How much will a short sale cost me?

10 Jan

Short Sale Help

Short Sales Help

That’s a question we hear from our clients all the time and unfortunately, like everything else related to foreclosures and short sales, there seems to a be a lot of conflicting information our there.  One of the biggest questions they have is “who pays the short sale closing costs?”….

In our experience when our clients do short sales they have ZERO out of pocket costs, their lender pays the short sale closing costs, releases them of ALL future liabilities related to the balance owed (deficiency) and they have NO tax liabilities.

Lets take those points one at a time shall we?  “ZERO out of pocket costs”….  Usually when you sell your home you would have all sorts of closing costs associated with the sale of your home, the same is true of a short sale…. you would have title insurance, escrow fees, notary fees, wire fees, agent commission, NHD reports, pest work….. I could go on and on and on… however when we negotiate a short sale with your bank those fees are part of the negotiations and the lender expects to pay them when they approve a short sale.  They will not pay every fee you ask them to, however the rest are covered by the buyers and their agents.  We do not ask our sellers to cover any of those fees.

In the interest of full disclosure there are certainly times when the Sellers will have to come up with some money to close the deals.  These situations are few and far between, but they do happen, don’t believe anyone who tells you otherwise.   The only times we have had to get the sellers to contribute (cash or a promissory note) to close a short sale is when the 2nd lien on the property is abnormally high and/or the seller makes a large amount of money and or discloses too many assets.  In the end what the bank wants to do is make sure that by accepting a short sale offer they will be MAKING MORE MONEY than if they went the foreclosure route.   If the Short Sale NETS them more money 100% of the time they will APPROVE the short sale, the trick is knowing when the bank is netting more money and also who to take that message to…..  unfortunately the vast majority of short sale experts in the Sacramento just listen to what the banks tell them and just say “ok”, they don’t understand that if they fight for their clients they can, more often than not, get the deal done with NO out of pocket costs.

“releases them of ALL future liability”….. This actually just got easier (at least in California), on September 30th 2010 SB 931 was made into law (you can read the entire bill if you are bored), this bill prohibits a deficiency judgement on any 1st lien that agrees to a short sale.  We were doing this for our clients before this bill passed, but this does make it a bit easier and gives you more leverage when trying to get the 1st lien holder to agree to allow $ to the 2nd lien holder.  The 2nd liens are where the men get separated from the boys, removing deficiencies when dealing with 2nd lien holders can be problematic, but possible (check the attached approval from a 2nd lien holder removing all liability), what sets us apart is we understand the numbers as the bank sees them and we know when the bank is lying to us, all that helps us get the best deals possible for our clients.

As for ….”NO tax liabilities”…..  Let me preface this by saying we are not CPAs, the following information is what we have seen happen to our clients, you should always consult a licensed CPA to verify any financial information you have been given…..  Under the Mortgage Debt Relief Act of 2007 homeowners who complete a short sale between 2007 & 2012  will have ZERO tax liability as long as a a few criteria are met:

  • The property is your principal residence
  • The amount of debt forgiven is under $2 million (under $1 million if married filing separately)
  • You may exclude debt reduced through mortgage restructuring, as well as mortgage debt forgiven in a foreclosure
  • To qualify, the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence
  • Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion
  • Proceeds of refinanced debt used for other purposes – for example, to pay off credit card debt – do not qualify for the exclusion

The state of California also has a similar mortgage debt forgiveness law, which you can read about here.

For those of you with investment properties wondering about the tax implications you need to be able to demonstrate that you are insolvent (your liabilities outweigh your assets) at the time of the short sale to have your mortgage debt forgiven.

So as you can see, for the most part, homeowners who choose to go the short sale will, more often than not, not have any out of pocket costs to complete a short sale.

Everybody’s situation is unique so the best we can do is give you a general idea of the process.  For a complete no obligation evaulation call me, Peter Parker, at my office 916.585.3636

Trackbacks and Pingbacks

  1. What is a Deed in Lieu of Foreclosure? Foreclosure Options Sacramento - March 29, 2011

    […] If you have exhausted other foreclosure alternatives like loan modifications or short sale then it can be an end to the headache, however it makes little sense to attempt to have your lender agree to a Deed in Lieu of Foreclosure before at least attempting a short sale in an effort to be rid of the property.  A short sale looks better on your credit report, you can make sure your lender agrees to waive any deficiencies, if you have more than one loan those loans can be negotiated on a short sale and your tax liabilities will generally be the same.  Some worry that a short sale will cost money, but it doesn’t, please read How Much Will a Short Sale Cost Me? […]

Leave a Reply