By Jennifer Srock
What are some possible affects a short sale has on the seller’s taxes and credit? A realtor must refer sellers to an attorney or tax adviser to assess your individual case.
What is a deficiency judgment?
The difference between the mortgage balance and the discounted amount will be the total that the lender may seek a deficiency judgment against the seller who sold their home “short” of what they owed on their mortgage. If granted, this judgment may affect the sellers and their credit report just as any other judgment. Likewise, the same judgment can be sought after if the seller has let their home go back to the bank and the bank sells it at auction for less than what was owed. A seller may back out of the short sale without obligation to the buyer if they don’t agree with the terms of the approval.
What is a 1099 on a short sale?
A 1099 is given to homeowners as a result of income they’ve received from the sale of their home. For example, if the bank is owed $100,000 and agrees to accept $75,000 for a short sale, the homeowners actually made $25,000 (the short sale amount). Therefore, the homeowner can receive a 1099 for that amount. Again, A seller may back out of the short sale without obligation to the buyer if they don’t agree with the terms of the approval.
Can these consequences be avoided?
Results may vary by state. Speak with a local accountant on how a 1099 may affect you. Speak with a local realtor and or attorney on how a deficiency judgment may affect you.
In Arizona, AZ statute 33-814, subsection G covers deficiency judgments.
Here’s an example of a short sale negotiation that took place between a bank and a listing agent on behalf of the seller.
The agent received approval from the first mtg on a short sale, but the letter of approval said that they were releasing the property only (and reducing the balance) but not releasing the homeowner from the debt. The letter said that by signing the agreement, the homeowner would still be responsible for the difference. There was a second mortgage for $10k and it is an equity line taken out after the home was purchased. The second will settle for $2500 but will go after the balance with a deficiency judgment.
AZ law provides for NO deficiency judgments on purchase money mortgages, meaning a mortgage used to purchase a property for a single family home on 2.5 acres or less. So, the first mortgage lender does not have the right to pursue a deficiency judgment. However, the second mortgage was placed after the purchase so that is a full recourse note, meaning they can go after the homeowner for the difference. Now if this had been an 80/20 loan when they first bought the home the second would also not be able to get a deficiency judgment. That gave the listing agent a reason to push the bank holding the second mortgage even harder in this type of a situation. The second mortgage company is in second lien position, meaning they will wind up with nothing and no recourse if the first mortgage forecloses.
The listing agent contacted our attorney who said to NOT have the seller sign the letter from the first mtg holder, which specifically says the homeowner will be responsible for the difference. The listing agent called that first mortgage holder and reminded them of the statute. She explained that we are in a declining value situation and by taking this as a short sale they will receive more money than waiting to foreclose and putting it back on the market.
This situation provides one more example of why the listing agent must be super knowledgeable about short sales. A typical agent could have accepted what the bank is telling them and the deal would have fallen apart. It’s not just the bank that could cause the short sale to fall through but, the seller can also decide to cancel by not agreeing to the short sale terms. The listing agent must be able to negotiate with the lender by knowing the market, the state laws and being able to convincingly demonstrate the information in a helpful, supportive way.
My blog about “Buying a Short Sale” gives some insight about a buyer’s perspective on short sales if you’re interested as well.
“I heard that Brewer had recently changed the law in AZ to allow for deficiency judgements in AZ. Is this true?”
In Arizona, a deficiency on a purchase money mortgage is not allowed on residential property if a single one-family or single two-family dwelling that is on 2.5 acres or less. On September 4, 2009, Jan Brewer did sign a new law that went into effect on September 30, 2009. It repealed the Senate Bill 1271 that changed Arizona’s anti-deficiency law.
Until September 30, 2009, a buyer was protected from a deficiency only if the real estate did not exceed 2.5 acres, and the land was utilized as a single one-family or single two-family dwelling or in a foreclosure.
Jan Brewer signed the new law that states,”If trust property of two and one-half acres or less which is limited to and utilized for either a single one-family or a single two-family dwelling by the trustor under the deed of trust for at least six consecutive months and for which a certificate of occupancy has been issued is sold pursuant to the trustees power of sale, no action may be maintained…The Trustor is responsible for demonstrating that the trust property was used by the Trustor as a one family or single two-family dwelling.” §A.R.S. 33-814 (G).
A homeowner may be liable for a deficiency judgment.
The deficiency may take affect If a homeowner hasn’t lived in their home for six consecutive months or if the value of the house has declined because the homeowner has committed waste or in other words, not taken care of the place.
In some cases, the lenders require the borrower to prove they qualify for deficiency protection because the banks and are ready to litigate. It’s always a good idea to consult with a lawyer on such matters as well. Realtors are not legal counsel. With legal counsel, most homeowners will be able to negotiate terms that prevent deficiency judgments from their lender, or they may claim protections under the current anti-deficiency statutes per Arizona law.