Now that we have all been and seen this market for a little while (ok it feels like forever for some) the questions are coming from buyers and sellers alike about short sales and foreclosures. There have been guidelines written, changed and re-written, we have seen modification promises and a confusing statements that make us think the banks HAVE to work with us only to find that is not the case.
So bottom line is you are trying to save yourself a foreclosure on your record. We all fear that word and fear the process, but for some it may be the best solution unfortunately. First of all I am not an attorney or a tax professional and before making any financial decision like this the advice of at least one is advised.
Short Sales can be complicated, long and have some hidden consequences. First of all let’s talk about what happens to the difference of the sales price and the amount you owe. You will most likely be issued a 1099 for the difference. Now, wait – don’t panic. If this is your primary residence or if you have been renting it to a family member there are currently guidelines that will help you not have to actually call this income. HOWEVER, if the property is an investment property you can have a pretty stiff number added to your yearly income. This is why talking to an attorney and / or a tax professional is vitally important.
Do not let an agent tell you, “you will not have to pay taxes on the difference.” This is different under different circumstances. YOU ultimately are responsible to know what will be the final outcome. I am not trying to scare you out of selling as a short sale, but you really need to understand the outcome.
This is a true story; Seller finds an agent that says – oh you can short sale your property– the property is listed. The seller said he wanted to short sale – and so the agent did what he/she was told. The property gets an offer for $125,000 less than is owed. The seller will be issued a 1099 for $132,000 the difference of what the bank received and the amount owed. This happens in 4 different cities that the seller owned property – all exceeding $50,000 loss to the bank so now the seller will receive at least $200,000 in 1099s. When he called me to list one of his local properties and I did the math for that property – and explained that before he listed the property he really needed to talk to an attorney and or a tax expert he did so but felt it was un-necessary. Then he called back in tears. He would have lost the properties, his credit would have been ruined for a period of time but everyone of these properties would have gone to a foreclosure sale not a judicial foreclosure. We will talk about the difference of judicial and non-judicial next week. There are ways to avoid this from happening through the short sale negotiations you can be saved a lot of these worries and issues.
In Oregon most foreclosures are done through a sale. A Notice of Default and Intent to Sell is served. When the lender / bank takes the property they have cleared the debt. So, if the seller above had allowed all of these properties to be foreclosed on he would owe nothing on them and not had a tax issue he is not capable of resolving easily… this is why talking to a real estate professional, an attorney and a tax professional is so important.
I know the photos do not go with this post…. but we get our wildflowers in Central Oregon so late in the spring I had to share what I found last week.