HOA dues can be deal killers for Short Sales if you are not familiar with Minnesota law concerning Assessment Liens and how to negotiate them. As the Negotiator, you many times have to educate the lender as to how Association Liens are treated in MN. This post will give you a general idea of how they work and how to negotiate them.
Associations governed by MCIOA, retain what’s called a “Super Lien” status based on section 3-116 of the Uniform Common Interest Ownership Act (CIOA) for assessments accruing, without acceleration, during the six months prior to the expiration of the owner’s redemption period. So basically, if the lender were to Foreclose, the Lien would stay in place and the lender has to pay the dues from the date of the Foreclosure sale through the end of redemption and then monthly dues thereafter that until the property sells and the new buyer starts paying the monthly dues.
In the event of a Short Sale, from a title transfer standpoint, the seller is redeeming the property and then selling it to the new buyer, “subject to bank approval of a Short Sale.” What the means, is that technically, the Association is due the full balance. So the HOA can kill the deal by wanting a full payoff.
As part of the negotiations with the lender, on your initial “negotiating” HUD, you will want to put the full amount due, projected through the date of closing and hope that the lender will allow ALL OF IT. We have gotten many lenders to do that.
Well, what happens if the lender refuses to pay? Then what do you do? Well, that’s when you have to let the Loss Mitigator know that you know what you’re doing and educate him as to HOA rights in the state of MN and how the lien becomes a “Super Lien.” The bank is going to HAVE to pay at least six months of dues, probably more. So they can either allow at least six months, or they can take the property back and probably have to pay even more. Most of the time, here at Short Sale Mitigation Services, we get the lender to allow at least six months, sometimes more.
So what if the HOA now comes back and wants more than six months? They are definitely within their right since the seller is redeeming. That’s when your negotiating skills really come into play. You gota’ get the association to see that it’s not in their best interest to allow the lender to foreclose; specially if the property is in pre-foreclosure. You must drive the point across that the sooner the house is sold, the sooner the new buyer will start making regular payments. The Association is formed by unit owners themselves that usually have to pick up the slack of any units that are not paying their dues. So you HAVE to get to board member that will help you plead your case to the rest of the board. The homeowner hopefully can help you do that. Many times, you might be dealing with an admin person, or maybe even an attorney that is just stuck and will not budge. That is when you need to escalate to a decision maker. You help them realize this “Super Lien” provision is not likely to make the association whole, but it will lessen the “sting” of the loss suffered by the association as a result of the mortgage foreclosure. However, the association may have to wait quite a while to receive the funds from the foreclosing lender; most lenders simply pay their assessment liabilities from the proceeds of the closing upon their subsequent sale of the property.
We hope this posting is helpful in your Short Sale negotiations. If you have any questions, please feel free to contact us at info@mnshortsaleinfo.com or visit us on the Web at www.MNShortSaleInfo.com
Disclamer: This post is only an opinion and not legal or financial advise. Please talk to an attorney or an accountant for legal and financial advise.
Thursday, July 22, 2010
Monday, July 19, 2010
Tax Implications on Foreclosure/Short Sales in MN
Tax laws, when it comes to debt being forgiven, are very clear. If you owe a debt to someone and they cancel or forgive that debt, the canceled amount may be taxable. Does it make sense? Sure, because you have just received something that you did not have before. So, when a homeowner loses a property in foreclosure or sells a house via a Short Sale, banks will typically charge off (forget about) the mortgage loan and simply issue to the former borrower a 1099C form for the amount of the loan that the bank forgave. For example, if you bought a house with a $100,000 loan, and the bank received $80,000 in a Foreclosure or Short Sale, that leaves $20,000 to collect.
Fortunately, there is good news for homeowners that purchased a home as far back as 2007. In 2007, President Bush signed off on “The Mortgage Debt Relief Act of 2007” generally allowing taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a Foreclosure or a Short Sale qualifies for the relief. However, the exclusion does not apply if you; either refinanced and cashed in some of the equity or you took out a Home Equity Line of Credit (HELOC). The amount of equity you cashed out will be taxed. Investment homes or second homes also do not qualify.
The provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million is eligible for this exclusion ($1 million if married filing separately).
For those who don’t qualify for Debt Forgiveness, the question then might be:
Will I get sued for the loan balance after a Foreclosure or Short Sale?
The short answer is no, if you live in Minnesota. In MN the bank does not have the right to come after you for the $20,000 “deficiency” if the property goes to Foreclosure sale. If you don’t live in Minnesota, and live in a state that has recourse (can pursue for a deficiency), the bank might simply forgive the debt anyways. Please check your state laws. If the bank forgives this debt, the bank then will issue you a 1099 for the amount of $20,000. But why would a bank ever forgive the debt and get nothing rather than at least try to collect something? The answer is simple: because by “1099ing” the borrower, the bank is declaring a deductible loss that reduces their income tax by roughly 35%. You see, the bank is not likely to have a collection rate as successful as the 35% that they are guaranteed to get, by charging off the debt. From the bank’s perspective, it’s simple and sound economics.
Ok, so you fall in the category in which you will receive a 1099 because the bank foreclosed or you sold your house via a Short Sale. Breathe easy, insolvent (broke) taxpayers are not liable for “Cancellation of Debt” (COD) income, generally speaking. However, if you need help with this circumstance, you’ll definitely need to find your own tax professional because the rules are technical. The applicable Code section is 26 U.S.C. Sec. 108, which generally sates that “Gross income does not include any discharge of indebtedness when the taxpayer is insolvent” Insolvency is defined elsewhere in the code to mean a simple balance sheet calculation. Do your liabilities exceed your assets? If so, you may be insolvent. The IRS form 982 (Reduction of Tax Attributes Due to Discharge of Indebtedness covers this issue exactly, and can give relief to an insolvent taxpayer hit with a huge 1099. Explore this with your tax advisor.
We hope this posting is helpful in your Short Sale negotiations. If you have any questions, please feel free to contact us at info@mnshortsaleinfo.com or visit us on the Web at www.MNShortSaleInfo.com
Disclamer: This post is only an opinion and not legal or financial advise. Please talk to an attorney or an accountant for legal and financial advise.
Fortunately, there is good news for homeowners that purchased a home as far back as 2007. In 2007, President Bush signed off on “The Mortgage Debt Relief Act of 2007” generally allowing taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a Foreclosure or a Short Sale qualifies for the relief. However, the exclusion does not apply if you; either refinanced and cashed in some of the equity or you took out a Home Equity Line of Credit (HELOC). The amount of equity you cashed out will be taxed. Investment homes or second homes also do not qualify.
The provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million is eligible for this exclusion ($1 million if married filing separately).
For those who don’t qualify for Debt Forgiveness, the question then might be:
Will I get sued for the loan balance after a Foreclosure or Short Sale?
The short answer is no, if you live in Minnesota. In MN the bank does not have the right to come after you for the $20,000 “deficiency” if the property goes to Foreclosure sale. If you don’t live in Minnesota, and live in a state that has recourse (can pursue for a deficiency), the bank might simply forgive the debt anyways. Please check your state laws. If the bank forgives this debt, the bank then will issue you a 1099 for the amount of $20,000. But why would a bank ever forgive the debt and get nothing rather than at least try to collect something? The answer is simple: because by “1099ing” the borrower, the bank is declaring a deductible loss that reduces their income tax by roughly 35%. You see, the bank is not likely to have a collection rate as successful as the 35% that they are guaranteed to get, by charging off the debt. From the bank’s perspective, it’s simple and sound economics.
Ok, so you fall in the category in which you will receive a 1099 because the bank foreclosed or you sold your house via a Short Sale. Breathe easy, insolvent (broke) taxpayers are not liable for “Cancellation of Debt” (COD) income, generally speaking. However, if you need help with this circumstance, you’ll definitely need to find your own tax professional because the rules are technical. The applicable Code section is 26 U.S.C. Sec. 108, which generally sates that “Gross income does not include any discharge of indebtedness when the taxpayer is insolvent” Insolvency is defined elsewhere in the code to mean a simple balance sheet calculation. Do your liabilities exceed your assets? If so, you may be insolvent. The IRS form 982 (Reduction of Tax Attributes Due to Discharge of Indebtedness covers this issue exactly, and can give relief to an insolvent taxpayer hit with a huge 1099. Explore this with your tax advisor.
We hope this posting is helpful in your Short Sale negotiations. If you have any questions, please feel free to contact us at info@mnshortsaleinfo.com or visit us on the Web at www.MNShortSaleInfo.com
Disclamer: This post is only an opinion and not legal or financial advise. Please talk to an attorney or an accountant for legal and financial advise.
Thursday, July 15, 2010
How Bankruptcy Affects Short Sales
One scenario that occasionally shows up in our Short Sale office is where the seller has filed a Chapter 7 Bankruptcy; and how that affects a Short Sale if the lender(s) want a promissory note.
You first have to start off by understanding how loans work and of course how Bankruptcy works as well. This will be a very brief overview. If you want further clarification, consult a BK attorney and your favorite experienced Mortgage professional as this is an opinion and should not be taken as legal advice.
A loan is comprised of a Promissory Note and a Mortgage. The Note spells out the terms of the loan (i.e. 30 years, 7%, etc.) and is the promise to pay the loan. The Mortgage is the collateral on the note. In other words, it’s the instrument that allows the banks to Foreclose and it’s the lien on the property.
There are two different forms of bankruptcy; Chapter 13 and Chapter 7.
Chapter 13 is a reorganization of debt; meaning that the Bankruptcy court will negotiate with all non-secured creditors to create an affordable payment plan. You still have to continue making your mortgage payment on top of the BK payment.
Chapter 7 basically wipes out all debt; including the Promissory Note. However; the mortgage/lien is still in place. What that means is that the lender still has the right to Foreclose.
You typically want to work on a Short Sale only if the BK has been discharged. There is a way to work a Short Sale while it’s in BK; however it requires more steps beyond the scope of this posting.
Ok, so how do Short Sales and Chapter 7 play together?
The purpose of a Short Sale is to be able to sell the property to a new buyer with bank approval for the loss; therefore, you have to be able to provide free and clear title. The only thing that truly has to be released is the Mortgage/Lien and the lender has to agree to do just that. However, in order to best serve your client, you also have to try to get the lender to satisfy the Note as well; otherwise the seller ends up with a deficiency. In the case of a Chapter 7, the Note has been wiped out so the seller is no longer responsible for paying off the Note, but the Mortgage is still in place.
If a seller has filed Chapter 7, the debt CAN be reaffirmed, if the seller agrees to take back an Unsecured Note (i.e. Promissory Note). So it’s the Negotiator’s job to make sure that no Promissory Note is signed.
So here’s how you should approach a Short Sale with these circumstances:
If it’s a first mortgage, they are going to get paid a net of the proceeds of the sale. Typically that will be enough. Second mortgages and Junior Liens will probably also want money in order to release their lien. Normally, you will ask the first mortgage to allow up to 10% of the principal balance be paid to the 2nd and $500 to any Junior Liens below that. They may or may not allow all that money to go to Junior Liens, but that’s the standard. If Junior Liens want more and the Senior Lien won’t allow it, the seller might have to contribute some cash. Remember, this is just to release the lien and you have to make sure that the approval letter says that. A good practice is to be clear about the BK upfront when you are negotiating and that any Promissory Notes will not be accepted by the seller as part of the terms of the Short Sale.
We hope this posting is helpful in your Short Sale negotiations. If you have any questions, please feel free to contact us at info@mnshortsaleinfo.com or visit us on the Web at www.MNShortSaleInfo.com
Disclamer: This post is only an opinion and not legal or financial advise. Please talk to an attorney or an accountant for legal and financial advise.
You first have to start off by understanding how loans work and of course how Bankruptcy works as well. This will be a very brief overview. If you want further clarification, consult a BK attorney and your favorite experienced Mortgage professional as this is an opinion and should not be taken as legal advice.
A loan is comprised of a Promissory Note and a Mortgage. The Note spells out the terms of the loan (i.e. 30 years, 7%, etc.) and is the promise to pay the loan. The Mortgage is the collateral on the note. In other words, it’s the instrument that allows the banks to Foreclose and it’s the lien on the property.
There are two different forms of bankruptcy; Chapter 13 and Chapter 7.
Chapter 13 is a reorganization of debt; meaning that the Bankruptcy court will negotiate with all non-secured creditors to create an affordable payment plan. You still have to continue making your mortgage payment on top of the BK payment.
Chapter 7 basically wipes out all debt; including the Promissory Note. However; the mortgage/lien is still in place. What that means is that the lender still has the right to Foreclose.
You typically want to work on a Short Sale only if the BK has been discharged. There is a way to work a Short Sale while it’s in BK; however it requires more steps beyond the scope of this posting.
Ok, so how do Short Sales and Chapter 7 play together?
The purpose of a Short Sale is to be able to sell the property to a new buyer with bank approval for the loss; therefore, you have to be able to provide free and clear title. The only thing that truly has to be released is the Mortgage/Lien and the lender has to agree to do just that. However, in order to best serve your client, you also have to try to get the lender to satisfy the Note as well; otherwise the seller ends up with a deficiency. In the case of a Chapter 7, the Note has been wiped out so the seller is no longer responsible for paying off the Note, but the Mortgage is still in place.
If a seller has filed Chapter 7, the debt CAN be reaffirmed, if the seller agrees to take back an Unsecured Note (i.e. Promissory Note). So it’s the Negotiator’s job to make sure that no Promissory Note is signed.
So here’s how you should approach a Short Sale with these circumstances:
If it’s a first mortgage, they are going to get paid a net of the proceeds of the sale. Typically that will be enough. Second mortgages and Junior Liens will probably also want money in order to release their lien. Normally, you will ask the first mortgage to allow up to 10% of the principal balance be paid to the 2nd and $500 to any Junior Liens below that. They may or may not allow all that money to go to Junior Liens, but that’s the standard. If Junior Liens want more and the Senior Lien won’t allow it, the seller might have to contribute some cash. Remember, this is just to release the lien and you have to make sure that the approval letter says that. A good practice is to be clear about the BK upfront when you are negotiating and that any Promissory Notes will not be accepted by the seller as part of the terms of the Short Sale.
We hope this posting is helpful in your Short Sale negotiations. If you have any questions, please feel free to contact us at info@mnshortsaleinfo.com or visit us on the Web at www.MNShortSaleInfo.com
Disclamer: This post is only an opinion and not legal or financial advise. Please talk to an attorney or an accountant for legal and financial advise.
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