Investor Short Sale, What are the ramifications?
I met with an investor yesterday who is interested in short selling her property. She has had it as a rental property for the last 2 years (it used to be her primary residence) and she has struggled with keeping a tenant in the home. Coupled with struggling to keep a tenant in the home, her husband was out of work for 6 months. Long story short, she has gone through all of her cash savings and is 2 months behind on her mortgage payment. What are the potential ramifications if she short sells the house? I told her that if the property is foreclosed on, the bank would have the right to sue her for the balance plus legal fees. I have heard that some banks are clearing personal checking accounts for owners who have investment properties. Does anyone have any first hand experience with these situations?
Replies to This Discussion
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Permalink Reply by Kent Dills on
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Cindy, of course every situation is different but I closed on 3 shorts for an investor in 2009. 1st on each IndyMac Bank, 2nd was OCWEN on 2, and SLS on the last. In no cases did the investor have to come out of pocket with cash or sign a note. And, no deficiency judgements so far.
But every deal is different. This track record (as well as those of others willing to share) should give you positive expectations going in. Then you just need to deal with the scenario as it fleshes itself out! Best of luck and keep working hard! -
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Permalink Reply by Cindy Greenya on
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Kent, this is great news! Thanks for sharing!
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Permalink Reply by James ferebee jr on
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I just finish shorting 15 houses for an investor, GMAC even revised the note and it showed that the obligations were satisfied. Saxon had 7 of them and they shorted everyone and even paid the back taxes from 2008 on three of them because they were also due. Looks like Indy Mac is going to follow the lead from the rest of the banks.
I am working with an investor who has 30 homes at this time and so far so good 5 done and they are clear no prom notes or other cash out. However in both cases the investor did not have loads of cash in the bank...
In addition I explained to the other lenders that my client was in trouble with other lenders as well. -
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Awesome!
James ferebee jr said:I just finish shorting 15 houses for an investor, GMAC even revised the note and it showed that the obligations were satisfied. Saxon had 7 of them and they shorted everyone and even paid the back taxes from 2008 on three of them because they were also due. Looks like Indy Mac is going to follow the lead from the rest of the banks.
I am working with an investor who has 30 homes at this time and so far so good 5 done and they are clear no prom notes or other cash out. However in both cases the investor did not have loads of cash in the bank...
In addition I explained to the other lenders that my client was in trouble with other lenders as well. -
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Permalink Reply by Mori Langshaw Sr on
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This is not explaining the total ramifications to the IRS though guys. Traditionally investors (that bought a property and rented it out) cannot escape the deficiency judgement. They are liable for the taxes on the deficiency...period! Now if they have an all star accountant/tax advisor, then maybe they can do some things but the bottom line is that an "Investment" property DOES have IRS ramifications. This is not between the bank and the homeowner. Its between the IRS and the homeowner.
The bank is STILL reporting the deficiency to the IRS (no matter if your negotiator tells you that they are cancelling the deficiency), so your investor is going to have to answer that. Please remember, if you closed a short sale in, lets say, August, your seller won't get their 1099-C until this time and then they do their taxes. Chances are that you may never know about the deficiency judgement issued.
In your scenario Cindy, you say she rented her primary residence out 2 years ago. Federal tax law says that if you lived in a property 2 out of 5 years before a sale then it is considered your primary residence, thus, your seller would qualify under the Mortgage Debt Relief Act and have the deficiency cancelled.
Disclaimer: I am not a tax accountant or an attorney, consult with your tax advisor. -
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Wow Mori! That is great information! Thank you so much for sharing!!!
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Permalink Reply by Juan Reyes on
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Permalink Reply by Karyl Moore on
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In AZ, you're right about the lender having the right to pursue the deficiency on a non-owner occupied home. I have an investor owned short sale and there is a HELOC with a credit union. The credit union did take money out of their account without warning.
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