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Real Estate short selling

Started by Raider Bill, December 04, 2008, 05:07:25 PM

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Raider Bill

Here lately I've been hearing a lot about short selling property. from what I gather, the bank agrees to take a lower price than owed. This I'm told is a big up and coming thing here in Florida.

Word is that this way theres no foreclousere on your credit report.
How can this be? Got to affect your credit?

A close friend that got way too overextended on her house asked me if I knew anyhting about it which I do not.

Any knowledge?
The First 70 years of childhood is always the hardest.

cheyenne

Because it's a sale not a forecloseure that has been agreed to by both parties. That being said it all depends on the agreement between the bank and the seller and the fine print of the contract. A good lawyer is a must to protect a sellers concerns. Cheyenne
Home of the white buffalo

stonebroke

I think though you have to report the amount forgiven as income and pay taxes on it.

Stonebroke

beenthere

I'll admit to not knowing, but I will wager that there are a lot of business's springing up to take someone's money to "try" to make that happen. Preying on those who are already overextended people.
Often hear their advertising about helping people with taxes owed, bad debts, etc. and they will (for a fee) try to get it taken care of. Must make good money, because they can afford TV commercials.

Just be cautious. Best for people to go direct to the creditor and see what can be worked out. IMO.  :)

I also can see the banks taking that information and loss, and claiming some of the bailout money.  >:( >:(
south central Wisconsin
It may be that my sole purpose in life is simply to serve as a warning to others

nsmike

I think I can explain short selling. If a bank forecloses it has to keep the property for the statutary redemption period before it can dispose of the property. In a short sale they avoid the holding costs like taxes, insurance and maintenance. In a lot of states property thats been forclosed goes the vacant building list which means it lmust be updated to current code which means it either loses value or increases costs. For the bank a sure writeoff today carrys less risk than holding the property in todays market.
Mike

John Bartley

Quote from: stonebroke on December 04, 2008, 06:01:55 PM
I think though you have to report the amount forgiven as income and pay taxes on it.

Stonebroke

I don't know, so I can't say for sure, but if an income reporting is required, shouldn't there also be an accompanying capital loss to be used as a matching deduction? After all, there may be some virtual income, but the capital loss is real enough?

just wondering...

cheers

John
Kioti DK35HSE w/loader & forks
Champion 25hp band mill, 20' bed
Stihl MS361
Stihl 026

farmerdoug

A capital loss would only come into effect when you sell it for less that you paid.  If you borrowed more than you paid for the house and you sell it for more than you paid but then less than you you owe then you will have income and capital gain taxes both.
Doug
Truck Farmer/Greenhouse grower
2001 LT40HDD42 Super with Command Control and AccuSet, 42 hp Kubota diesel
Fargo, MI

cheyenne

Farmerdoug has just explained why we have this mess today. Everybody wanted a bite of the apple, now they all have tummy aches. They all made thier beds now let them sleep in it. These bailouts are a joke and won't work. The worst is yet to come. Cash is King. On a side note, another sawmill in my area just shut down! what does that tell us. Cheyenne
Home of the white buffalo

scsmith42

Stonebroke is correct.  The IRS treats debt forgiveness as income, and it is taxable.
Peterson 10" WPF with 65' of track
Smith - Gallagher dedicated slabber
Tom's 3638D Baker band mill
and a mix of log handling heavy equipment.

Ironwood

Here all along we've been living responsibly, w/ in our means and WHAT, NO BAILOUT FOR ME!? I should have been mismanaging my business, and life, so I can get in on some of that bailout cash. When are the people who have done things responsibly going to benefit? Kinda makes me want to puke.  BLAH  >:( :(


         Ironwood
There is no scarcity of opportunity to make a living at what you love to do, there is only scarcity of resolve to make it happen.- Wayne Dyer

logwalker

Quote from: scsmith42 on December 04, 2008, 08:20:08 PM
Stonebroke is correct.  The IRS treats debt forgiveness as income, and it is taxable.

Let's say you took a loan for 250k for a house and the bank forecloses or threatens to. You find a buyer willing to buy it for 200k on a short sale. The bank is agrees to take the loss. I have trouble seeing how the IRS can construe that as a taxable gain. After all you never actually got the money. I do think it would be reported to the credit agencies and go against your record.

Ironwood, they get the bailout and we get the bill. Vote all them out of office next chance you get. Joe
Let's all be careful out there tomorrow. Lt40hd, 22' Kenworth Flatbed rollback dump, MM45B Mitsubishi trackhoe, Clark5000lb Forklift, Kubota L2850 tractor

farmerdoug

Logwalker,

If you borrowed 250,000 you better have gotten the money.  If you did not then why did you borrow it?
Doug
Truck Farmer/Greenhouse grower
2001 LT40HDD42 Super with Command Control and AccuSet, 42 hp Kubota diesel
Fargo, MI

DanG

According to Dave Ramsey, and I've heard him explain this a number of times, you need to have an ironclad agreement, in writing, from the bank stating that they will accept the short-sale amount as payment in full.  If you don't, you could be liable for the amount of shortfall.  Don't take anything you hear over the phone as the Gospel!  It needs to be written out, and you need to read and understand all of it.
"I don't feel like an old man.  I feel like a young man who has something wrong with him."  Dick Cavett
"Beat not thy sword into a plowshare, rather beat the sword of thine enemy into a plowshare."

Raider Bill

I hate to see her do this, she worked hard to buy this property [single] and really fix it up by herself but her job has fallen through on her and she feels although she hasn't missed a payment the time is coming.

You are right there's a line wanting to "handle" this for her with buyers waiting. Someone's making money here.

Thanks,

My advise will be to hang in there.
The First 70 years of childhood is always the hardest.

Ironwood

I saw one gal on TV saying she had all her coulde-sac neighbors go into foreclosure, and untimately her county job fell through and she was NOT going to spend her 401K or savings to stay in the house!,.......................Kinda got me thinking, I suppose I would do the same, but what about personal responsibilty? You committed to this, you should follow through, I dunno, it is complex. She had no qualms of walking away. I thought it at least interesting.

Ironwood
There is no scarcity of opportunity to make a living at what you love to do, there is only scarcity of resolve to make it happen.- Wayne Dyer

DanG

Ironwood, it is a complex situation indeed.  If that lady has no hope of being able to stay in the home, she is wise to not sink her retirement fund into it.  The mortgage company accepted a certain amount of risk going in, and have been recieving interest payments for that.  They even share a certain amount of responsibility for the loss of her job, in all likelyhood.  If they had conducted their business responsibly, the house would be worth more than they have in it, so they wouldn't lose money, anyway.  Also, I'm hearing the the Government was insisting that the mortgage companies offer loans to people that couldn't afford them, so they bear some responsibility as well.  We, the people, elected the morons that did that, so we, the people are gonna pay for it.  About all we can do about it, this go-round, is to smile and pay the bill.  To prevent it from happening again, we can vote the nitwits out of office! >:(
"I don't feel like an old man.  I feel like a young man who has something wrong with him."  Dick Cavett
"Beat not thy sword into a plowshare, rather beat the sword of thine enemy into a plowshare."

moonhill

Ironwood, the woman on TV should put all her savings and 401k into the house.  That is if it makes the property completely hers, it pays the debt completely.  I wouldn't trust 401k's or paper dollars/savings.  If it is not tangible it is in question.   I wish I had everything in Gold coins.  When you wake up and you house is gone something is wrong.  It wouldn't surprise me to wake up one morning and inquire if my savings was still in the bank and there was no response.   I must say the future looks bleak.

Tim
This is a test, please stand by...

scsmith42

Logwalker, think of it like this.

The bank gave you 250K, based upon your credit record and promise to repay them with interest.

You used the money to buy something.  Maybe you used what you purchased to collaterilize the note from the bank, perhaps you didn't (such as using a Home Owners equity line to purchase a boat, or a different piece of real estate).

You repay the bank 50K less than they gave you.

At the end of the day, from a cash perspective you received 50K more than you repaid the bank.  You also may not have repaid them some interest that was due.

The actual asset that secures the loan is incidental. 

The policy of the IRS is that the 50K is taxable income - I think ordinary income but am not sure.  I'm not sure about if taxes are due interest that may have been waived if it was part of the 50K note. 

At the same time, you can claim a capitol loss on selling an asset for 50K less than you paid for it, but as I recall capitol losses will not offset ordinary income, only capitol income.  So you may get hammered with a loss that really doesn't help, while owing a tax in a separate class.
Peterson 10" WPF with 65' of track
Smith - Gallagher dedicated slabber
Tom's 3638D Baker band mill
and a mix of log handling heavy equipment.

logwalker

scsmith42, You may be right. But the borrower never actually receives the proceeds from the loan. It goes to the seller. It doesn't seem like a gain to me. But the IRS may see it differently. Does the IRS have this on a website? Another way to approach this is that the purchase was a investment and as such would offset the capital loss of the short sale. I think I would fight it. But then I don't see this happening to me. Joe
Let's all be careful out there tomorrow. Lt40hd, 22' Kenworth Flatbed rollback dump, MM45B Mitsubishi trackhoe, Clark5000lb Forklift, Kubota L2850 tractor

logwalker

It was reported this morning that 533,000 lost jobs in November and 10% of all mortgages are at least 1 month late or in foreclosure. Those are scary numbers. Joe
Let's all be careful out there tomorrow. Lt40hd, 22' Kenworth Flatbed rollback dump, MM45B Mitsubishi trackhoe, Clark5000lb Forklift, Kubota L2850 tractor

stonebroke

I think the IRS treats it like a gift. You owed the bank extra money and they gave you the money you agreed not to pay. Nothing the IRS does makes any sense.

Stoneboke

Roxie

In 2007 the IRS allowed "restructured" mortgages to be free from income tax.

http://www.irs.gov/individuals/article/0,,id=179414,00.html

Restructed debt (credit cards, etc) is still taxable income.

Say when

scsmith42

Roxie, that's great news for Bill's friend.

LW - what's the difference between the bank loaning you 200K, giving it to you via a check, which you turn around and write another check for 200K to the person selling you the house, and then turn around and give the bank a lien against the house to secure the 200K note,

As opposed to just having the bank write the check to the seller?

The net result is the same.

Now if the bank was both the seller as well as the lender, then that could be different.
Peterson 10" WPF with 65' of track
Smith - Gallagher dedicated slabber
Tom's 3638D Baker band mill
and a mix of log handling heavy equipment.

Raider Bill

The First 70 years of childhood is always the hardest.

stonebroke


farmerdoug

Okay, that debt fogiveness is good only up to the principal of the house.  If you bought the house for 200,000 and then rolled a boat, car,credit card, home improvement, etc in for 100,000.  So now you owe 300,000 on the house.  Let say the bank will forgive you 100,000 so you are back to a 200,000 loan.  In that case you are liable for the taxes on the 100,000 forgiven.

If you borrowed 300,000 to buy the home and then the bank forgives a 100,000.  You would not be liable for the tax on the 100,000 forgiven.
Doug
Truck Farmer/Greenhouse grower
2001 LT40HDD42 Super with Command Control and AccuSet, 42 hp Kubota diesel
Fargo, MI

logwalker

Quote from: farmerdoug on December 05, 2008, 04:25:05 PM
If you borrowed 300,000 to buy the home and then the bank forgives a 100,000.  You would not be liable for the tax on the 100,000 forgiven.

Yes, that is all I'm saying. If other things got rolled into the house via a home equity line of credit, then it would be different. But the HELOC would be in second position to the First Mortgage.

scsmith42, you are right that a refinance would net the borrower cash that should be taxable. I was just thinking of a straight mortgage for the initial purchase. It sure gets complicated. Joe
Let's all be careful out there tomorrow. Lt40hd, 22' Kenworth Flatbed rollback dump, MM45B Mitsubishi trackhoe, Clark5000lb Forklift, Kubota L2850 tractor

scsmith42

Peterson 10" WPF with 65' of track
Smith - Gallagher dedicated slabber
Tom's 3638D Baker band mill
and a mix of log handling heavy equipment.

isawlogs


Between you and me , it should not be complicated at all .... You borrow it , you paye it back .   ::)
A man does not always grow wise as he grows old , but he always grows old as he grows wise .

   Marcel

stonebroke

So I was just kinda wrong but not completely?

Stonebroke

Raider Bill

In this case She borrowed $137k for the house, down stroked $25k =$162. Took second morgage or equity loan of $20k to fix up plus some more of her $$$ around $10k.   total owed bank around $182.

Poured everything she had into this house then the bottom dropped out of her industry.
The First 70 years of childhood is always the hardest.

logwalker

The bank took the risk and got the collateral. It just was worth a lot less. I am really surprised they let the borrower off the hook. Seems like they would try to get the rest out of their hide. Joe
Let's all be careful out there tomorrow. Lt40hd, 22' Kenworth Flatbed rollback dump, MM45B Mitsubishi trackhoe, Clark5000lb Forklift, Kubota L2850 tractor

easymoney

there is a small bank in my town that has been known for years to make small loans to people that the bigger banks would not touch. like you could go in and borrow a few hundred dollars on your signiture with no collatteral. they finance a lot of used cars and trucks even logging operators. from time to time they auction off thier reposessions. i bought an 02 pontiac grand am at one of thier auctions a couple of weeks ago for $800.00 a good car just needing a good cleaning.  i found the payment book in the glove copartment they had loaned $5,500.00 on this car and he had not made one payment on it. from the way cars were selling i think the bank was loosing big time. i have heard they have a lot of people that are behind with payments. thier repo lot is already filling up again.

Handy Andy

  Seems to me that, if someone has a house, refinances it to take out money for cars and vacations, whatever, then decides they can't make the payments and the bank has to take a hit because the house isn't worth what it once was, should have to pay taxes or something for the loss the bank takes. Really should have to pay back the bank's loss at a future date. 
My name's Jim, I like wood.

johncinquo

SCS has it correct.  The seller receives a 1099 to report at the end of the year, from the bank.  I have bought my 4th short sale property this year.  I have turned 3 into rental properties, and my offices are in the other.  I have also bought 3 other properties from bank liquidations.  Talk about cheap, the banks want these off their books.  How about a house that sold for $124,000 6 years ago, that sold for $34,000 last week.  If I coul get my hands on more cash I would buy these every month. 

The banks want these off their books as quick as possible.  They will take the loss now, and get some money back into their system to work with, rather than sit on an asset for an unknown amount of time, with an unknown pay out, and face further risk. Banks are also not in the property management or rental business, so they are better off not trying to keep the property. 
To be one, Ask one
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