Another Short Sale Question - Posted by Jim

Posted by DaveD (WI) on February 17, 2006 at 07:45:43:

We won’t do the deal unless they waive deficiancy. Why kick the seller in the teeth? As long as the seller DOES SOMETHING to mitigate his obligation (like attempt to sell it) the bank will go along, provided you can build a reasonable case for doing so. Where the bank will always pursue is when the seller doesn’t lift a finger (well, maybe “one” if you can read between the lines;-) to address his obligation. And they deserve it.

Another Short Sale Question - Posted by Jim

Posted by Jim on February 16, 2006 at 14:57:40:

Lets say they owe 100K and you get the bank to take 80K. What happens to the 20K? Can the bank still go after the homeowner? Do they usually do that? Does something get signed saying that the bank is forgiving that amount?

Thanks,

Jim

Re: Another Short Sale Question - Posted by TSSP:

Posted by TSSP: on February 17, 2006 at 06:47:55:

The $20K shortfall is called the deficiency. The lender may or may not pursue, judicially, a deficiency judgement.

If the lender forgives the deficiency amount, they are required to issue an IRS form 1099 to the beneficiary of the forgiven debt. The IRS views forgiven debt as taxable income. Whether the lender complies with the requirement that they issue a 1099, or not, the seller is still required to report the forgiven debt on their income tax return.

However, in most scenarios, the forgiven debt is demonstrated to be exempt from tax.

Re: Another Short Sale Question - Posted by DaveD (WI)

Posted by DaveD (WI) on February 16, 2006 at 15:52:17:

It depends. What you are referring to is called a deficiancy judgement. The bank will pursue judgement and collection unless they have a reason not to… like bankrupcy. We always ask the bank not to pursue the deficiancy because it is just another knock in the head to a downtrodden seller.

Deficiancy judgement question - Posted by Dave Ojeda

Posted by Dave Ojeda on February 18, 2006 at 14:14:42:

DaveD,

What steps must be taken to have the bank not pursue the deficiancy judgement? I have heard of investors in the area never explain this to the seller leaving them with this 1099 issue. I have done foreclosures but not short sales with my deals, I want to protect and disclose as must to the seller as I do short sales. Kicking them any more is not in my nature.

Re: Another Short Sale Question - Posted by Jim

Posted by Jim on February 16, 2006 at 19:18:00:

Dave,

Thanks for the response. Do you find that banks are usually responsive to not pursuing? Or is it just a case by case?

Thanks,

Jim

Re: Deficiancy judgement question - Posted by DaveD (WI)

Posted by DaveD (WI) on February 18, 2006 at 17:31:56:

They have to agree not to pursue as part of their taking less for payment in full. You get it in writing as a function of your purchase docs… usually in your cover letter, but it could be any number of other ways. Could be in your offer, or could be in their payoff letter.

Ah, the 1099 is a different issue. Overblown. The lender does that to cover their butt for the charge off they make. It is a deductable expense for them, so yeah, it has to show up as income somewhere else. But the IRS also knows if this “income” to the seller is part of a sale for loss… they don’t count it as income. I forget the rule, but any accountant knows it.