Replies to This Discussion

Permalink Reply by Douglas Lineberry on October 3, 2011 at 12:43pm

OK - no problem.  Easy to put together a short seminar on it.  I speak to real estate brokerages and title companies about these kinds of issues all the time.  I'd be happy to put together a short online seminar that people can listen in on from their own desks.  That's very easy for me to do.

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Permalink Reply by Dean E Eshelman, CPA, CDPE, IRES on October 3, 2011 at 3:16pm

Through the end of 2012 you can elect to reduce the basis of the residence for the amount of the 1099 unless you have a cash out refinance, then the amount of the basis adjustment is reduced under a formula specified in the regs. In the case of a cash out refi part of the 1099 is may taxable.

Now the basis adjustment election on Form 982 means that if you had a basis of 160,000 in the home ( you need to know the definition of what constitutes basis) and your non-cash out refi or original indebtedness forgiven is 80,000 you now have a basis of 80,000. You sold the property for 105,000 so you have a taxable gain 25,000 gain (105-80).  No not really, remember there is a rule that if you lived in the home as your primary residence for 2 out of 5 years then the first 500,000 of gain is not taxable (joint tax return). Therefore their is no taxable gain.

 

See the comprehensive examples in IRS pub 523 and instructions for IRS Form 982

 

IRS Code Sec 108 is a complicated statute. There are many more iterations of facts that change this calculation.  This is just one example and you can see there can be taxable income, especially in the case of a cash out refi, a second mortgage or HELOC. Depending on the individual circumstances and tax attributes of that individuals tax return there may be other items for which a basis reduction can be elected.

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Permalink Reply by Paul Francis - Vegas Short Sales on October 3, 2011 at 10:31am

Very well stated.... I just recently had an "investor" that wanted to short sale an "investment" property until I told them to consult with a Tax Attorney on the implications this would create with their taxes.

Turned out that short selling that home was not such a good idea...

 

 

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Permalink Reply by Jeff Payne on October 3, 2011 at 10:56am

Good stuff, lets agree to agree!  Your last post was very helpful and answered my question in depth.

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Permalink Reply by Patrick Smith on January 5, 2012 at 6:11am

" I think many realtors resent the kind of attorney that does encroach on our territory "

+2 for Janice.  Also, since when did short sale negotiation become your territory?  Last time I checked - except for listing the property - what you are doing for your clients is negotiating a distress-based amendment to the overall loan agreement.  To me that sounds a whole lot more like legal work than brokerage.  But I'm biased.  I use my law license more often than my broker's license.

When your clients ask you what the impact of accepting a short sale without a deficiency waiver means to them, what do you tell them?  Are you sure what you are doing isn't offering legal advice?

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Permalink Reply by Paul Francis - Vegas Short Sales on October 3, 2011 at 9:29am

Something all of us need to keep in mind is that we obviously do not come across the homeowners that have used an Attorney for a successful loan modification. These homeowners are obviously not the ones that contact us to short sale their home.... the ones that are not successful are the ones who contact us to short sale which may give us the impression that all of the loan modifications are scams.

 

I do know of homeowners that have started out with me that really wanted to stay in their home.... in these situations I want them to explore ALL avenues before proceeding to a short sale and there have been cases where they got a loan mod. on through an Attorney.

 

I do have Attorneys for reference that I do know that certainly care, offer a free consultation and are not just setting up a short sale Processing service where agents that can't make it are working for them for $10 an hour processing paperwork with a Law Firm's letterhead. A couple of times.... I have worked with the caring Attorneys doing the short sale but they provide the legal advice. One of them even provides the advice for free -- while I do the actual short sale. They look at it like we look at doing free CMA's... the business will come back to them one way or another.

 

Regardless.... if a homeowner really wants to stay in their home, I'm certainly not going to be the short sale agent that tells them not to waste their time talking to an Attorney to explore all of their options.

Personally.... I handle those particular short sales with Extreme Caution... For those that I come across that can afford to pay their mortgage (if they cut some of their expenses) but don't want to because they are so upside down (but want to stay in the home) ..... I don't touch them unless they have tried a loan modification. Just my personal policy...

 

Bottom line is.... the perception that all Attorneys are a waste of time or ruining homeowners because of what ends up on your desk is probably the wrong way to form an opinion. Take notes of the ones where the dissatisfied homeowners are coming from.... and take notes of the stories you come across and who the Attorney was that provided the happy results.

 

I've got a list of both in my area....

 

It's not hard to figure out who the obvious Ambulance Chasers are.... Especially when the client does not even meet/talk to the actual Attorney but ends up talking to their assistant or whatever. When this whole fiasco started, I went along with my clients and sat down with plenty of Attorneys and learned plenty. I still go along with my potential clients.... always interesting and you can certainly pick up who really has the homeowners best interest at heart.

 

 

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Permalink Reply by Eric Mieles on October 3, 2011 at 11:25am

I would just like to say....Thank you to all who shared and contributed to this post and topic. That's why I come here and our amazing niche of real estate needs exactly what this post did. We all SPOKE UP, we shared information, we debated and I'm sure some learned and were able to get better.

Please note, I believe all professions will have there share of good and bad and it's unfortunate that soooooo many attorneys jumped into this niche and gave others a bad name however I am 100% for homeonwers getting credible, professional advice and a TEAM of professionals looking out for there best interest.

I also would like everyone to note, I started this discussion with.....A QUESTION....rather than a statement. The reason being is to spark movement, thought provoking discussions and ultimately CHANGE.

Thanks everyone!!!

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Permalink Reply by Kevin Hardin on October 3, 2011 at 4:36pm

Disclsoure, I am the Director of a practice group at a law firm, I have been dealing with mortgage law and regulatory issues for 19 years. I decided to go to law school at the turn of the industry and due to take the Bar next year. As such I am not an Attorney but work directly for the Managing Partner of the firm. This post is NOT an advertisement. It is meant to communicate what is going on in the heads of Attorneys in our firm only. 

 

Our firm handles everything in relation to a distressed mortgagor. Loan Modification, Short Sale, Deficiency, Foreclosure, Audit, Litigation etc. 

 

I think what has separated us from many law firms out there is that we will NOT retain a client for any service, till an actual legal review has been done of their existing mortgage. That is to say, how can any Attorney recommend Short Sale, Foreclosure or Loan Modification if he/she does not understand the Mortgagor's risks and obligations?

 

Specific to Arizona, where we practice, we have certain statutes that bear to deficiency. Some Realtors complain that we might recommend foreclosure over a short sale. Why?, because if the homeowner stands to owe nothing post foreclosure i.e. no deficiency, then how can a short sale that requires some form of cash contribution or promissory note be in their best legal interest? Now, Realtors will scream foul when that happens and we appreciate their position when the witness a commissionectomy, but, why would any listing agent EVER list a property without having an Attorney review the mortgage and determine what the mortgagor's legal rights and obligations are first before all that time and effort is spent? You would not accept an offer from a Buyer without evidence of their ability to close, would you? Then why would you list a property for short sale and or being to "negotiate" a short sale without this information?

 

Now, on the other hand, if a review of those mortgages determines that, in fact, a deficiency risk arises, we have found that Short Sale is an amazing tool to mitigate that deficiency risk and get a great result for a homeowner. If the Listing Agent and Mortgagor retained the services of an Attorney that sticks to what they do best, the Agent or third party short sale negotiator can "Process" the short sale and all legal questions go to the Attorney and everyone can co exist. 

 

Next, in our opinion, any service offered by an Attorney should be based upon a greater Attorney / Client relationship not just a sale of a service. Negotiating a Loan Modification or Short sale is NOT a legal service per se. Now we will negotiate a short sale occasionally and only if there is large issue i.e. an unreasonable demand for cash contribution, demand for promissory note, mortgage insurance company committing First Party Bad Faith, extreme deficiency risk or potential exposure of mortgage fraud etc. We believe a good Attorney will shy away from offering a Loan Mod or Short Sale Negotiation and stick to the legal issues, like reviewing deficiency risk, if any, reviewing the short sale approval prior to closing to ensure proper language etc. 

 

Lastly, in the last 4 years I have been focused on this topic, I have rarely found ANY mortgagor would benefit from a Loan Modification. We are in AZ, where we find over 60% of mortgaged properties are underwater. Even assuming that a home will start appreciating by 3% per year starting today, a home that is greater than 20% underwater, will still take up to 7 years to break even and that is just unpaid balance to fair market value. It will still take another 3 years more to acquire enough equity to sell that property. The number of clients that come in that meet that low of a negative equity number is small and most are much more extreme. How can that possibly be a good outcome? It is indentured servitude. Tax Deductible Rental status at best. Further, loan modification payments are not reported as current as some would state. I review client's credit reports that have been in mods for the last two years and now facing ever increasing negative equity want to understand their options, each and every credit report is showing the mortgagor in a repayment plan which is negative. If we blew up a Nuclear Bomb in their credit report today in the form of Bankruptcy and Foreclosure, that mortgagor, assuming they pay and reestablish their credit will be a mortgagor again in 3 years under FHA. If that is true, WHY would any Attorney recommend this option unless this Attorney is incentivised by a large fee for processing a loan modification? Further, the statistics are unavoidable. How can you accept up front non refundable monies on a service that no one can control and the majority of mortgagors fail to receive the result intended? If we had a car repair business that charged car owners a flat fee to fix cars with the idea that the repair failed 75% of the time, that car repair business owner would GO TO JAIL for fraud!

 

In conclusion, each state has issues that are unique to this problem, but a common issue are parties doing tasks outside their license and their expertise. 

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Permalink Reply by Richard Zaretsky on October 4, 2011 at 1:35am

Wow Kevin -

Sounds like the mantra at our firm too!  We turn away more than we accept, either because we tell them to try themselves and save the money for our fee, or they are not eligible or realistic in their goals.  Our philosophy is that we are the attorneys and we practice law and that means giving legal advice.  The Realtor practices the transactional side of real estate which means marketing a property for a buyer or seller along with negotiating associated pricing and terms advice.

 

Good job!

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Permalink Reply by Pacita C Dimacali on October 3, 2011 at 10:47pm

I have a client who came to me two weeks before the auction. He had been applying for loan modification for nearly a year but can't get approved (because his income is way down). People have to understand  that applying for loan mod is about the same as applying for a new loan. One must prove ability to repay.

 

So we hurried and listed his property for short sale and luckily got an offer quickly. Begged -- BEGGED -- Chase to sotp the foreclosure so that we can work on the short sale.

 

At the same time, I want to make sure the seller is well aware of his options by advising him to see an attorney. He did. Attorney told him his best option is short sale. But then the attorney told him that for $1500 he can handle the short sale negotiations with the bank. Excuse me? We're in contract. I'm already working with the bank.

 

The seller thanked him...and proceeded to tell me...that he went, he saw, he listened. And that his best best in working out the short sale is to continue working with me since I have shown him how much I truly care about him and his family's situation.

 

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Permalink Reply by Michael Campus ABR,SFR,SRS on October 3, 2011 at 11:57pm

Just a note on TAX LIABILITY . I am not an attorney nor any type of tax professional. However, I do know this;

Suppose after a short sale is completed with a bank approval including a deficiency waiver, the borrower gets a 1099

later for $100,000 (just an example OK?) .

Does anyone here (or anywhere) actually believe that the IRS is now going to expect the borrower to pay (appx 35%) income taxes on the forgiven amount ( would be due in full with borrowers next tax filing) when they can't make a monthly mortgage payment in the first place???

I suggest you do a little research on how the IRS is treating these deficiences and 1099's.  I know. You should too.

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Permalink Reply by Dean E Eshelman, CPA, CDPE, IRES on October 4, 2011 at 12:05am

Waiver of deficiency does not mean that the individual will not get a 1099 for debt forgiveness, he will. Its a matter of the individual tax situation and how any part of the forgiveness of indebtedness can offset tax attributes. See IRS Form 982 and Pub 523 for detail examples. Unfortunately, some individuals may not be able to escape tax liability all together. A tax professional needs to evaluate the taxpayer situation.

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