Short sale brokers really manage two separate processes. The first is a real estate transaction in which the broker assists the seller in finding a buyer. The second is a complicated negotiation between the seller and one or more lenders. The negotiation can carry significant financial consequences. While the duties of the broker in a short sale are many, here are a few key obligations short sale brokers have to their clients.
1) Help your client determine if they qualify for a short sale.
Many brokers know the basic criteria for qualifying for a short sale: You owe more than your house is worth and you can’t afford to make your loan payments. What makes things complicated is short sale guidelines vary greatly depending on which investor owns the loan. For example, as of November 1, Fannie Mae and Freddie Mac are allowing homeowners to do a short sale even if they are current on their loan as long as they have an eligible hardship, which includes death of a borrower or co-borrower, divorce, disability or relocation for a job. (You can check here to see if your loan is with Fannie Mae or Freddie Mac.) Other investors require homeowners to have missed loan payments before they will authorize a short sale. Some lenders commonly ask for money from the homeowner at closing, others don’t. All these variables can be confusing to a homeowner. Your client is counting on your knowledge of the short sale process to help them make the best possible decision.
2) Communicate the tax implications.
If your client is considering a short sale, they will no doubt ask you how it will affect their taxes. While you will want to refer your client to a tax professional for advice, it’s important to understand and be able to communicate some basic but critical tax implications.
Key to your client is the impact of the Mortgage Forgiveness Debt Relief Act. If you owe a debt to someone and they cancel or forgive that debt, the canceled amount may be taxed as income. The Mortgage Forgiveness Debt Relief Act allows homeowners to exclude income from the forgiveness of debt on their principal residence as long as the loan was used to buy, build or substantially improve the property. An important note: The Act is set to expire on December 31, 2012. Whether Congress will extend it at this point is uncertain.
3) Determine if the client qualifies for cash incentives.
A number of lenders are willing to pay cash incentives to homeowners to have them do a short sale and avoid foreclosure. Bank of America and Chase are major lenders who are offering cash incentives to short sale sellers – BofA up to $30,000 and Chase up to $35,000. There are also a number of small local servicers who have been bought by large lenders like Chase and BofA who may be still operating under their original name, but have access to the incentives offered by their parent company. These incentives are an enormous benefit to cash-strapped clients who are trying to start their lives over again. It is critical that the broker finds out whether their client qualifies for incentives and to negotiate with the lenders to best serve their clients’ needs.
If you are working with a buyer or seller on a short sale and have any additional questions, I’d be happy to provide you with advice free of charge. My name is Richard Eastern, and I’m a Windermere real estate broker and a partner in Washington Property Solutions, a short sale solution provider. Our goal is to help brokers like you provide the best possible service to their clients in the short sale process. We pay a 30% referral fee. If I can be of any help, please give me a call at (206) 612-5541.