diligent, they can rebuild their credit score within about 2 years.
A foreclosure will follow a person around forever.
If a person is truly insolvent - their debts are higher than their assets, there is a good chance they will not pay tax on the cancelled (short) amount.
Debt from a second home or investment property does not qualify (Mortgage Forgiveness Dept Relief Act). For more information consult your accountant or CPA.
In a foreclosure the debt amount is much greater than a short sale because it includes the bank’s legal costs, property maintenance costs, etc. In a foreclosure the property is abandoned for many months this results in major disrepair and theft. Banks are not in the business of owning real estate. The banks cost of ownership escalates everyday. These much higher costs may be taxable to you and the bank can sue you.
In the future, lenders will pursuit a deficiency judgment against borrowers and attempt to collect the amount that was forgiven. In a short sale the delinquent amount is usually forgiven. In a foreclosure the short amount is the difference in the amount owed and the price the house is sold for by the bank (foreclosure or REO) PLUS the bank’s legal costs, maintenance costs, repair costs, taxes, etc.
A short sale is better than a foreclosure for 3 major reasons:
- It is less damaging to your credit
- You pay little or no income tax on the short amount
- The bank will not pursue a deficiency judgment for the amount owed.
Deed in Lieu of Foreclosure
With a deed in lieu of foreclosure, you give your home to the lender in exchange for the lender canceling the loan. The lender promises not to initiate foreclosure proceedings and to terminate any existing foreclosure proceeding. Benefits – you do not have to sell your condo.
Disadvantages – you cannot get a deed in lieu if you have second or third mortgages, home equity loans or tax liens against your property. In addition, getting a lender to accept a deed in lieu is difficult these days. Many lenders want cash, not real estate- especially if they own hundreds of other foreclosed properties. That is why a short sale may be the best alternative to foreclosure. For More info on Short Sales and Foreclosures contact firstname.lastname@example.org or call/text 305-710-2538.