SHORT SALE! Owner owes 3M on his 2M house!

7 Replies

Hey all! 

I just got a very warm lead that is in quite the predicament. I'm very familiar with every aspect of real estate - except short sales. I have someone that currently owes 3M on a house that can only be sold for about 2M.

What are my options here? Are are HIS options here? Any help or guidance would be great!

A short sale - no different than than any other. The numbers are just larger.  Without more information, hard to say if he would qualify etc... but unless he plans to come up with a $1mil out of pocket or stay in the house, that would likely be his only option to get out.

With a short sale, the basic explanation of the process is that the homeowner contacts their lender and the lender reviews the homeowner’s specific situation (financials, hardship and reason they are seeking to sell the property, etc.). The overall goal is to have the lender approve to sell the property for less than what is owed so the homeowner can walk away not owing anything and can avoid foreclosure. 

The lender will also confirm the fair market value and look to have an offer that is in line with the value.

It’ll come down to the lender’s guidelines and what the homeowner’s situation is.. that will really determine whether or not they will qualify for assistance.

for banks to take short sales the property has to be listed on MLS as well for a period of time.

Also if the bank forgives (allows for sale below owed amount) part of the loan. Taxes will be owed on that forgiven amount.  Not sure if a bankruptcy would change the parameters or not but that may be a better option for the seller.

Originally posted by @Scott Rogers :

Also if the bank forgives (allows for sale below owed amount) part of the loan. Taxes will be owed on that forgiven amount.  Not sure if a bankruptcy would change the parameters or not but that may be a better option for the seller.

yes if the bank reports the debt as forgiven.. there is an IRS form though you can file with your tax's that says your broke.. then you don't own the tax's on the forgiven amount.. during the crisis IRS postponed this so no one got that treatment but that sunset and now short sales or debt forgiveness needs to be calculated …. the forgiven debt is tax as ordinary income so a 1 mil forgiveness could be a 300 to 400k tax bill.. OUCHIE

This is a short sale if they want to get out from under the property. It's a loan modification or likely a ch 11 BK prospect if they want to attempt to keep while retaining ownership of the property. 

High net worth individuals may be in a hard place for a short sale if they still have money/assets.  This is because banks can get a judgement for payment of their losses even after foreclosure.  If they are basically heading toward bankrupt then they have a better chance.  If they complete a short sale they will receive a 1099 for the difference ($1M) and may be responsible to pay taxes on that 'phantom income'.  Many times they don't, but everyone's situation is different. so you need to suggest they discuss with their tax advisor first.

I would give a short sale a try because you never know what the lender will decide.