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Should I Pursue A Short Sale?

As Tampa real estate attorneys working in a distressed housing market, one of the most common questions we receive is whether a client should pursue a short sale. The decision to pursue a short sale is one that varies greatly depending on the circumstances and should be discussed with an experienced Tampa real estate attorney. The questions presented and answered here are intended to help assist with basic information regarding the short sale process.

What is a short sale?
A short sale is the sale of real property whereby the lender who secured the seller’s loan agrees to accept less than what is owed on the note in order to sell the property to a third party. The process is similar to that of a traditional sale up until the point an offer is signed by the seller. At that time, the bank steps into the shoes of the seller and accepts or declines the offer. If the offer is accepted by the bank, the bank works the transaction through closing, paying all closing costs on behalf of the seller.

What if I have multiple loans?
In a short sale, all liens must be removed from the property before the property can be sold. This means that each loan must be negotiated. Typically, the first lien holder will allot nominal amounts towards any secondary liens existing on the property so that the property can be freed of encumbrances and sold. Unless all lien holders agree to release their liens, the sale will not go through.

Does a short sale hurt my credit?
Yes, it will have an effect on your credit. It is important to note that any default of monthly payments will hurt your credit; not just pursuing a short sale. However, taking action to avoid foreclosure will help mitigate the impacts to your credit. It is also important to note that the impacts of a short sale on your credit are typically less than that of a foreclosure or bankruptcy.

Can I sell my house to a family member and remain in the house?
Generally speaking the seller must vacate the home upon closing a short sale. A short sale is intended to be an arms-length transaction between buyer and seller. Therefore, unless the lender grants express consent for the seller to remain in the home, the seller must vacate at the time of closing.

Should I pay my Association fees if I am doing a short sale?
The Tampa real estate attorneys at DeWitt Law Firm recommend that you keep your association payments current wherever possible. If you fall behind in your association assessments, additional liens may be recorded against the property. Association liens for unpaid assessments tend to be some of the most difficult liens to remove from real property. Therefore, it is best to keep your association payments current whenever feasible.

Do I have to pay my property taxes if I am doing a short sale?
If you fail to pay your property taxes a tax certificate may be sold. Generally speaking, the bank will step in and pay the real estate taxes, but they are not required to do so. The best course of action to avoid tax certificates being sold is to pay your property taxes.

Do I have to pay my homeowners insurance if I am doing a short sale?
If you fail to pay your homeowners insurance, the bank will usually put what is known as forced place insurance on the property. Forced place insurance comes at higher premiums and is a way that the bank protects its asset. Again, please note that the bank is not required to pay for homeowners insurance, therefore, the best course of action is to continue to pay your insurance.

Will I be subject to taxation if I pursue a short sale?
Any waiver of debt is considered a taxable event by the IRS. Therefore, if the bank accepts a short sale and waives the remaining debt, a 1099 will be issued to the IRS and the amount of debt waived will be taxable income. For many years, the Mortgage Debt Relief Act exempted waived debt from taxation. However, that legislation sunsetted on December 31, 2013. To date, the Mortgage Debt Relief Act has not been renewed. It is important to consult a CPA to discuss tax ramifications and many times your accountant can find ways to mitigate your tax exposure.

Will the bank pursue a foreclosure if I do a short sale?
The bank will not forgo a foreclosure just because you are pursuing a short sale. The short sale and the foreclosure can occur simultaneously. However, if the bank is aware of your short sale attempts, they may be slower to pursue a foreclosure action against you.

Do I need an attorney for a short sale?
Short sales are complicated events that call into question many legal questions. While there are many realtors who are very competent at handling short sales, they cannot answer your legal questions or defend a foreclosure action for you. The Tampa real estate attorneys at DeWitt Law Firm firmly believe that a real estate attorney should be involved in every short sale to avoid one of the many pitfalls out there.