Matt Weidner – Fighting With The American People

Posts Tagged ‘short sales’

1. Misrepresenting tax consequences.

Although it’s true that the federal government passed a law in 2007 directing the IRS not to count mortgage debt forgiven by a lender as income, the provision is limited. It applies only to purchase money; it doesn’t apply to debt on a cash-out refinancing, and it doesn’t apply to second homes. There’s also a dollar limitation, albeit a generous one ($1 million for married couples filing separately, twice that for joint filers). “A lot of associates are telling people there are no tax consequences,” says Lance Churchill, a short sales specialist and trainer who operates in Boise, Idaho, and San Diego. “But it’s a limited law and you just need to be accurate about it.”

2. Misrepresenting how secondary debt is treated.

Practitioners might mistakenly tell sellers that all the house debt is forgiven once the primary lender approves a short sale. But that might not be the case, Churchill says. Holders of second deeds of trust don’t typically forgive the debt. More commonly, they accept a partial payment, like $2,000; and rather than write off the balance, they sell the balance to a collection agency for another few thousand dollars. In many states, these second loans are recourse, so sellers can be caught by surprise when the collection agency contacts them a year later seeking payment of the debt.

3. Acting on inappropriate lender requests for seller contributions.

It’s not uncommon for lenders to go after money that the sellers have in the bank or in a retirement account before they approve a short sale request. They’ll sometimes seek to put the onus on the real estate practitioner to get sellers to sign over a note for the amount they have in the bank as a condition of sale. But in states where mortgage debt is nonrecourse, lenders have no right to the money, and associates that suggest otherwise to the sellers might be later sued for negligence.

4. Breaching fiduciary duty.

Investors are increasingly executing what’s known as a “double close and flip,” a type of short-sale transaction that can leave practitioners exposed to irate sellers who say they got a raw deal. Here’s what typically happens: Investors insist on handling short-sale negotiations with the lender, freeing up their real estate practitioner to concentrate on finding a buyer. During the negotiations, the investors—often without the practitioner’s knowledge—talk the sellers into turning over the deed. Once the practitioner finds a buyer, the investors do a double closing, buying it themselves at a deep discount and then flipping it to the buyer at the listed price, making money on the spread. “The seller might feel he got less than he would have had the associate done his job and not handed over negotiations to the investor,” says Churchill.

5. Providing poor oversight of a loss mitigation company.

Companies that specialize in managing short sales promise to focus on the complicated details of the short sale, freeing up practitioners’ time to find buyers. But if you take a hands-off approach, you can be charged with negligence if a deal falls apart. “A lot of these companies are fly-by-night or have one person who’s overworked,” Churchill says. “Practitioners are coming back a month later to find no one’s even opened the file.”

6. Lacking the required license to undertake loss mitigation.

It often makes sense for practitioners to take a two-pronged approach with clients facing a difficult time paying their mortgage—first trying to help them accomplish a loan modification (for a fee), and then finding a buyer if a modification doesn’t work. But watch out. Depending on your state, you could need a specific license, sometimes called a credit repair license, to earn a fee for helping owners modify mortgage terms. Without having the right credentials, taking a fee for loan modification assistance could be a criminal offense.

7. Facilitating transactions not listed on the HUD-1 form.

It’s not uncommon for investors to offer incentives to sellers to move a deal forward, but lenders typically frown upon sellers who walk away with money when they’re supposedly taking a loss. Investors sometimes work around this limitation by offering to buy something from the sellers at an attractive price, such as a couch for $5,000. Associates who communicate these offers to sellers can get tied into charges of lender fraud because the deals may be deceptive.

In many instances, the best solution for a homeowner facing foreclosure is to sell his or her property to satisfy the underlying mortgage debt and conclude the foreclosure case.  Because so many homeowners owe more on their homes than the property would bring at sale, the only practical solution is a “short sale” or a sale of the property for less than the balance of the mortgages on the property.

Although evidence is anectdotal at this point in time, most of the sales that are occuring in Pinellas and surrounding counites are short sales, or sales where the lenders have agreed to take less for the property than the balance of the outstanding mortgages.  Short sales take considerably longer and are far more difficult to accomplish than a traditional sale so homeowners are urged to work with realtors who have experience in this unique area of property sales.

Having said that, realtors should carefully review Florida Statutes, Chapter 501.1377, Florida’s Foreclosure Rescue Act, http://www.leg.state.fl.us/statutes/index.cfm?App_mode=Display_Statute&Search_String=&URL=Ch0501/SEC1377.HTM&Title=-%3E2009-%3ECh0501-%3ESection%201377#0501.1377 to ensure their actions do not violate the law because they could be subjected to fines and penalties of up to $15,000 per violation.  Many realtors are working with or have some affiliation with “short sale consultants” or other individuals or companies that are engaging in activities that clearly violate the law and subject the consultant and everyone working with that person or company to fines and liabilities.

The bottom line is every realtor should include as part of their listing package specific and very clear instructions that any homeowner who is either in foreclosure or is close to foreclosure MUST hire a local real estate attorney to represent them in the foreclosure case.  Failure to do so could subject the realtor, title company and everyone associated with the listing to liability from the homeowner and other sources.

Ideally, a realtor active in the short sale market should be actively working with an experienced foreclosure defense attorney who will help to ensure the foreclosure process is delayed long enough to allow the short sale to go through and who may be able to help force the lender to accept offers they might otherwise reject.  For more information, contact Matt Weidner at www.mattweidnerlaw.com

A critical question affecting homeowners who are caught in a foreclosure problem is whether they will face 1099-c tax liablity from the IRS.  In short, if the lender has a mortgage on your home for $200,000 and the home is sold in foreclosure and the bank only recieves $100,000, the lender will issue to the borrower and the IRS a 1099-C Notice of Debt forgiveness.  In some circumstances, the borrower would owe the IRS their maximum tax rate on that amount, so if a homeowner were is a 28% tax bracket, she could face a $28,000 tax liability.  Given the serious financial consequences of this issue, it is critically important that any borrower engaged in a short sale, deed in lieu or other transaction understand the specifics involved in these transactions.

Each fact situation is different and there are ways to reduce or eliminate the tax liability entirely for the homeowner, but all of this must be taken into consideration prior to agreeing to any transaction.  The general rule is that homeowners may not face liability when the transaction relates to their homestead or primary residence, but the homeowner may face liablility when the property is a second home or investment property.

Having said that, each situation and the rules that apply are complex.  For advice on your specific situation, contact Matt Weidner at www.mattweidnerlaw.com!