Short Sales in Missouri

By Chris Watkins

The economic crisis we are facing is affecting millions of homeowners.  Many people are facing situations in which they can no longer afford their mortgage payments.  Perhaps they lost their job, or the interest rate on their adjustable rate mortgage has increased.  Whatever the reason, foreclosure rates are skyrocketing.  And to make things worse, property values are falling dramatically.  This means that for many people, their homes are worth significantly less than their mortgage balances.

If you are in a situation in which you can no longer afford your mortgage, and foreclosure is inevitable, you might want to consider a short sale.

WHAT IS A SHORT SALE?

A short sale is an arrangement with your lender whereby your lender consents to your selling your home for less than the balance of your mortgage.  It is, in effect, a negotiated settlement with the lender.  Often lenders will write off whatever debt remains after the sale.

HOW DOES A SHORT SALE BENEFIT A HOMEOWNER?

Whether a homeowner succumbs to foreclosure or negotiates a short sale, either way they are going to lose their home.  So why bother trying to negotiate a short sale?  There are several reasons:

• Deficiency.  A foreclosure can be an expensive process, and often leaves the debtor owing a substantial amount of money to the lender after the sale.  The debtor is liable to the lender for the deficiency, along with any costs incurred by the lender, including attorneys’ fees.  The lender can sue the debtor for these amounts and obtain a court judgment.  In a short sale, since it is a negotiated transaction with the lender, the amount of the deficiency is often forgiven.  This means that once the short sale is complete, the debtor can walk away with the comfort of knowing that his or her debt has been satisfied, and he or she will not be sued by the bank in a deficiency suit.
• Credit Score.  Whether you do a foreclosure or a short sale, your credit score (FICO score) is likely to take a massive hit.  Most experts, however, believe that a short sale is less harmful to your credit than a foreclosure.  Furthermore, with a short sale, it may be possible to negotiate with the lender how they will report you to the credit bureaus.  For example, the lender may agree to report that the debt was “paid as agreed” or something similar that would be less harmful than reporting “foreclosure” or “deficiency judgment.”

HOW DOES THE LENDER BENEFIT?

Lenders have no obligation to accept a short sale.  Once you default on your loan, it is entirely at the lender’s discretion as to whether or not to commence foreclosure proceedings (short of you filing for bankruptcy).  Banks, mortgage companies, and other lenders are businesses, and deciding whether to foreclose on a home or to accept a short sale is a business decision.  When a homeowner has defaulted on his or her mortgage, it usually becomes a matter of the bank cutting its losses.   So what are the reasons a bank would be willing to accept a short sale as opposed to a foreclosure?

• Lenders stand to lose more money in a foreclosure than in a short sale.  The reason is that there are a lot of expenses involved in a foreclosure (including legal fees and trustee fees).  Also, there is no guarantee that a buyer will show up at a foreclosure auction, and if they do show up, that they will make a good bid.  Although technically the debtor is liable to the lender for the costs of foreclosure, it can be hard to collect – people going through foreclosure usually don’t have sufficient assets with which to pay debts. 
• In many foreclosure sales, there are no buyers, and the lender ends up taking possession of the property.  Lenders want to avoid this for several reasons.  For one, they make no money on the property while in their possession.  Also, foreclosed properties are often in a state of bad disrepair, so lenders often have to spend a lot of money to get the property in a sellable condition, not to mention maintenance costs, utilities, insurance, and other such costs.  And of course, the lender will have to pay marketing costs (realtor commissions, etc.) to resell the property. 

WHAT DOES THE SHORT SALE PROCESS INVOLVE?

If you are in a situation in which you want to try to negotiate a short sale, then it is necessary to prove to your lender that your financial condition is so bad that you have no choice but to default on the mortgage.  This is usually accomplished by delivering a “hardship letter” to the lender, along with copies of bank statements, tax returns, W-2s, etc. 

You will also need to obtain an appraisal or market analysis so that you have a fairly accurate idea of the value of your property.  With that information, your real estate agent will have a good idea of what price to list the property.  The goal is to price the property high enough that your lender will be willing to sign off on the sale, yet low enough that you get quick offers.  The sales contract should say that the sale is “as is” and that it is contingent upon your lender’s approval. 

THE BENEFITS OF USING AN ATTORNEY IN THE SHORT SALE

There are several reasons to use an attorney when trying to negotiate a short sale:

• Unlike non-attorney organizations that provide short sale services, an attorney has a fiduciary duty to zealously act on your behalf, and is regulated by rules of professional conduct that apply to all attorneys.  These rules require attorneys to maintain strict confidentiality and to avoid conflicts of interest.  Furthermore, most attorneys are covered by malpractice insurance. 
• Attorneys generally have more training and experience in negotiations – particularly negotiating settlements in adversarial or semi-adversarial situations.  Remember, a short sale is, in effect, a settlement agreement with your lender.  Important negotiation points are (1) whether the bank will release you from further liability after the sale; (2) what the bank will report to the credit agencies; and (3) whether the bank will permit you to pay some or all of your expenses (such as realtor commissions and attorneys’ fees) from the proceeds of the closing.
• Lenders often will be more likely to take your matter seriously and devote more attention to it if they know you have hired an attorney. 
• If you have an attorney, lenders have a little more incentive to avoid foreclosure if a viable alternative (such as a short sale) exists.  The reason is that foreclosures have very specific notices and other procedures that must be followed to the letter – otherwise the foreclosure sale could be delayed or invalidated.  The bank knows that a good attorney will closely scrutinize the foreclosure process and look for reasons to invalidate it.

ARE THERE INCOME TAX IMPLICATIONS TO A SHORT SALE?

When a lender forgives a debt owed by a borrower, as is often the case in a short sale, there is an issue of whether that constitutes taxable income.  The general rule is the amount of debt discharged by a lender is included in the borrower’s gross income for federal tax purposes.  However, legislation passed in 2007, called the Mortgage Forgiveness Debt Relief Act of 2007, allows many debtors to exclude such income, provided that the mortgage covers their principal residence and borrowed funds were used to buy, build, or substantially improve the residence.  If the debt forgiveness does not qualify for exclusion on this basis, there are other grounds for exclusion that may apply.  For example, there is an “insolvency exclusion” that may apply to the extent a borrower was “insolvent” (i.e., liabilities exceeded value of assets) immediately before the discharge of indebtedness.

When indebtedness is forgiven, it will be necessary for the borrower to file IRS Form 982 (Reduction of Tax Attributes Due to Discharge of Indebtedness) with his or her federal tax return. 

CONCLUSION

If foreclosure is inevitable, and you are willing to move out of your home, then you should consider exploring whether a short sale would benefit you.

If you would like a complimentary consultation on the benefits of attorney representation through this process and of Jones & Watkins LLC to serve as Legal Counsel for your Short Sale call (573) 234-1130 or email us through our Contact Form.