Everyone in real estate knows that we are the Short Sale Kings. While there maybe some pretenders to the throne, they are just wannabees seeking to find refuge riding upon our coattails.
I mean we don’t mean to be cocky but it’s nice being THE SOURCE for Short Sale information. Well I guess that sounds a little cocky but so what, it’s true.
BIG UPDATE: March 27, 2010: After tons of comments and privately sent emails we felt that this subject deserved more than an article. So we decided to do a complete radio show episode about deficiency judgments. And to kick it up a notch even further, we made it the first installment of Real Estate Radio USA TV…yep it’s a video on the subject that covers deficiency judgments in GREAT detail. To view the video, click on the image below…but make sure you get some background and read the article and comments below.
CLICK THE IMAGE ABOVE TO WATCH THE VIDEO
We teach and execute short sales and it always amazes me..still…in now 2009, in the midst of arguably the best real estate market EVER, how many agents out there are still being fed bad information.
I get emails from around the Country from agents asking themselves ..HUH..after reading something on this website or that website. Heck, one could make one heck of a living just straightening out the misinformation being spewed on Active Rain, that is of course if people on Active Rain would actually PAY for their professional education.
Ok, maybe that was a cheap shot, I am sure there are quite a few agents on Active Rain who take their profession seriously and have paid and educated themselves to be proficient short sale executors. I just wish they would actually speak out when they see bad stuff being said and corrected the misinformed poster.
But I guess actually telling someone that they’re full of crap on Active Rain goes against house rules. So everyone exists in a Delos-like, Utopian West World where you’re ok and I’m ok, and Mary Poppins is always singing on some Austrian hillside.
Yikes..excuse me while I throw up!
Recently, a real estate agent posted some drivel trying to explain the issuance of a 1099 in a short sale. I will admit, it was one of the better attempts I have seen on Active Rain by someone trying to explain this but it fell a bit short. It was a “nice post” but a bit technically wrong.
As I am one half of the Dynamic Duo known as the Short Sale Kings, The mighty Sultan of Short Sales, let me take a moment to set things straight. Maybe…just maybe, there is one agent out there who gives a crap enough to actually want to learn this.
So while I am waiting for my blueberry muffins to cool, let me address this.
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There is no such thing as a deficiency on a short sale. We find realtors ALWAYS miss this. Or get terms interchanged.
Forgiveness of Debt and a deficiency are two separate and distinct situations and the terms do not mean the same thing whatsoever and the distinction is VERY..VERY..important.
A short sale is a negotiated settlement, short payoff on a mortgage. PAYOFF. When a short sale is completed, the bank issues a SATISFACTION of the mortgage AND RELEASES the borrower from all obligation. Once a Satisfaction of Mortgage is filed and the Release of Mortgage is obtained, there is NOTHING from which a deficiency JUDGMENT can be obtained. The mortgage has been SATISFIED and the Borrower RELEASED.
In this instance a homeowner may get a 1099 and may be liable for taxes on the debt which was forgiven.
However, if a home is actually foreclosed, and the bank sells the home as a REO and they sell it for less than what is owed, then the bank, in certain states, can obtain a deficiency judgment for the balance. In Florida it’s actually written in the Final Summary Judgment of Foreclosure.
Now here’s the big difference MOST realtors don’t grasp and have a problem relaying to their clients.
Let’s say that the mortgage balance with fees and costs is $300,000. The short sale is completed on the house for $200,000. The amount of debt forgiven is $100.000.00. The 1099 , if issued, would be for $100,000.00. Does this mean the homeowner owes the IRS $100,000.00..NO OF COURSE NOT!!
This is treated as ordinary income in most cases and the homeowner would have to pay taxes on this new found “income” according to their tax rate. Let’s say they are in a 33% tax bracket…then they would owe the IRS $33,000 theoretically…I say theoretically because there are a NUMBER of maneuvers and strategies that any half decent accountant can do to reduce this IRS debt.
Now..on the other hand…the same house is actually foreclosed on by the bank. Same $300,000 outstanding debt, same price on re-sale of $200,000.00 ..now the bank has what is termed a deficiency of $100,000.00. Based upon their Final Summary Judgment ins some states, they can simply go back to Court and they are entitled to a DEFICIENCY JUDGMENT for the ENTIRE $100,000.00!!
So as you can see…there is a HUGE difference here. By the way..check with your state, but here in Florida, this judgment, once certified, has a potential lifespan of twenty years and will continue to grow as statutory interest is applied and compounded while not being paid.
Other than bankruptcy and expiration this $100,000 judgment will continue to grow and grow over the years.
So when talking to a homeowner which situation is better to be in.
Real estate agents need to know the difference. There is a HUGE difference.
My muffins have cooled and you are now schooled..for free! You’re most welcome!
UPDATE: We have been getting tons of comments and emails regarding this entire issue and we think we understand the problem many of our readers are having.
We have been writing from a point and perspective of “obviousness”. You see whenever we do a short sale it is obvious to me that I want clear and marketable title so that I can re-sell the property for a profit. So in that essence there can’t be any mortgages or liens on the property so we ensure that the mortgages in a short sale are satisfied and released.
As a part of our due diligence and promise to the Seller, we also make sure that he or she are also “released ” from the mortgage when the short sale is finalized. It is now apparent that many homeowners are getting screwed because they are dealing with real estate agents who:
1. Have no idea what they are doing
2. Have outsourced the file to someone else who doesn’t know what they are doing
3. Could care less what happens to the homeowner as long as they get paid.
That’s the only way I could explain the incompetence of an agent who advises a client to go through with a short sale transaction WITHOUT the payoff of the mortgage in default along with a release and satisfaction. Anything short of that in my opinion is malpractice and simply wrong.
Please make sure that your agent doesn’t screw up your short sale. Trust me, once they have their commission they won’t be back to help you when you find out that they did not obtain a full release for you. In that event you could indeed be left holding the proverbial bag.
I just could not even comprehend that someone would treat a client in that regard.
Sign up for our Short Sale Video Course so you can truly be educated as to the nuances of a short sale. You might find yourself making a few bucks! Now available on DVD!
Florida Deficiency Judgments – What is Fair Market Value …What is fair market value in determining a deficiency judgment by Sackrin & Tolchinsky, South Florida Lawyers since 1982.
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Sun-Sentinel.com, on Tue, 22 Dec 2009 – A deficiency judgment? Naaah. Probably big fat bonuses for all! Hurray! While I do allow a personal exemption for house-flippers or speculators inspired by …
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Appeal-Democrat, on Fri, 18 Dec 2009-In some states, the lender still may come after you for a “deficiency judgment” if he or she can’t get enough money when the house finally is sold. …
Deficiency judgment rule, not exception – Business … When the mortgage foreclosure sale has occurred and the bank takes the property back, what are the consequences for a borrower as far as personal liability when the foreclosure judgment amount exceeds the fair market value of the …
I was issued a 1099A on a property that went into foreclosure, but they sent the deficiency to a collection company who is trying to collect on the balance. Are they still able to try to collect the deficiency after they issued a 1099A?
Hi Jacquline..like we have said in the article..a 1099 and a deficiency judgment are two separate items. The 1099 is based upon the amount of income you “earned” by having the debt forgiven. And yes, you do owe that on your taxes…sort of…
If this was your primary residence, you will ahve a get out of jail free card based upon the Mortgage Debt Reflief Act. If it wasn’t on your pesonal residence, you’ll have to seek refuge through IRS Form 982. Either way talk to your accountant for assistance.
As for the deficiency judgment, check the terms of your approval letter and then pull the mortgage satisfaction filed and that should tell you what’s up. Also certain states do not allow any deficiency to be collected. What state are you in and do you have a copy of your mortgage satisfaction?
I had previously read about the Mortgage Forgiveness Debt Relief Act — you article, however, clarified a point on which I was previously not clear.
Thanks again.
Glad we could help
Barry,
About 4 – 6 months ago I was on your site often and read every comment posted on short sales. I was going through with a sale that came apart at the end. Buyer found a house that was cheaper. I am now back in the hunt with a new Realtor and am starting the process all over again with Chase (loan is a Freddie). I just talked to an attorney in Florida who tells me that he has not seen many Full Releases from Chase. Is that your experience as well? This house is an investment home for me. I owe $213K on the mortgage (in my name) and the house is worht $150K at best. I told the Realtor I can not sell the home unless I get a full release and want that listed as a contingency. Am I being realistic expecting a Full Release letter from Chase? Thanks….
If you want a quick real answer, go to the public records in the county in which the property is and search online for recent (60-180 days) for the actual releases that were filed by Chase. Often the servicers and people involved are different than those who actually file the documents. We have been told over and over that BOA does not do full releases…then lo and behold you check the public records and what actually is filed? A full release of mortgage AND the note. So if the negotiator won’t budge, ask, insist and then be prepared to accept the short sale in as best a terms as you can get…but before you do anything…see how their releases are being worded on the public records. You may find you’ll end up sitting pretty anyway
a few months ago you gave me very good info on my short sale. I now have another problem. about 5 years ago when we bought the property we
did a 1031 tax exchange now we have short saled property. the property
value was 37,000 dollars below amt owed to mortgagee and the 1031 exchange was for 80,000, of course we lost everything and this was a second home. How bad will my tax implications be? Is there anything I can do to lessen my debt to the IRS? Any info from you will be greatly
appreciated.
Hi Pat, despite sometimes being referred to as a know it all, I am certainly not. 1031 exchanges are unfortunately not an area of real estate that I have any experience with and as such I can’t give you any advice on. I can recommend an attorney you can speak to if you want, please advise.
Barry,
Is the release that is filed the substitution/reconveyance document? That is all that I found on my county recorder’s page for my house which was short sold recently. It looks like there were two filed on separate dates (presumably one for the first mortgage and one for the second?).
Nick..what state are you in?
Hi Barry -
I am in Clark County, Nevada.
Instead of ebook, do you actually have a book on your information about Short Sale and Deficiency as of date today is 3/29/2011. There seems to be more laws that have been put in place. Not everyone can keep up. Just checking. I like to read hard copies in book form and have references to look into like web links etc as the laws etc do change from time to time for future references. Thanks.
Short Saled in Maryland Feb 2010 primary home. Discount approved by bank by 1st for the 2nd. So far no collections are reported on the credit report. No promissory notes were signed at settlement. No 1099 yet. No letters from 2nd bank since then. The 1st Trust bank sent a letter that we were paid in full. The key thing is I want to make sure that there won’t be a deficiency later on. Reading sources really do help back us up if need be.
THANKS for your investigative tools for each case scenarios, even though checking with a lawyer of our state/county seems appropropriate, if necessary.
Since I am deaf, the videos are hard to use. Books I prefer. I am not a fan of e-readers. That’s since I don’t paste myself on the net.
Hi Linda, sorry we do not have a hard copy book available
No comment but HUGE question. We bought a house and the sellers realtor covered and concealed mold in the house we bought as well as asbestos tiles thrown in the hvac floor vents. No disclosure to these facts of course. Mold counts were in the millions. County assessor reassessed house and gave it $0.value. The property is only worth $50,000.00. Been in litigation for 3.5 years. B of A has agreed to take the house back because it was sold to us under fraudulent terms.
Will we have to pay taxes on any future deficiencies from B of A?
You really need to speak to a lawyer. I would say that if BOA is taking the home back in a voluntary repossession and if you owe a mortgage on the home that they are forgiving then the IRS will indeed seek to collect. So you may seriously need to talk to a lawyer and get protected BEFORE you do anything. Good luck.
A friend owns a piece of land in the mountains of NC. The interest only 5 yr mortgage balance is $190,000. The land is worth more like $140,000. The 5 yr note comes due on Oct 1, 2011. If I can talk the bank into lowering the mortgage balance to $140,000, and giving me a 30 yr mortgage at a decent interest rate, will they send me a 1099 for the $50,000 forgiven so that I can keep paying on the mortgage?
Whoa Greg..slow down bud… If I read this right, your friend owns the property and owes the mortgage. HE would get the 1099 when you buy the property. Sounds like what you’re asking is would they discount the loan and let you assume it. Not sure on that one. Most banks we’ve dealt with want to be paid off if they are discounting the loan. That’s why it’s called a “short payoff”. But it’s worth a try in this economy. They may be willing to go along with it. Especially since it’s vacant land. Where in the mountains is it?
Barry,
Thanks for your comments over the last couple of years. I have recently closed on an investment property in the Orlando area (I live in ILLinois). The mortgage was with Chase and Freddie. The Short Sale closed last week. Per the HUD, I have a shortage of $92K. Should I expect a 1099 from Chase for that amount? Do they always issue a 1099? Does it tend to come in the next year? The house closed in December of 2011, should the 1099 come in 2012? I talked to my Accountant who tells me he will zero out the shortage and not to worry. The wording in my Chase approval letter contained the following; “JP Morgan Chase Bank, N.A. successor by merger with Bank One, NA, agrees to release it’s security interests in the above captioned collateral AND forgive any deficiancy balances upon receipt of $XXX,XXX.XX in certified US funds”. I assume that is all I need for the approval. I had an attorney for this process who said it looked good. Can Chase come after me for the shortage down the road. Thanks again for you comments over the years.