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WHAT IS A SHORT SALE IN FLORIDA S REAL ESTATE MARKET?
A short sale is similar to a regular residential/ home sale with one exception. In a regular home sale, the lender is paid in full when the new homeowner takes clear and marketable title to the property. In a short sale, the lender accepts less than what is owed.
Through a short sale, the property never makes it to the courthouse steps. The homeowner is delinquent in their payments but the lender has not yet published public notice.
With a short sale, the lender allows the house to be sold for less than the actual mortgage balance. As a result, the borrower avoids a deficiency judgment. The lenders would rather get most of their mortgage through a sale arranged by the owner then take the property back at a foreclosure sale.
However, the problem for the borrower after a short sale is that the difference between the balance owed to the mortgage company / bank and the full mortgage balance is considered by the IRS to be a forgiveness of debt for tax purposes. The mortgage lender may send the borrower a Form 1099 for the difference amount making the seller responsible for taxes on that additional tax liability.
What does this mean to the buyer if he/she is purchasing a property through a "short sale"?
The offer/ contract for purchase and sale is subject to current lender`s approval / acceptance. Which is more time complex compared to a regular sale / purchase where only the seller and buyer agrees to the condition and terms of the contract. There is a chance that the bank denies your offer. So be aware that while you are waiting on an answer to your offer regarding a "short sale" property you can NOT submit an new offer (binding contract with clauses for example right to inspection) on another property unless you would like to execute a multiple purchase.
DOWNSIDES
It sounds too good to be true - your mortgage lender tells you they will accept less money than you owe from your home sale to help you avoid going to foreclosure. This agreement is known as a short sale - also known as short-sale or shorted sale. Under certain conditions, the lender will accept a payoff less than you owe and will release the secured lien. For example, you may owe $150,000 on your note, but your home is appraised at $125,000 because of a down turn in the real estate market. You may be having problems keeping up with your mortgage payments because you just lost your job. You lender may agree to accept $125,000 from the sale of your house as payment in full to release your lien. Wow, you think you just saved $25,000 and are now out of trouble - no foreclosure and no more house payment. Before you get too excited, check with your lawyer, your CPA or tax accountant, and a realtor who has a lot of experience with real estate short sales. A short sale may, in fact, be the best solution for you, but it could also come back to bite you.
WHY LENDERS AGREE TO SHORT SALES
Mortgage companies and banks sometimes agree to short sales because when a property is foreclosed, the loan becomes a "non-performing" loan on the accounting books. Non-performing loans may affect how much the bank can get from the Federal Reserve in order to lend money to other people and make more profits. Often times, the lender can make more money on a short sale than on a foreclosure even though they don't get the full pay off amount on your loan. Not all lenders will accept a short sale and there are possible downsides for you.
WHAT LENDERS AND REALTORS MAY NOT TELL YOU
* A lender may release your secured lien for less than you owe, but they have the right to collect the remaining amount of the original loan. In the earlier example, if your lender accepts $125,000 for your $150,000 secured note, they can still seek a judgement against you for the remaining $25,000 debt.
A new federal tax law provides a strong financial incentive to go ahead with a short sale.
Before 2007, if someone lost a home in foreclosure or was forced to sell for less than the loan amount, the Internal Revenue Service figured that that person owed the government for a phantom profit -- tax on the money he or she did not have to repay.
But under the Mortgage Debt Forgiveness Act, signed by President Bush in December, this "debt cancellation income" is forgiven for 2007-09, and is not taxable.
"Until recently, the problem with the short sale was they would have a phantom tax they had to pay," said said David Agee of the Bradenton law firm of Reed and Agee. "Because part of the problem with a short sale is: 'I am somebody in trouble. I can't pay for it.'"
