Short Sales: Legal Pitfalls and their Solutions
Reprinted from REALTOR.org/realtormag Law & Ethics April 2009
Comments noted from the Short Sale Queen®
July 2009
In many areas, short sales are the biggest game in town. But you don’t want to jump into this niche willy-nilly. In addition to educating yourself on the ins and outs of these complex deals, you also need a good picture of the legal risks that exist for you.
There is no reason why any of these so called Pitfalls have to negatively affect us as real estate investors and double closers. We are making money disclosing and playing ethically, there is nothing in here that I do not include in your manual, coaching calls or when I personally talk to my Seller. If all of these explanations and pitfalls recovery option are not included in what you tell your seller now, CHANGE WHAT YOU SAY TO YOUR SELLER. There is no reason why you can’t do as many deals, make as much money but disclose to your Buyer, Seller, Title Company, Realtor, etc. and be honest, ethical and moral with all your clients!
Misrepresenting tax consequences.
Although it’s true that the federal government passed a law in 2007 directing the IRS not to count mortgage debt forgiven by a lender as income, the provision is limited. It applies only to purchase money, it doesn’t apply to debt on a cash-out refinancing and it doesn’t apply to second homes. There is also a dollar limitation, albeit a generous one ($1million for married couples filing separately, twice that for the joint filers). “A lot of associates are telling people there are no tax consequence,.” says Lance Churchill, a short sales specialist and trainer who operates in Boise, Idaho, and San Diego. “But it’s a limited law and you just need to be accurate about it.” Accountant who spells funny.
From the Short Sale Queen: As long as you notify your seller and include it in the contract – specifically on the line “16.0 Additional Terms:” on the Option to Purchase and Sell Agreement you are disclosing the tax consequence. If the defaulting loan was a cash out-refinance for the seller or even if you don’t know if there is a second mortgage on the property – be accurate and tell your sellers there is a good chance the bank will NOT forgive the unpaid amount and may come after them for that amount in the future.
Use this paragraph for additional Terms: Bank to place no deficiency judgment on seller’s credit. Bank to accept the purchase price as payment in full of underlying mortgage. Seller understands if the underlying loan on this property is a cash-out refinance or second home or has a second mortgage there may be tax consequences and they should seek legal advice from a qualified tax Accountant. These loans would not fall under the Mortgage Forgiveness Debt Relief Act and Debt Cancellation of 2007.
http://www.irs.gov/individuals/artic…179414,00.html
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