ELIZABETH, N.J- If you are one of the many property owners experiencing financial distress in the City of Elizabeth, you have probably received a myriad of letters offering short sales, mortgage modifications and bankruptcy services from a number of professionals. Since public records of Court proceedings, along with deed and mortgage records are now accessible to everyone as result of the internet growth , it will become virtually impossible for you to hide from the hundreds of solicitors who will knock on your door or send you mailings offering help.
One of the remedies being offered by real estate brokers as a panacea for those who have defaulted in their mortgage obligation is the so called “short sale”. Indeed, the “short sale” may alleviate the financial burden of the debtor if the bank forgives the property owner from the obligation to pay the promissory note in exchange for the sale of the property at market value.
The “short sale” concept is very easy to understand. If the property is worth less than the mortgage balance (example: the property if worth $100,000 and the balance on the mortgage is $250,000) a negotiator can attempt to settle the default by convincing the bank to take the net proceeds of the sale ($100,000) and pardon the debtor on the $150,000 remaining. If the bank accepts, the bank will pay all the costs of the sale, including the attorney, the broker’s commission and the realty transfer taxes. Some banks are even willing to pay the property owner money as an incentive to leave the house. Those programs are commonly known as “keys for cash”.
While in a perfect scenario the bank forgives the debtor of the remaining debt at closing, this is not always the case, especially in cases where there is a second loan. In those cases, the holder of the second loan may agree only to the release of their second mortgage in exchange for a little money (usually $6,000) but they wait until the debtor “gets back on his feet” to send a collection letter for the balance.
Here are a few tips for those who are contemplating a “short sale” as a way to compromise their debt to the bank:
- Get a lawyer to represent you. The best lawyer is one in whom you have trust and confidence. In a short sales scenario, be careful of those brokers who tell you that “you do not need a lawyer”. You want to protect yourself from any further liability to the bank.
- Make the “clean slate” your objective. Since you want to end up with a “clean slate” on the indebtedness with the bank, instruct your attorney to make sure that you will have no further responsibility of making payments subsequent to the closing.
- Don’t vacate the property. Do not leave the house until you know the short sale has been approved. Be certain that the buyer has been funded by his mortgage company and the closing has been set down. You are the captain of the ship. Don’t abandon your ship based on promises that the closing is a “done deal”. Unless you are reassured that the closing will take place you and your family should not surrender possession.
- Consider your Tax Liability. Ask your attorney to explain to you the tax consequences of the “short sale”. The bank could issue a 1099 to IRS informing them of the forgiveness on the balance on that taxable year. In the example that I gave before, you maybe imputed with a “gift” for $150,000.
- You may have other options. Ask your attorney if the “short sale” is your best option. If you would like to keep the house and the lender has refused a mortgage modification, you can still obtain relief from the Bankruptcy Court by proposing a suitable Chapter 13 Plan. You may be able to ask for a “cram-down” of the second mortgage.
Law Offices of Julio Sanchez, Esquire
425 Elmora Avenue
Elizabeth NJ 07208
Telephone: (908) 355-0666
Fax: (908) 355-3548