With a short sale, it is unnecessary and problematic for a property owner to sell their own property themselves without the expertise of a Short Sale Broker, as a short sale needs to be an arms-length transaction to avoid the risk of being constructed as fraud. Additionally, even if the seller of a short sale has an active real estate license and wants to receive a commission from the sale of their own property, this is not permitted. When a lender agrees to reduce the amount of a mortgage to accommodate a short sale for a borrower, the borrower cannot receive additional proceeds from the sale, above what is agreed to in a possible relocation assistance offer (example: seller receiving a real estate commission as a result of selling their own property). As such, since the lender technically pays the real estate commission in a short sale, it is wise for the seller to select an experienced Short Sale Broker to represent their best interest in the process. Additionally, if a potential buyer approaches a seller directly to purchase their property with a short sale, this is typically not in the seller's best interest as the sale needs to be processed by a Real Estate Broker on a short sale.
There are many factors that determine the overall success of a short sale. If a borrower selects a real estate agent that does not have experience with selling real estate with a short sale, this can be to the detriment of the borrower (seller). The experience of the Short Sale Broker representing the seller is one of the most important aspects to the overall success of completing a short sale. The majority of short sales that fail are a result of the short sale not being set up for success by the Real Estate Broker representing the seller.
There are many variables that determine how long a bank can take to approve a short sale. In the best-case scenario, it’s possible to have approval within several weeks. However, 30 -90 days seems to be the new normal, at this time.
Once a property is placed on the market as a short sale, it is prudent for the Short Sale Broker to notify their seller's lender that the borrower's property, which has a pending foreclosure sale, is now being marketed for sale as a short sale. Since a short sale is typically in the best interest of the borrower and lender, the lender will normally slow down the foreclosure process, to accommodate a short sale.
When a lender experiences a financial loss due to facilitating a short sale for their borrower, the lender will normally write off their financial loss as "bad debt" and report this as a tax write-off to the IRS, by sending their former borrower a 1099-c Tax Form. According to the IRS, any debt that was owed that has been canceled, forgiven, or discharged is taxable income according to the IRS (to the former borrower).
The good news to the former borrower is that with their former lender provides them a 1099-c Tax Form, the borrower has confirmation that the lender will not be pursuing a deficiency judgment against them.
With the circumstances of a short sale, most borrowers are financially insolvent at the time they completed a short sale. This means a borrower's liabilities exceeded their assets. To avoid any tax consequences from receiving a 1099-c, the taxpayer needs to show the IRS they were insolvent on their tax return by completing tax Form 982 with their taxes. Ideally, this is something a qualified CPA should help a taxpayer with, which could make any canceled, forgiven, and or discharged reported income a nontaxable event.
There are situations with second mortgages where lenders will not waive their right to a deficiency judgment as a condition of the short sale. However, completing a short sale process will discover what is possible and where your next step should be if the lender is not going to waive the deficiency.
Often with a short sale, a lender will give the terms at which they will release a deficiency judgment as a condition of sale. In some situations, this settlement can be financially resolved by the purchaser of the Short Sale, which solves the problem for the seller (borrower). If not, with a Short Sale Settlement agreement, the seller is often given a clear financial direction on what their lender will accept to waive a pending deficiency judgment. If the borrower's property is foreclosed, the borrower loses leverage to negotiate a deficiency judgment release.
Typically a condominium or HOA association can get their foreclosure lawsuit completed before the borrower's lender is able to foreclose. This is problematic to a borrower because it means they could lose ownership of their property by their HOA or condominium association quickly and then have a subsequent foreclosure against them after the HOA or condominium association loses their legal ownership in the property through the original foreclosure action. As such, if a borrower is able to make their HOA and condominium fees, they have a better chance of maintaining their ability to a resolution, without experiencing two foreclosures on one property.
Foreclosure laws are different in different states. Florida is a judicial state, which means a lender must file a lawsuit in court, have it served to the borrower, along with a summons. If a defendant fails to answer the complaint or file a motion to dismiss with the time limit set forth in the summons, the defendant is in default, which can greatly shorten the time needed for the lender to foreclose. Residents in Florida facing foreclosure are entitled to Equitable Right of Redemption, which allows them the right to pay off the mortgage before a foreclosure sale. Also in Florida, after a foreclosure sale, the defendant has a redemption period of 10 days to pay off the judgment to redeem their property.