- Dennis Hoffman, managing broker, Prudential Florida Realty, Orlando.
- Ken Bennett, Regional Director, Watson Realty Corp., Longwood.

Sentinel: How is a short sale different from a traditional sale?

Dennis Hoffman: Short sales can take longer because they need to get approval by a third-party, which is the bank or mortgage holder. We use a company that specializes in them, so we can often get these transactions to close much quicker. Otherwise, it's a regular sale with a contract between the buyer and seller. Buyers just need to know that even though a seller may accept an offer, they can't close unless the bank or lender also accepts it.

Sentinel: How is a short sale different from a foreclosure?

Ken Bennett: With foreclosures, there is a process in which the owner is given every opportunity to bring their payments current. At the end of the day, if they are not able to do so, they lose all legal and equitable interest in the property, which is turned over to the bank.
With a short sale, the owner is typically 120 to 180 days behind in their payments. They're also upside-down on the property, which means the value of the property is less than what's currently owed. Plus, we have to negotiate with both the seller and lender, who will very often allow the property to be sold for less than the current value since the loss might be less than what they'll face in foreclosure.
Sellers can't profit from short sales, which have to be arm's length transactions, meaning the property can't be sold to a family member. There's also been talk in the past about deficiency judgments, but Florida legislature has decided that the seller doesn't have to pay tax on the forgiven amount.
Finally, a short sale is not as bad and does not stay on your credit report as long as a foreclosure.

Sentinel: How long are short sales typically taking in today's market?

Ken Bennett:Short sales were taking on average three to four months, with little or no communication during that time. As a result, we were seeing many buyers back out or walk away from sales. In large measure, this was due to the fact that lenders did not have the appropriate systems in place or enough people to handle the volume of transactions. Now, though, the larger lenders have put systems in place and hired additional staff, and we're getting responses in two or three weeks.

Sentinel: What advice do you have for anyone purchasing a short sale?

Dennis Hoffman: To make sure they're dealing with a company that's educated on short sales, since there are a lot of misperceptions out there. Our agents are always going to seminars to learn more about short sales -- how to deal with the banks or lenders, what guidelines and procedures they have, and more. An educated Realtor who knows the process is very important. Just like doctors have specialties, so do agents. Right now, the bulk of our business is in foreclosures and short sales, which is why our company is so proactive in making sure we stay educated and informed.

Sentinel: : What kinds of things can go wrong with these transactions?

Dennis Hoffman: There are certain guidelines that qualify a property for a short sale; a hardship is usually attached. Just because a seller is upside down [meaning they owe more than the property is worth], the bank or lender may not necessarily view it as a short sale. And, even with properties that have been approved for short sales, banks and lenders can reject offers from buyers. That's where the education of our agents comes into play. We also work closely with a company that specializes in short sales to make sure these kinds of problems don't surface.

Sentinel: How can a Realtor® most help buyers with short sales?

Ken Bennett: The Realtor® can help by negotiating with lenders to determine a fair price for today's market. With home values dropping so quickly and so often, it's difficult for the average buyer to keep up with all the changes.
There are also companies that help to negotiate short sales, but they charge a fee and are held accountable by other state laws. As Realtors®, we're allowed under Florida statutes to negotiate short sale transactions as long as we don't charge fees above and beyond our normal commission.
Also, when you work with a Realtor®, you have a third party in the mix who is not emotionally charged. In situations like this, you need a cool head to negotiate an equitable settlement, and we definitely provide a valuable service in that respect.

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Luxury-Home Owners in U.S. Use ‘Short Sales’ as Defaults Rise
By Kathleen M. Howley and Dan Levy

Dec. 17 2009 (Bloomberg) -- Homeowners with mortgages of more than $1 million are defaulting at almost twice the U.S. rate and some are turning to so-called short sales to unload properties as stock-market losses and pay cuts squeeze wealthy borrowers.

“The rich aren’t as rich as they used to be,” said Alex Rodriguez, a Miami real estate agent with JM Group USA Inc., whose listings include a $2.9 million property marketed as a short sale because the price is less than the mortgage, leaving the bank with a loss. “People have reached the point where they can’t afford the carrying expenses of a $2 million home.”

Payments on about 12 percent of mortgages exceeding $1 million were 90 days or more overdue in September, compared with 6.3 percent on loans less than $250,000 and 7.4 percent on all U.S. mortgages, according to data from First American CoreLogic Inc., a Santa Ana, California-based research firm. The rate for mortgages above $1 million was 4.7 percent a year earlier.

As defaults on the biggest mortgages rise, borrowers such as Steve Holzknecht are turning to short sales to exit loans that now are larger than the market value of the house. In such a transaction, the lender agrees to accept less than a 100 percent payoff on a mortgage to expedite the property’s sale.

Holzknecht, 53, last month cut the asking price for his 7,280-square-foot home in Kirkland, Washington, by $550,000 to $1.25 million, lower than the balances of his two mortgages. Holzknecht, the former owner of Four Suns Inc., a Seattle luxury homebuilder that went out of business two months ago, constructed the Craftsman-style home in 2000. He declined to identify his lenders or the amount he owes.

Common Plight

“It’s not uncommon to see this situation on the high end of the market -- homes selling for less than it would cost to build them,” said Holzknecht’s agent, Joe Flick of Roanoke Group in Seattle. The property came on the market eight months ago priced at $1.85 million, he said.

Porter Michael Peterson, a 33-year-old linebacker for the National Football League’s Atlanta Falcons, bought a mansion near Tampa, Florida, four months ago for $1.1 million -- almost half the amount of the mortgage taken out by the sellers three years earlier, according to real estate records. Reggie Roberts, a spokesman for the Falcons, didn’t return a call seeking comment.

Short sales almost tripled to 40,000 in the first six months of 2009 from the same period a year earlier, according to data from the Office of Thrift Supervision. The bank regulator doesn’t break out short sales by size of mortgage.

Upside Down Mortgages

“You are just starting to see the tip of the iceberg with luxury short sales,” said Adrian Heyman, owner of Property Advisors, a real estate broker in Scottsdale, Arizona. “A lot of wealthy people are upside down in their mortgages and they just can’t afford the second or third vacation home anymore.”

There are 114,000 home loans of more than $1 million, according to First American. About a quarter of all mortgaged homes in the U.S. have loan balances bigger than their current value, known as being upside down or underwater, the data company said.

The Dow Jones Industrial Average lost more than half its value as it tumbled to a 12-year low in March. The number of U.S. households with a net worth of more than $1 million, not counting primary residences, fell to a five-year low of 6.7 million last year from a record 9.2 million in 2007, according to Spectrem Group, a Chicago-based consulting firm.

The financial-services industry was among the hardest hit by the recession. While Goldman Sachs Group Inc. set aside a record $16.7 billion in the first nine months of the year for employee bonuses, some Wall Street executives will see pay cuts, according to Johnson Associates Inc., a New York-based compensation-consulting firm.

Distress

Year-end bonuses for people at hedge funds, asset- management firms and insurance companies probably will drop an average 20 percent, the firm said.

“There’s a lot of distress,” said Tracy McLaughlin, co- owner of Morgan Lane Real Estate in Ross, California, north of San Francisco. “You have hedge-fund guys whose funds evaporated and a year-and-a-half later they’re still not working.”

The entry-level segment of the housing market was aided this year by an $8,000 first-time buyers tax credit that pushed resales to a 6.1 million annual pace in October, the highest since February 2007, the National Association of Realtors said in a Nov. 23 report.

President Barack Obama signed a bill last month extending the program into next year. The new version keeps the first-time buyer benefit and makes a smaller credit available to some move- up buyers. It can’t be used for homes priced above $800,000.

Luxury Market Left Out

The Federal Reserve set out in January to lower fixed mortgage rates by purchasing $1.25 trillion of bonds backed by home loans. The 30-year fixed rate for so-called conforming loans that can be bought by Fannie Mae and Freddie Mac dropped to an all-time low of 4.71 percent in the week ended Dec. 4, according to McLean, Virginia-based Freddie Mac, the second- largest U.S. mortgage financier. The rate rose to 4.81 percent last week.

The Fed purchases haven’t affected the high end of the market because they exclude so-called jumbo loans. Mortgages above the $729,750 limit set by Congress for the nation’s highest-priced markets cost almost 1 percentage point more than conforming loans, according to Keith Gumbinger, vice president at HSH Associates, a mortgage-data company in Pompton Plains, New Jersey. That’s quadruple the historic spread.

“There is no refinance market for you if you are underwater and outside the Fannie and Freddie framework,” Gumbinger said. “High-end neighborhoods are all suffering from the same problems of diminished income at a time when there is little equity to work with.”

Trapped by Market

Masoud Bokaie, co-founder of engineering firm BORM Associates Inc. in Irvine, California, owes $2.6 million on a 3,664-square-foot house with marble floors and granite counters about 10 miles (16 kilometers) away in Newport Beach. He’s waiting to hear whether lenders Luther Burbank Savings and Wells Fargo & Co. will approve a short sale.

He received an offer last month “close to” the loan balances, said Shirley Cameron, his agent at Coldwell Banker Platinum Properties in Irvine, who declined to specify how much. Bokaie said he doesn’t want to pay $7,000 a month in net costs including the property’s mortgages and taxes when real estate values in the area continue to tumble.

“What’s the point when the market is going in the other direction?” Bokaie said in an interview.

The U.S. median home price was $173,100 in October, 25 percent lower than its July 2006 peak, according to the National Association of Realtors. Prices fell 7.1 percent from a year earlier, the slowest pace of the year.

More Declines Expected

“The reason the low end stopped falling is because the government stepped in with affordable loans,” said Scott Simon, managing director at Pacific Investment Management Co., a Newport Beach-based investment firm that runs the world’s largest bond fund. “There is no political will to bail out a million-dollar house.”

Luxury home prices probably will drop another 5 percent before reaching a bottom in September 2010, according to Sam Khater, senior economist at First American.

Those declines may lead to losses on jumbo mortgages that dwarf the “haircut,” or discount to full value, that banks take on short sales or foreclosures of moderately priced homes, said Rodriguez, the agent with JM Group in Miami.

“When the bank takes a loss on a $3 million property it’s a lot bigger than the loss on a home with a $150,000 mortgage,” Rodriquez said.

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SHORT SALE FOREClOSURE ?

Keepin IT simple!

- A short sale is when a homeowner is trying to sell for less than the amount owed on the loan, this type of transaction requires bank approval and there are certain guidelines and pre-requisites a bank will ask for prior to s short sale approval.

- A foreclosure is when the lender takes over the property. A court ordered sale is required prior to the foreclosure and at this sale if no buyer comes forward who is willing to pay the minimum bid for the property, then the lender takes possession and the property is foreclosed on.

The following breakdown is courtesy of Oliver Ruiz, General Manager of Fortune International and President of the Miami Board of Realtors:

Fannie Mae Mortgage Eligibility (Primary Residence):

A homeowner who loses a home to foreclosure is ineligible for a Fannie Mae backed mortgage for a period of 5 years.
A homeowner who successfully negotiates and closes a short sale will be eligible for a Fannie Mae backed mortgage after 2 years

Fannie Mae Mortgage Eligibility (Non-Primary Residence)

An Investor who allows a property to go to foreclosure is ineligible for a Fannie Mae backed investment mortgage for a period of 7 years
An investor who successfully negotiates and closes a short sale will be eligible for a Fannie Mae backed investment mortgage after 2 years.

Future Loan with any Mortgage Company:

On any future loan application, a prospective borrower will have to answer YES to question C in Section VII of the standard 1003 that asks “Have you had property foreclosed upon or given title or deed in lieu thereof of the last 7 years?” This will affect future rates.
There is no similar declaration or question regarding a short sale.

Impact to Credit Score:

Score may be lowered anywhere from 250 to over 300 points due to a foreclosure. Typically will affect score for over 3 years.
Only late payments on mortgage will be reported as paid or negotiated. This will lower the score as little as 50 points, if all other payments are being made. A short sale’s affect can be 12 to 18 months on an individual credit score.

Credit History:

Foreclosure will remain as a public record on a person’s credit history for 10 years or more.
Short sale is not reported on a credit history. There is no specific reporting item for “short sale.”

Security Clearances:

Foreclosure is the most challenging issue against a security clearance outside of a conviction of a serious misdemeanor or felony. If a client has a foreclosure and is a police officer, in the military, in the CIS, Security, or any other position that requires a security clearance will be revoked and position could be terminated.
Short Sale, on its own, does not challenge most security clearances.

Current Employment:

Employers have the right and are actively checking the credit regularly of all employees who are in sensitive positions. A foreclosure, in some cases, can be grounds for immediate reassignment or termination.
Short Sale is not reported on a credit report and is, therefore, not a challenge to employment.

Future Employment:

Many employers are requiring credit checks on all job applicants. A foreclosure is one of the most detrimental credit items an applicant can have and in most cases, will challenge employment.
Short sale is not reported on a credit report and is therefore not a challenge to employment.

Deficiency Judgment:

In 100% of foreclosures (except in those states where there is no deficiency), the bank has the right to pursue a deficiency judgment.
In some successful short sales, it is possible to convince the lender to give up the right pursue deficiency judgment against the homeowner.

Deficiency Judgment (amount):

In a foreclosure, the home will have to go through an REO process if it does not sell at auction. In most cases, this will result in a lower sales price and longer time to sell in a declining market. This will result in higher possible deficiency judgment.
In a properly managed short sale, the home is sold at a price that should be close to market value and, in almost all cases, will be better than an Foreclosure sale resulting in a lower deficiency.

Tax Consequences of Selling Real Estate in a Short Sale

following is an article written by Christopher S. Robins, CPA. Christopher Robins is a professional CPA with Twilley, Rommel & Stephens, P.A. in Salisbury, MD.

By: Christopher S. Robins, CPA

Twilley, Rommel & Stephens, P.A., Salisbury, MD

Whenever real estate is sold there are potential tax consequences for the seller. In a short sale, real estate that is subject to mortgage debt in excess of its fair market value (“underwater”) is sold to a third party with the consent of the lender to accept the sales proceeds in satisfaction of the debt. The property could be a principal residence, a second home, or investment property. Dealing with the tax issues related to a second home, rental or investment property can be challenging. The tax implications of these transactions will be addressed in another article.

The amount realized on a sale of property depends on the type of financing:

· Nonrecourse Debt. The borrower is not personally liable to repay the debt even if the value of the property is less than the outstanding debt.

· Recourse Debt. The borrower is personally liable to pay any amount of the debt not satisfied by the value of the property.

It is rare for a residential mortgage to be nonrecourse. If a principle residence is sold in a short sale with nonrecourse debt, the amount realized is the full amount of the debt, even if greater than the property’s fair market value. Because the discharged debt is treated as part of the amount realized, there’s no discharge of indebtedness income.

If the cancelled debt in a short sale was recourse, the transaction may be taxable income to the seller/debtor in two ways:

· The discharged debt is taxable if it does not meet one of the exclusions discussed below

· The sale results in a taxable gain and does not qualify for the federal tax exclusion from the sale of a principle residence

The major exclusion is the Mortgage Debt Relief Act of 2007 which provides for taxpayers to exclude from their income up to $2 million of qualified principal residence indebtedness. This is debt incurred to acquire, construct or substantially improve the taxpayer’s principal residence. A refinancing of such debt also qualifies. The exclusion applies where a taxpayer restructures the acquisition debt on a principal residence, loses a principal residence in a foreclosure, or sells a principal residence in a short sale. “Principal residence” is defined as the home where the taxpayer ordinarily lives most of the time. A taxpayer can have only one principal residence at a time.

When cancellation of debt income cannot be excluded under the qualified principal residence acquisition rules, see whether another exclusion applies. Generally, debt forgiveness is taxable, unless one of the exclusions applies. Other exclusions include:

· Bankruptcy: Debts discharged through bankruptcy are not considered taxable income

· Insolvency: If a homeowner is insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable.

· Certain farm debts: If you incurred the debt directly in operation of a farm, your cancelled debt is generally not considered taxable income

These exclusions as well as other tax implications of real estate will be discussed in future articles.

In accordance with IRS Circular 230, the information on this website is not intended or written to be used, and cannot be used as or considered a "covered opinion" or other written tax advice and should not be relied upon for the purpose of avoiding tax-related penalties under the Internal Revenue Code; promoting, marketing, or recommending to another party any transaction or tax related matter(s) addressed herein; for IRS audit, tax dispute or other purposes.

Furthermore, the firm of Twilley, Rommel & Stephens, P.A. does not render any accounting, legal, or other professional advice, through this website, nor do we claim or recognize any responsibility to update or revise any publications we present on this website, publish, or distribute abroad. If you feel that you need financial or tax advice, specific to your situation, please contact one of our competent professionals by e-mail, fax, or phone and we will set up an appointment to discuss your specific situation.

Don't foreclose! Do a short sale

Short sales are the hottest thing going in the distressed-property market, and the trend is expected to get even hotter in coming weeks, when the government starts handing out cash to encourage lenders to close these deals.

"Banks have ramped up short sale approvals," said Duane Legate of House Buyer Network, which connects short sellers with buyers. "They're hiring a lot of the people who once worked in the mortgage-lending industry and moved them over to short sales."

These transactions, where lenders allow homeowners to sell their houses for less than they owe, accounted for 17% of all residential real estate sales in February, up from nearly 13% in November, according to a monthly real estate market survey by Campbell/Inside Mortgage Finance.

And Bank of America (BAC, Fortune 500), the country's largest mortgage servicer, has more than doubled the number of short sales it processed in recent months.

Elizabeth Weintraub, a Sacramento, Calif.-area real estate agent who handles many short sales, was amazed at how quickly a recent deal went through. "Bank of America approved it in 24 days," she said. "That flipped me out."

This is a huge change from even just six months ago when the short-sale market was stalled and most people would describe the process has real estate hell. Because lenders stand to lose so much on these transactions, they have been reluctant to make short sales happen, often waiting months before getting back to potential buyers.

"In the past, many short sales would never come to fruition and the ones that did averaged over half a year to complete," said Chris Saitta, CEO of Equator, which produces short sale software.

"Things would just fall into a black hole and not come out again," added Weintraub.

And even when banks did agree to the sale, the process could be further complicated if the original owner had a second mortgage.

In most cases, the first lender is repaid in full before any money flows to a second-lein holder. And because most distressed borrowers are severely underwater, there's usually nothing left to send on. As a result, second-lein holders are left holding the bag and have been killing many deals.

But that has been changing. For one thing, banks realize that they make out far better financially with a short sale than a foreclosure. "The lenders lose 50% on a foreclosure and only 30% on a short sale," said Glenn Kelman, founder of the real estate Web site Redfin. "And short sales offer a way to get distressed properties off their books quickly."

And on April 5, lenders and mortgage investors will have even more incentives to offer troubled borrowers short sales instead of foreclosing.

Under the new Home Affordable Foreclosure Alternatives program, borrowers will earn a $3,000 "relocation incentive" and servicers will get $1,500 for handling a short sale.

The investors who actually own the mortgage notes will get $2,000 in exchange for sharing proceeds of the short sales with any second-lien holders. And, finally, those second lien holders will receive up to $6,000 for releasing their claims.

Lenders participating in the program must also determine the market values of properties early on and inform the owners of just what price they're willing to accept. Then, if owners come back to the lenders with bonafide offers, they have to be accepted within 10 days.

Equator's Saiita anticipates a short sale explosion in response to the new program. "The challenge will be handling all the volume," he said.

The company has already tweaked its software, which 58 servicers use, to handle the new HAFA rules. And that should help reduce the time it takes to execute a sale, which currently averages 88 days.

The boom in short sales may accelerate the end to the foreclosure crisis by cleaning out the overhang of borrowers in distress and replacing them with more stable homeowners.

Plus, these sales are better for distressed borrowers because their credit scores suffer less. Going through a foreclosure can knock 200 points off a FICO score, twice as much as the penalty for a short sale.

Information from: Ask the experts: What is a Short Sale ?

- Dennis Hoffman, managing broker, Prudential Florida Realty, Orlando.- Ken Bennett, Regional Director, Watson Realty Corp., Longwood.

Tax Consequences of Selling Real Estate in a Short Sale

Don't foreclose! Do a short sale

- Dennis Hoffman, managing broker, Prudential Florida Realty, Orlando.
- Ken Bennett, Regional Director, Watson Realty Corp., Longwood.