Posted on Wednesday, January 27, 2010
At a recent Bar meeting I heard from a Florida residential foreclosure defense attorney who had the following to say about short sales;
Don't pay the taxes. Why bother if the lender can deal with it during the process anyway and you’re short on cash?
Don't pay the mtg. Many banks are recently telling borrowers they won’t consider a short sale unless the loan is in default – this one keeps changing so be sure to check up over time.
Pay the homeowner association. Not doing so will cause more problems having to negotiate with them on the late fees and legal fees ,any banks will not allow be paid from sale proceeds in a short sale.
Keep the rental income. This attorney says, you may as well. You’re already in default and you’ll need the cash when your credit is trashed.
What if the bank won’t release you from the deficiency? This lawyer says on commercial properties do the short sale anyway and deal with the deficiency later if you have to. But if the property is your residence he says don’t agree to a short sale without some kinds of agreement about the deficiency. Why? Because you can continue living in the house for free, an additional benefit, until the bank takes it back by foreclosure.
About the deficiency, banks use the term "charge off." This does not mean they are releasing you from the deficiency. Be careful Once you’ve sold the house, the deficiency will be an unsecured debt. If you are married, depending on who was on the loan and how you hold your other assets, it may be uncollectible.
And as for the taxes on the deficiency, if the property is your primary residence, under the Mortgage Debt Forgiveness Act, there is no tax. UNLESS you did a cash out refinance, in which case the amount cashed out will be taxed as forgiven debt.
Interestingly, he said that most of the time the bank is right about whether to accept an offer or not – they seem to be able to gauge market value pretty well. Don't hold out for higher price - up to bank to accept/decide value. Most of time their right.
If getting released from the deficiency is important to you, make sure the purchase contract gives you an out if bank won't release you from the deficiency.