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Short Sales In Orlando Florida Series – Lesson 4 – Personal Considerations
Short Sales in Orlando Series overview
In Lesson 1 the definition of a short sale was established. The homeowner negotiates with their lender to sell the property less than what is owed. If the lender agrees then you have a short sale. Although the definition is very simple, the process and results are quite complex. Complex in terms of time, guidelines, negotiations, paperwork, parties involved, closing, patience, and emotions. We will begin to simplify the complexities of the short sale. In Lesson 2 we walked you through the foreclosure process in the great state of Florida. In Lesson 3 we discussed the lender short sale process. It is critical to have a basic understanding of the processes to have a successful short sale.
Short Sale Personal Considerations in Orlando Florida
Note: This article describes the short sale process in Florida. Because the foreclosure and short sale process are closely connected, please be sure to understand your state foreclosure process and laws. The short sale process will be slightly different based on the foreclosure process in your state.
Although the short sale sounds like a viable option for homeowners under water (they owe more than what the house is worth) or heading into foreclosure, there are several key personal ramifications to consider. This is not meant to be taken as legal advice but instead to educate you so you can investigate further so you to make an informed final decision.
The impact on your credit is usually the first question on homeowners’ minds. Lets compare a foreclosure and a short sale.
Foreclosure credit impact:
- Each month you make a non-payment is about a 50 point reduction. A foreclosure could take up to a year so alone non-payments will greatly reduce your credit score.
- The actual foreclosure will reduce your credit score up to 250 points!
- The foreclosure will stay on your credit report up to 7 years!
- Virtually impossible to obtain future loans up to 7 years
- Long term impact
Short Sale credit impact:
- Each month you make a non-payment is about a 50 point reduction. A short sale could take up to a year so non-payments will reduce your credit score.
- A short sale will reduce your credit score up to 150 points.
- Shorter time on your credit report
- A skillful negotiator will work hard on your behalf to minimize the impact to your credit. Loan Satisfied is the goal.
- Short term impact
- A responsible homeowner can quickly recover from the credit impact
Make no mistake a short sale will not eliminate the negative impact to your credit but is certainly a more positive alternative to foreclosure. A responsible homeowner can quickly recover their credit rating with a short sale but has very little chance of quick recovery with a foreclosure.
Now that you understand their will be an impact to your credit using a short sale, the following are additional considerations with a short sale.
The Deficiency Judgment
A Deficiency Judgment is the difference of what is owed and the amount sold. For example, 200k is owed and it sells for 150k. The deficiency is 50k. The lender has the option to place a Deficiency Judgment on you up to the full amount. A skillful negotiator will have the entire Deficiency Judgment waived. If the lender refuses to waive the deficiency (numerous reasons why) a skillful negotiator will negotiate much less than the full amount with favorable terms (0% interest). At this point you have a personal decision to make. Do you accept the Deficiency Judgment which becomes a promissory note to repay the deficiency or do I let the house go to foreclosure or even bankruptcy. Again this is a very personal decision but you must choose wisely if the deficiency is not waived and especially if you choose bankruptcy.
1099
If the Deficiency Judgment is waived the lender has the option to file a 1099 IRS form. So lets take our example of a 50k deficiency. The lender waives the deficiency so the good news is that you don’t owe the lender 50k. But if a 1099 is filed, the IRS, in a warped way, considers this as income to you which you will owe taxes on. So if you’re personal tax rate is 25% then you will owe the IRS 12k in taxes on that 50k. But there is good news, President Bush signed the Mortgage Relief Act of 2007 which waives all 1099s through 2011. One criteria is it has to be your primary residence, so investment, vacation, or 2nd home properties do not qualify for this exemption. If you qualify for the exemption then a simple IRS form needs to be filed along with taxes. If you don’t qualify for the exemption there is still hope. You will need to consult with your CPA or tax adviser how you can wipe out the taxes owed.
One more important consideration to keep in mind is if the lender forecloses they still have the option to pursue a Deficiency Judgment. So not only do you have a devastating foreclosure on your record but your credit report will show you owe the bank a deficiency judgment. That is what I call a double whami!!
Your Time
How much time can you commit to the short sale process? Many days you will be on-hold with the bank waiting to talk to the person assigned to your case. How much time can you commit to get your house ready to be sold? How much time can you commit to talk with potential buyers? How much time can you commit to coordinate the closing? A normal short sale will demand up to 300 hours of your time spread out over months.
Your Skills
To have a positive outcome you will be required to be skillful in numerous areas. The ability to skillfully negotiate with lenders and buyers is a must. Time management skills is also a necessity. Organizational skills is required because you need to have paperwork available at a moments notice and ability to recall previous conversations. People skills is a must. You will be dealing with all kinds of personalities and must be able to adjust accordingly. If you are a person lacking people skills you will struggle in this process.
Your Emotions
Holding your emotions in tact is a must. Because this is a stressful situation your emotions will be tested. Your emotions will be influenced by your family, lenders, buyers, title companies, Realtors, the legal system, attorneys, customer service, interested investors, and you. If you let you emotions get the best of you may jeopardize the entire process.
Before venturing down the short sale path, you must consider these personal considerations. If you are limited on time, emotions, and skills I highly recommend a 3rd party to work a short sale. An experienced 3rd party has a tremendous advantage over someone with no short sale experience. Also a 3rd party knows what it takes to find potential qualified buyers interested in below market properties. In addition an experienced 3rd party knows how to delay a foreclosure sale date, are you? Our services are at no cost or fees to homeowners. We are experienced in short sale negotiations and will work very hard on your behalf to get your deficiency judgment waived. If at any time you feel we are not providing a quality service we will stop working your case and not ask for any compensation. So focus on dealing with your hardship and moving on with your life and let us deal with all the headaches of selling your house in these very tough economic times.
Understanding personal considerations in a short sale is critical. You need to be aware of these considerations especially if you are interviewing potential 3rd parties. If they do not discuss the Deficiency Judgment or 1099 implications, are they intentionally not telling you or they are not familiar with these considerations? How committed are they with your case? The next Short Sales in Orlando Florida lesson we will next discuss some short sale myths.
About the Author
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