SPECIAL UPDATE - SEE SHORT SALE AND FIRPTA TAX WITHHOLDING - IRS ISSUES PRIVATE GUIDANCE
---------------------------------------------------------------------------------------
It is critical for Realtors, Buyers, Closing Agents and Lenders to understand the important issues of the short sale when applied to the Internal Revenue Code's Foreign Investment in Real Property Tax Act of 1980 or FIRPTA transaction because disregard for following the FIRPTA rules will make the Buyer and Closing Agent and possibly the Lender liable to the IRS for the Seller's Tax Liability!!!!! The problem is that right now there is NO RULE by the Internal Revenue Service ("IRS") for FIRPTA Short Sales.
Recently a Realtor asked me if we handle short sale transactions for foreigners - meaning persons who would be subject to FIRPTA. Application of FIRPTA has been common in Florida real estate transactions for decades because of the large number of foreign buyers and investors. The difference here was that the Realtor was asking if we could handle the short sale transaction of his foreign client seller. This required some thought and it was enlightening to search for the answer. It is important to point out that there is no specific rule for a short sale, and thus this discussion required analysis and interpretation of the Regulations of the IRS. This article discusses in summary what must be done by a transferee (buyer) or closing agent regarding the short sale of a property owned by a foreigner in a transaction not exempt under FIRPTA, and is therefore not meant to be a complete and exhaustive discussion of FIRPTA.
To assist with understanding this complex situation I recruited Shawn Wolf, Esq. who, along with his law firm, specializes in taxation regarding foreigners in the United States.
Summary Conclusion
I have jumped to the conclusion before even discussing the FIRPTA issues about short sales because the discussion below is frankly, daunting to any person with only basic knowledge about FIRPTA and about short sales. So this is a warning to the meek that this article requires a few readings to understand and you must use the hyperlinks to the IRS Regulations and Code that are provided in the text to fully comprehend the article.
Short Sales and FIRPTA seems to be a toxic combination fraught with potential liabilities to the buyer and closing agent and maybe even the lender, with any related interpretations and opinions potentially varying depending upon who your client may be. In the most common scenario, however, conservative thinking must be applied to these transactions to avoid having the buyer or closing agent pay the income tax of the seller.
The ultimate cost of a short sale vs. foreclosure must be examined by the lender. Published estimated cost of managing and selling an REO (WHAT IS AN REO?) is about $58,000 - and higher for larger mortgages (higher value properties). How a lender may calculate the benefit analysis of a foreclosure compared to a short sale when the transaction is not exempt under FIRPTA should govern whether or not the Realtor decides to take the listing since the lender may likely opt for the foreclosure route and not allow any short sale.
Closing agents are on the front line of the issue of FIRPTA and short sales and should be certain they are competent to handle the transaction without some professional assistance from tax counsel.
OK - Let's Get Into Short Sales and FIRPTA
What is FIRPTA?
In a nutshell, FIRPTA requires that the "buyer" (which term includes not only the actual buyer but the closing agent for the transaction as well), to withhold 10% of the "amount realized" (usually 10% of the selling price) from the property sold by a non-U.S. citizen / non-U.S. income tax resident (i.e., a "foreign seller") and remit it to the IRS shortly after the sale. The foreign seller can then request a refund of the withholding by filing a tax return with the IRS for the taxable year of the transaction.
Exceptions to FIRPTA
There are certain exceptions to the requirement of making the withholding, all of which are risky to the buyer and closing agent (with such risk being minimized through proper and timely documentation). This article is not a review of the full methods of dealing with FIRPTA, but only how it relates to a short sale. A person familiar with the FIRPTA requirements will be familiar with whether a buyer and closing agent can reasonably rely on the exceptions available in any particular transaction.
The key definition in the rule is the "amount realized". The IRS Regulations say, "The amount realized by the transferor (seller) for the transfer of a U.S. real property interest is the sum of:
(i) The cash paid, or to be paid; and
(ii) The fair market value of other property transferred, or to be transferred; and
(iii) The outstanding amount of any liability assumed by the transferee or to which the U.S. real property interest is subject immediately before and after the transfer."
Remember, the seller is not the lender - it is the owner of the real estate.
If the foreign seller transaction does not qualify under any exceptions, (likely the $300,000 maximum sale price coupled with the "qualified buyer" [IRS Regulation 1.1445-1(a)(4)], then barring an exception being applicable, the buyer or closing agent will remain liable to the IRS for 10% of the amount realized until such time as the foreign person pays his or her U.S. tax liability (in addition to possible penalties and interest relating to the failure to withhold). The prospect of being liable to the IRS for someone else's income taxes is obviously not a position for which any person wants to volunteer. Without an exception applying, this would likely kill the ability of the foreign seller to affect a short sale unless the lender agrees to taking its agreed amount less the amount of the required withholding.
Foreclosure and Deed in Lieu Under FIRPTA
There are special rules relating to the transferee (winning bidder) at a foreclosure sale and for a deed in lieu of foreclosure, all as set forth in IRS Regulation 1.1445-2(d)
As relevant to a foreclosure, IRS Regulation 1.1445-2(d)(3)(i)(A) generally provides that the "normal" 10% of the amount realized rule applies to a foreclosure sale; however, if certain special notice requirements are met, then the withholding will be reduced to the lesser of : (1) 10% of the "amount realized" or (2) an "alternative amount" equal to the entire amount determined by the court having jurisdiction over the real property that accrues to the debtor from the amount realized from the foreclosure sale (i.e., the surplus amount from a sale where the winning bid exceeds the amount of the foreclosure judgment - something that does not happen when the bid is less than the judgment amount). Importantly, if it is a foreclosure situation where the lien and debt is terminated, that amount shall not be treated as an amount that is reportable under IRS Regulation §1.1455-2(d)(3)(i)(A).
Furthermore, as relevant to a deed-in-lieu, IRS Regulation §1.1455-2(d)(3)(B) provides that the buyer or transferee (the lender taking back the property) must withhold 10% of the amount realized EXCEPT: (1) the transferee is the only person with a security interest; and (2) no cash or other property is paid to any person in respect to the transfer (except usual closing expenses); and (3) the related notice requirements for the transfer are satisfied.
FIRPTA and the Short Sale - the Dilemma - NO RULE FOR SHORT SALES
There is no rule for applying FIRPTA to a short sale as there is for a deed in lieu of foreclosure and foreclosure (discussed above); however, certain analogies could be drawn. In this regard, a short sale might be most analogous to a deed-in-lieu of foreclosure. Consider a foreign seller that, instead of short selling a property, deeds the property to the lender in a deed-in-lieu transaction. Assuming the above conditions are met, this transaction would not require FIRPTA withholding. Going one step further and assuming that the lender is a U.S. bank, a subsequent sale by the bank would not be subject to withholding.
In this context, it is important to understand that, as a general matter, the "other property paid" requirement would be satisfied in a short sale if the entire amount of the indebtedness either remains to be paid to the lender - in other words the foreigner is still liable to the lender for the unpaid balance of the loan (commonly known as the deficiency) - or if the indebtedness is simply forgiven. Thus by analogy, the short sale transaction would seemingly qualify for the exception under §1.1455-2(d)(3)(B) if it were re-characterized as a deed-in-lieu and a subsequent sale by the bank.
Regardless, of this logical analogy, the fact remains that a short sale is in fact, a sale by one party to another with the proceeds thereof going to the lender. In this regard, it would appear that 10% of the amount realized would need to be withheld on the sale. The relevant question then becomes: "What is the amount realized in a short sale?" Is it the amount paid by the buyer? Is it the amount paid by the buyer PLUS the amount of the debt that may or may not be forgiven by the lender? Does it matter if the debt is forgiven at closing or several years later (by letting enforcement of the debt lapse through the statute of limitations)?
One would think that, if there is NO forgiveness of debt and the foreign seller remains liable for the deficiency (whether or not such deficiency is collectable is another issue), then there is no additional "amount realized." The problem is that there is little, if any, IRS guidance on the issue, and in fact a "no-name", confidential non-binding discussion with the IRS did not clarify the issue (although certain follow-up may be forthcoming, and I will keep you posted if further guidance is provided).
Regardless, 10% of the "amount realized" will need to be submitted to the IRS, and without applying for a Withholding Certificate based on the maximum tax liability of the foreign seller it may not be possible to clearly determine how much should be withheld.
FIRPTA and the Lender
Lenders will not be happy with the conclusion that FIRPTA withholding is required on a short sale. As mentioned above, there is no question that 10% of the purchase price must be withheld on a FIRPTA sale. It is also possible that 10% of the forgiven debt also be withheld. Although there may be a U.S. income tax refund of part or all of the 10% withholding paid back to the foreign seller after he/she/it files the relevant U.S. income tax return, the filing of the tax return is not a procedure to be handled by the closing agent, buyer or lender and therefore there is no guarantee any money refunded will, in fact, be paid to the lender. Alternatively, the problem with not withholding the correct amount is liability of the buyer and the closing agent, and possibly the lender, for the amount that should have been withheld (along with penalties and interest). No party should put themselves in that position.
Here is an example:
Assume someone (a U.S. income tax non-resident alien or "NRA") bought a home for $500,000 cash and thereafter borrowed $800,000 when the value increased to $1,000,000 (80% LTV). Due to the changed market conditions, the NRA owner short sells the property and the sale is consummated for $750,000.
Theory One
One theory is that withholding would be based on the $750,000 sale price, and therefore the HUD settlement statement is going to show a net amount to the lender that is LESS $75,000 being held by the closing agent or the IRS (see below). The ultimate receipt of that $75,000 or any portion of it by the lender will be dependent on the taxpayer's receipt of the Withholding Certificate from the IRS (or if the money was already sent to the IRS, the application for any relevant refund). In this situation, the Withholding Certificate could be obtained based on gain of $250,000 (i.e., $750,000 less the $500,000 purchase price), thereby reducing the withholding (in the case of an individual that has held the property long enough to qualify for the beneficial long-term capital gains rate) to $37,500 (i.e., 15% of $250,000, or the NRA seller's estimated maximum U.S. income tax liability). Under either scenario the lender will not receive the full $750,000.
Theory Two
The other theory is that the amount withheld should be based on $800,000 (i.e., the sale price of $750,000 PLUS the $50,000 of additional debt above and beyond that), thereby requiring $80,000) The question would then how to compute the NRA seller's gain for purposes of the Withholding Certificate, and a complex computation may be necessary in order to determine the amount of gain (this is because the amount of tax due would increase the amount of the debt forgiveness, which in turn could increase the gain, and so on, requiring a circular calculation to be run until the computation terminates). It is hard to imagine that this type of result was intended.
How To Handle the FIRPTA Short Sale
I am not an expert in tax law. For help in the answer I went to Shawn Wolf Esq. (spw@pnrlaw.com) at the tax law firm of Packman, Neuwahl & Rosenberg, P.A. (www.pnrlaw.com) in Coral Gables, Florida. Mr. Wolf and the law firm specialize in the area of tax law and specifically how foreigners are affected by US tax laws. Their expert opinions, including their discussion with the IRS (which, as mentioned above, was initially provided and then withdrawn), yielded results that are will not make the short sale process easy for any involved party. Here is what the consensus says:
A. FIRPTA regulations must be applied to a short sale.
B. Assuming that the NRA seller's maximum U.S. income tax liability is less than the 10% withholding (possibly computed with debt forgiveness to show the "maximum withholding), a "Withholding Certificate" application should be submitted to the IRS on or prior to the date of closing. The purpose of the Withholding Certificate would be to have the IRS determine the amount of funds to be remitted with Form 8288. The Withholding Certificate application is IRS Form 8288B. If the NRA seller's maximum U.S. income tax liability exceeds the 10% withholding amount (again, possibly computed with debt forgiveness to show the "maximum withholding) there is no benefit to applying for a Withholding Certificate.
More Specific Procedure - Dealing with Real Life
As an example of the procedure for a short sale with a foreign seller where the buyer / property does not qualify for the typical $300,000 residence exemption would go like this:
1. Determination by closing agent or buyer that the seller is a foreign person subject to FIRPTA and the transaction is not going to be exempt from FIRPTA reporting.
2. As soon as practicable after realization this is a FIRPTA reporting transaction, apply for the Withholding Certificate by submitting Form 8288B to the IRS (if beneficial). How practical this might be in a short sale scenario experienced closing agents can only roll their eyes - but must still comply.
3. Until receipt of the Withholding Certificate fixing the amount needed to submitted to the IRS, the amount to be withheld for eventual timely submittal to the should be held in escrow by the closing agent (conservatively speaking, this amount should be 10% of the purchase price and the amount of the debt above the sale price. The withholding should be a separate line item on the HUD-1).
4. Be sure the preliminary HUD-1 submitted to the lender for approval of the short sale includes the line item deduction.
5. The best practice is probably to have a written agreement between the lender and the seller and the buyer that any amount withheld under FIRPTA compliance that is not required to be submitted to the IRS under the Withholding Certificate is to be paid to the lender by the closing agent from funds withheld by the closing agent for that purpose. A similar agreement can be entered into with respect to any U.S. income tax refund received by the NRA seller, but the ability to collect those monies if they are paid by the IRS directly to the foreign seller may be an issue.
Final Thoughts
This is only what our consensus is regarding our interpretation of the current IRS Regulations applied to the short sale process. The IRS may eventually disagree or agree with these conclusions. In the meantime we think it best to be conservative in application since the liabilities to the buyer and closing agent are so drastic.
Copyright 2008 Richard P. Zaretsky, Esq.
Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make. This article is for information purposes and is not specific advice to any one reader.
Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660 RPZ99@Florida-Counsel.com - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide! Shortsales@Florida-Counsel.com New Website www.Florida-Counsel.com. See our easy to find articles at Need Short Sale Information? - These Articles Probably Answer Your Question
I have many desperate homeowners coming to my office begging for ways to save their homes. Often times the homeowners qualify under the published criteria for the hyped Hope For Homeowners program also called H4H by the FHA. The program, passed by Congress in July 2008 was to save the homes of 400,000 homeowners. So far only 300 or so have applied! Why?
The program was to start October 1, 2008. That was pushed back to December 1, 2008 and then December 15, 2008. The program went through a major re-write to loosen qualification criteria and to give existing lenders a bigger dollar payoff.
Today is December 17th and as NPR reports, the program is a complete failure with not a single loan having been made - or likely to be made. Listen to the audio report from All Things Considered for the interesting details.
Those that have visited me to hopefully avoid a short sale or foreclosure on their home are devastated.
Copyright 2008 Richard P. Zaretsky, Esq.
Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make. This article is for information purposes and is not specific advice to any one reader.
Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660 RPZ99@Florida-Counsel.com - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide! Shortsales@Florida-Counsel.com New Website www.Florida-Counsel.com. See our easy to find articles at TABLE OF CONTENTS - RICHARD ZARETSKY SHORT SALE ARTICLES
As an attorney I often consult with homeowners that are in distress along with the Realtors that represent them in trying to accomplish a short sale. Often a detailed explanation of the foreclosure process would be very worth while for my client to have a thorough understanding of what they may be facing as the lender seeks to enforce the promissory note and mortgage. We usually don't have enough time to explain the process in full, so here is an article that should help non-lawyers understand what is happening according to rules of procedure in the court system and what options lenders have for enforcing the money they loaned to the homeowner.
The Promissory Note - the obligation to pay back the borrowed money -
In the beginning there is a PROMISSORY NOTE. This is a promise to repay money that is being given by the HOLDER, usually a bank or LENDER. To be sure the promissory note is repaid the HOLDER wants some collateral. The collateral could be anything from your heirloom watch to your car, but for our discussion purposes it will be your house.
The Mortgage - the collateral of your promise to pay back the borrowed money -
The typical way to provide the collateral of your house to the HOLDER of the promissory note is to sign a MORTGAGE. The mortgage is not a promise to pay any money. It is merely the promise that if the promissory note is not paid according to its terms, the HOLDER of the promissory note has the option of selling your house and taking from the proceeds of that sale only enough money to pay back the promissory note, giving to you the balance of any excess money from that sale.
Why do I get sued if I don't pay the money to the Lender?
Understand that the HOLDER does not have to use the mortgage to collect on the payments unpaid on the promissory note as there are other collection methods. For example, the HOLDER can just sue on the promissory note and get a money judgment against you for not paying according to the terms of the promissory note. That money judgment can then become a lien upon all of your property, both real estate and non-real estate, and (with certain exceptions) the HOLDER can then have the Sheriff sell your real estate or non-real estate assets until the funds raised are enough to pay off the promissory note.
For the purpose of this explanation let's assume the other route of enforcing the obligation to pay the promissory note is used and that is the commonly used "Foreclosure" or more appropriately termed "Mortgage Foreclosure". In the mortgage foreclosure the HOLDER takes the option of using the collateral of your home (in the example above) and elects to have it sold at (in Florida and most other states) a public sale conducted by an officer of the court, usually the Clerk of the Court in the county in which your house is located. At the foreclosure sale there is the opportunity for the public and the HOLDER to bid on the house and the house is then sold by the Clerk to the person that bid the highest amount.
The Foreclosure Sale Bidding Process-
This bidding process is confusing because you often hear that the Lender (HOLDER) got the house at the public sale for just $100. The bid of $100 is usually the opening minimum bid at a public sale. The reason for this is that there was no public interest in the house, usually because the judgment in the mortgage foreclosure is higher than the value of the house being sold. To understand why the HOLDER then only bids $100 and no one else bids at the public sale, you need to understand that the HOLDER, having been awarded a foreclosure judgment against the house (not against you as the borrower) is entitled to bid on the house at the sale and the HOLDER can "credit bid" up to the amount of the foreclosure judgment. This makes sense because why should the HOLDER, who is already owed money, have to actually pay the Clerk for any bid it makes if the money would only go right back to the HOLDER? So the court rules allow the HOLDER to just bid any number up to the amount the judge set in the foreclosure judgment (being the amount owned to the HODLER under the promissory note). So if no one else bids on the house at the sale, the bidding starts and ends at the $100 and the winner of the bidding is the HOLDER, who then gets the title to the house.
The Meat of the Foreclosure Process -
Now that we have dealt with the very beginning and the very end of the foreclosure process, let's get into the middle of the foreclosure process.
1. Notice that you are Delinquent: The foreclosure warning letter is usually the first stage of the foreclosure sale. This letter is not the letter that you owe a late fee because you did not pay by the 15th of the month. The foreclosure warning letter is usually after you are 60 or 90 days late on your payments. It usually precedes the filing of the complaint for foreclosure by 30 days, but currently that time period can be much longer. This letter could be written by the HOLDER or by the HOLDER's attorney and it usually demands the payment of the full amount of the delinquency and some letters could announce a full acceleration of the amounts due, including the principal amount of the promissory note. If you don't pay the money demanded to the HOLDER, the foreclosure complaint will likely follow. This letter may also include a suggestion that you contact the lender and see if a modification, deed in lieu, short sale or other assistance to your problem of paying the mortgage may be available and appropriate for you. Whatever you do however, understand that unless you pay the mortgage arrearage in full, the mortgage foreclosure process is likely going to continue!
2. The Foreclosure Complaint and Lis Pendens: The foreclosure complaint is a document that tells the court that you signed a promissory note and did not pay it, and you also collateralized the promise to pay the promissory note with a pledge of collateral (a mortgage) of real estate, in this case you house. Some people call this the "lis pendens". In reality the lis pendens is a document that is filed in the court file and also recorded ("filed" and "recorded" have different meanings) in the public records of the county where the real estate is located. The lis pendens mean literally "litigation pending" and it identifies who is involved and what property is involved. Some people think it is a lien on the house, but in a foreclosure litigation situation, the mortgage itself is the lien and the lis pendens is just a notice to the public that a lawsuit is filed, thus alerting anyone that would be buying or otherwise dealing with the identified real estate that its disposition is subject to a lawsuit. There are some issues of priority of liens that could be part of this discussion, but it is not necessary for the answering of your question.
3. Summons and Service of Process: The foreclosure complaint is provided to all of the defendants by "service of process" and usually that is accomplished by the delivery of a "summons" to each defendant. The summons says that you have a certain number of days to respond to the complaint filed in the court or a default will be taken against you. Let me mention a few things here:
a. If you are named a defendant in a foreclosure complaint it is because of one of three reasons: (1) you owe the money to the Holder; (2) you are owned money by the Borrower; (3) you are in possession or have a right of possession (like a renter) of the property described in the mortgage. If you are in category 2 or 3 you are not subject to owing money as a result of the lawsuit and the complaint is filed against you only so the mortgaged property can be sold free and clear of any claim you have or may have to the property named in the mortgage.
b. If you don't answer a complaint within the time period stated in the summons, a default will be entered by the court. The default is in effect an admission of the things stated in the complaint relative to your name and relationships in the complaint are all true. What this then means depends on what the complaint says concerning you. If you are a tenant for example, it means that the mortgage is a lien on the property superior to your right of possession. A discussion on foreclosure defenses is for another article unto itself, but they can include violations by the Lender of various regulatory rules. I have two caveats in regard to defenses: (1) don't confuse a defense with a defective foreclosure complaint. A lost note is not a defense, nor is a lack of an assignment of the mortgage. Both are defects in the complaint. (2) Defenses like Truth in Lending violations or RESPA violations require the transaction to be unwound and that means you have to pay back to the lender the money they loaned to you (less certain penalties and attorney fees). If you cannot return the money the defense becomes illusory. Congress is addressing this issue now that the housing market is upside down, but there are no solutions yet. Learn more at my article FORECLOSURE DEFENSE FALLACY.
4. The Timing of Pleadings: The HOLDER's attorney's procedure for a foreclosure is usually pretty much standard: file and serve the complaint, then wait for the statutory time to answer (usually 20 days), then file a motion for summary judgment of foreclosure with the necessary affidavits and schedule the hearing, then have the hearing with the judge on the motion for summary judgment of foreclosure (which hearing usually takes less than 10 minutes), then have the judge enter the order of final judgment of foreclosure and schedule the foreclosure sale date (sometimes the Clerk has to first give the date to the judge) which date is usually no less than 30 and no more than 45 days from the hearing; then the sale date comes and the public auction of the property occurs. It is this final event that ends the owner's ability to repay the loan.
5. Is the House Lost for Good? After the sale has occurred there is sometimes a period of redemption where you can still reacquire the house not withstanding it having been sold a public auction. This period of redemption varies from state to state. In Florida it effectively ends when the bidder at the foreclosure sale pays the full amount of the bid to the Clerk of the court. There can be legal objections to the sale based on irregularity or other technical infirmities and in Florida this must be brought to the attention of the Court within 10 days of the sale of the property at foreclosure. The judge then has a hearing on the issues and either sets the sale aside and orders a new sale or the judge confirms the sale and orders the Clerk of the Court to issue a deed to the successful bidder.
6. Attacking Errors in the Procedure: An appeal can be taken from a judgment of foreclosure but it must be timely. In Florida the time to take the appeal is 30 days from when it is rendered.
7. Deficiency Judgment or Surplus Funds? After the foreclosure sale, if the Lender got less than it was owed it can file a motion to have the court award a deficiency judgment against you as the borrower. How this amount of the deficiency is determined is usually the difference between the foreclosure judgment amount and the market value of the home at the time of the foreclosure public sale. An in-depth discussion on the procedure is covered in Foreclosure Deficiency Judgment Compared to Deed In Lieu and Short Sale Scenarios.
7.1 After the foreclosure sale, if the Lender got what it was owed there is probably more money left over. This occurs when the amount of the foreclosure judgment is less than the amount bid at the foreclosure sale. This excess money or "overbid" is called the "surplus" and it very well may belong to the borrower! To get this money the borrower must file a motion to the Clerk (sometimes the Court) to get the money. If there are other creditors that have judgments or liens on the house (like a second mortgage holder) those people could have a superior claim to the surplus money. Usually you can apply for these monies without an attorney, but if there are other claims or if you are uncomfortable with the process an attorney should be able to get the matter resolved with just a few hours of work.
This is a lot to digest and frankly I could have been much more detailed. You are probably asking yourself how long this whole process takes. Before the current deluge of foreclosures the courts and the attorneys were not that busy so things pretty much went about as fast in Dade County as they did in Flagler County. But today the whole system is over taxed with more cases than is humanly possible to process according the "fastest time" scenarios allowed by the Rules of Court. What was once typically a 100 day process can now easily be twice that or more.
Copyright 2008 Richard P. Zaretsky, Esq.
Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make. This article is for information purposes and is not specific advice to any one reader.
SEE A TABLE OF CONTENTS OF MY ARTICLES AT Need Short Sale Information? - These Articles Probably Answer Your Question
Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660 RPZ99@Florida-Counsel.com - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide! Shortsales@Florida-Counsel.com New Website www.Florida-Counsel.com. See our simple access to Short Sale and Foreclosure articles on Activerain at TABLE OF CONTENTS - RICHARD ZARETSKY SHORT SALE ARTICLES - 11/1/08
Actual question from a Realtor in Miami, Florida: I am trying to figure out for my clients who are still in the home and have actually had a foreclosure judgment awarded against their property while working on a short sale. At that point, they don't know if they should just give up as the "Foreclosure" has been awarded against them and not even pursue the short sale any longer, OR is there is hope that if they have the short sale approved that they are then "damaged less" than if they allow the auction sale to take place. I guess that I am not fully clear on what is considered the "foreclosure" as I am getting conflicting information and I feel ill prepared to answer our clients' questions at this point in the process.
Since people only refer to "foreclosure" as a single word when it actually a process, I am not sure if "foreclosure" branded on a person/credit is triggered by the "foreclosure judgment", the "sale at the courthouse steps" or the "deficiency judgment post sale". A short sale is easy to understand when that is triggered (the short sale is approved by the lender and the sale closes). But the "foreclosure" tag seems grayer to me. We are seeing, here in Dade County at least, a lot of foreclosure judgments awarded but then the lenders don't actually push for the sale for extended periods of time, still hoping the seller will get a short sale approved. It is these clients I am most concerned about.
The Answer:
Dear Miami Realtor -
As an attorney involved in the procedure of foreclosures and short sales I have been asked this question an increasing number of times - which tells me the legal process is confusing when it comes to the full run of the foreclosure process. So this article will set it out from way in the beginning to the very end and hopefully it will answer your question.
Nutshell Answer
First the nutshell answers to the above questions: When a foreclosure complaint is filed against a property owner it is not the END of the process - it is the BEGINNING. There is plenty of time for a short sale! In fact my office has several times accepted a client with a foreclosure sale scheduled for the next week and with a little convincing gotten it cancelled and then started the short sale process of getting a broker, listing the property and getting a contract, etc. A short sale is possible unless the property is already sold at a public auction of foreclosure. In almost every situation I have seen, the Lender does not want the foreclosure sale to occur if there is another alternative to them getting paid back at least the current value of the home. Primarily this is because of the cost to take and resell the property (averaged by Fannie Mae at more than $58,000). So what then is the process of a foreclosure?
What is the Foreclosure Process?
The Promissory Note - the obligation to pay back the borrowed money -
In the beginning there is a PROMISSORY NOTE. This is a promise to repay money that is being given by the HOLDER, usually a bank or LENDER. To be sure the promissory note is repaid the HOLDER wants some collateral. The collateral could be anything from your heirloom watch to your car, but for our discussion purposes it will be your house.
The Mortgage - the collateral of your promise to pay back the money -
The typical way to provide the collateral of your house to the HOLDER of the promissory note is to sign a MORTGAGE. The mortgage is not a promise to pay any money. It is merely the promise that if the promissory note is not paid according to its terms, the HOLDER of the promissory note has the option of selling your house and taking from the proceeds of that sale only enough money to pay back the promissory note, giving to you the balance of any excess money from that sale.
Why do I get sued if I don't pay the money to the Lender?
Understand that the HOLDER does not have to use the mortgage to collect on the payments unpaid on the promissory note as there are other collection methods. For example, the HOLDER can just sue on the promissory note and get a money judgment against you for not paying according to the terms of the promissory note. That money judgment can then become a lien upon all of your property, both real estate and non-real estate, and (with certain exceptions) the HOLDER can then have the Sheriff sell your real estate or non-real estate assets until the funds raised are enough to pay off the promissory note.
For the purpose of this explanation let's assume the other route of enforcing the obligation to pay the promissory note is used and that is the commonly used "Foreclosure" or more appropriately termed "Mortgage Foreclosure". In the mortgage foreclosure the HOLDER takes the option of using the collateral of your home (in the example above) and elects to have it sold at (in Florida and most other states) a public sale conducted by an officer of the court, usually the Clerk of the Court in the county in which your house is located. At the foreclosure sale there is the opportunity for the public and the HOLDER to bid on the house and the house is then sold by the Clerk to the person that bid the highest amount.
The Foreclosure Sale Bidding Process-
This bidding process is confusing because you often hear that the Lender (HOLDER) got the house at the public sale for just $100. The bid of $100 is usually the opening minimum bid at a public sale. The reason for this is that there was no public interest in the house, usually because the judgment in the mortgage foreclosure is higher than the value of the house being sold. To understand why the HOLDER then only bids $100 and no one else bids at the public sale, you need to understand that the HOLDER, having been awarded a foreclosure judgment against the house (not against you as the borrower) is entitled to bid on the house at the sale and the HOLDER can "credit bid" up to the amount of the foreclosure judgment. This makes sense because why should the HOLDER, who is already owed money, have to actually pay the Clerk for any bid it makes if the money would only go right back to the HOLDER? So the court rules allow the HOLDER to just bid any number up to the amount the judge set in the foreclosure judgment (being the amount owned to the HODLER under the promissory note). So if no one else bids on the house at the sale, the bidding starts and ends at the $100 and the winner of the bidding is the HOLDER, who then gets the title to the house.
The Meat of the Foreclosure Process -
Now that we have dealt with the very beginning and the very end of the foreclosure process, let's get into the middle of the foreclosure process.
1. Notice that you are Delinquent: The foreclosure warning letter is usually the first stage of the foreclosure sale. This letter is not the letter that you owe a late fee because you did not pay by the 15th of the month. The foreclosure warning letter is usually after you are 60 or 90 days late on your payments. It usually precedes the filing of the complaint for foreclosure by 30 days, but currently that time period can be much longer. This letter could be written by the HOLDER or by the HOLDER's attorney and it usually demands the payment of the full amount of the delinquency and some letters could announce a full acceleration of the amounts due, including the principal amount of the promissory note. If you don't pay the money demanded to the HOLDER, the foreclosure complaint will likely follow. This letter may also include a suggestion that you contact the lender and see if a modification, deed in lieu, short sale or other assistance to your problem of paying the mortgage may be available and appropriate for you. Whatever you do however, understand that unless you pay the mortgage arrearage in full, the mortgage foreclosure process is likely going to continue!
2. The Foreclosure Complaint and Lis Pendens: The foreclosure complaint is a document that tells the court that you signed a promissory note and did not pay it, and you also collateralized the promise to pay the promissory note with a pledge of collateral (a mortgage) of real estate, in this case you house. Some people call this the "lis pendens". In reality the lis pendens is a document that is filed in the court file and also recorded ("filed" and "recorded" have different meanings) in the public records of the county where the real estate is located. The lis pendens mean literally "litigation pending" and it identifies who is involved and what property is involved. Some people think it is a lien on the house, but in a foreclosure litigation situation, the mortgage itself is the lien and the lis pendens is just a notice to the public that a lawsuit is filed, thus alerting anyone that would be buying or otherwise dealing with the identified real estate that its disposition is subject to a lawsuit. There are some issues of priority of liens that could be part of this discussion, but it is not necessary for the answering of your question.
3. Summons and Service of Process: The foreclosure complaint is provided to all of the defendants by "service of process" and usually that is accomplished by the delivery of a "summons" to each defendant. The summons says that you have a certain number of days to respond to the complaint filed in the court or a default will be taken against you. Let me mention a few things here:
a. If you are named a defendant in a foreclosure complaint it is because of one of three reasons: (1) you owe the money to the Holder; (2) you are owned money by the Borrower; (3) you are in possession or have a right of possession (like a renter) of the property described in the mortgage. If you are in category 2 or 3 you are not subject to owing money as a result of the lawsuit and the complaint is filed against you only so the mortgaged property can be sold free and clear of any claim you have or may have to the property named in the mortgage.
b. If you don't answer a complaint within the time period stated in the summons, a default will be entered by the court. The default is in effect an admission of the things stated in the complaint relative to your name and relationships in the complaint are all true. What this then means depends on what the complaint says concerning you. If you are a tenant for example, it means that the mortgage is a lien on the property superior to your right of possession. A discussion on foreclosure defenses is for another article unto itself, but they can include violations by the Lender of various regulatory rules. I have two caveats in regard to defenses: (1) don't confuse a defense with a defective foreclosure complaint. A lost note is not a defense, nor is a lack of an assignment of the mortgage. Both are defects in the complaint. (2) Defenses like Truth in Lending violations or RESPA violations require the transaction to be unwound and that means you have to pay back to the lender the money they loaned to you (less certain penalties and attorney fees). If you cannot return the money the defense becomes illusory. Congress is addressing this issue now that the housing market is upside down, but there are no solutions yet. Learn more at my article FORECLOSURE DEFENSE FALLACY.
4. The Timing of Pleadings: The HOLDER's attorney's procedure for a foreclosure is usually pretty much standard: file and serve the complaint, then wait for the statutory time to answer (usually 20 days), then file a motion for summary judgment of foreclosure with the necessary affidavits and schedule the hearing, then have the hearing with the judge on the motion for summary judgment of foreclosure (which hearing usually takes less than 10 minutes), then have the judge enter the order of final judgment of foreclosure and schedule the foreclosure sale date (sometimes the Clerk has to first give the date to the judge) which date is usually no less than 30 and no more than 45 days from the hearing; then the sale date comes and the public auction of the property occurs. It is this final event that ends the owner's ability to repay the loan.
5. Is the House Lost for Good? After the sale has occurred there is sometimes a period of redemption where you can still reacquire the house not withstanding it having been sold a public auction. This period of redemption varies from state to state. In Florida it effectively ends when the bidder at the foreclosure sale pays the full amount of the bid to the Clerk of the court. There can be legal objections to the sale based on irregularity or other technical infirmities and in Florida this must be brought to the attention of the Court within 10 days of the sale of the property at foreclosure. The judge then has a hearing on the issues and either sets the sale aside and orders a new sale or the judge confirms the sale and orders the Clerk of the Court to issue a deed to the successful bidder.
6. Attacking Errors in the Procedure: An appeal can be taken from a judgment of foreclosure but it must be timely. In Florida the time to take the appeal is 30 days from when it is rendered.
7. Deficiency Judgment or Surplus Funds? After the foreclosure sale, if the Lender got less than it was owed it can file a motion to have the court award a deficiency judgment against you as the borrower. How this amount of the deficiency is determined is usually the difference between the foreclosure judgment amount and the market value of the home at the time of the foreclosure public sale. An in-depth discussion on the procedure is covered in Foreclosure Deficiency Judgment Compared to Deed In Lieu and Short Sale Scenarios.
7.1 After the foreclosure sale, if the Lender got what it was owed there is probably more money left over. This occurs when the amount of the foreclosure judgment is less than the amount bid at the foreclosure sale. This excess money or "overbid" is called the "surplus" and it very well may belong to the borrower! To get this money the borrower must file a motion to the Clerk (sometimes the Court) to get the money. If there are other creditors that have judgments or liens on the house (like a second mortgage holder) those people could have a superior claim to the surplus money. Usually you can apply for these monies without an attorney, but if there are other claims or if you are uncomfortable with the process an attorney should be able to get the matter resolved with just a few hours of work.
This is a lot to digest and frankly I could have been much more detailed. You are probably asking yourself how long this whole process takes. Before the current deluge of foreclosures the courts and the attorneys were not that busy so things pretty much went about as fast in Dade County as they did in Flagler County. But today the whole system is over taxed with more cases than is humanly possible to process according the "fastest time" scenarios allowed by the Rules of Court. What was once typically a 100 day process can now easily be twice that or more.
Miami Realtor - I hope this synopsis helps answer your question and if it raises any additional questions, just let me know and I will try to accurately answer you.
Copyright 2008 Richard P. Zaretsky, Esq.
Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make. This article is for information purposes and is not specific advice to any one reader.
SEE A TABLE OF CONTENTS OF MY ARTICLES AT Need Short Sale Information? - These Articles Probably Answer Your Question
Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660 RPZ99@Florida-Counsel.com - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide! Shortsales@Florida-Counsel.com New Website www.Florida-Counsel.com. See our simple access to Short Sale and Foreclosure articles on Activerain at TABLE OF CONTENTS - RICHARD ZARETSKY SHORT SALE ARTICLES - 11/1/08
THE TABLE OF CONTENTS HAS BEEN UPDATED AND MOVED - PLEASE CLICK ON THIS LINK TO GET TO THE NEW TABLE OF CONTENTS
TABLE OF CONTENTS - SHORT SALE AND LOAN MODIFICATION ARTICLES
Copyright 2009 Richard P. Zaretsky, Esq.
Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make. This article is for information purposes and is not specific advice to any one reader.
Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660 RPZ99@Florida-Counsel.com - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers, Buyers and Sellers Nationwide! Shortsales@Florida-Counsel.com New Website www.Florida-Counsel.com.
See our easy to understand articles at:
TABLE OF CONTENTS - SHORT SALE AND LOAN MODIFICATION ARTICLES
Richard Zaretsky is a Florida Bar Board Certified Real Estate Attorney practicing in West Palm Beach for over 33 years, and President of Automated Land Title Company for 27 years.
Richard Zaretsky has been practicing law for over 33 years.
If you have a particular problem or question regarding a listing, a buyer or a seller - or even a contract - please don't hesitate to call me. If you are a homeowner with difficultly paying your mortgage, in a foreclosure or considering foreclosure alternatives, you absolutely should contact me! Perhaps I can be of some assistance or at least give you some friendly advice. Brokers - why waste your time doing the paper work and qualifying a short sale? You should be doing what you do best - selling! We have a special program to assist brokers and sellers in the short sale procedure. Call me for information. Want to Buy a Foreclosure - we can assist you and your broker in the process and help prevent legal headaches in the future.
We can help with a short sale nationwide - so call and find out!
"We do not represent a client unless a written retainer agreement is signed by the client and us and the agreed retainer fee is received. Any discussion on this Blog is not legal advice and you should not act upon it without the advice of your attorney."
"The Hiring of an attorney should not be undertaken without a review of the credentials of the attorney - further infomation about Richard P. Zaretsky is available from this office and on the company website www.florida-counsel.com".
We are specialists in the Short Sale and Foreclosure process. Foreclosure and Bankruptcy should be considered absolutely last resorts to any borrower's mortgage problems!!!! Modification, Short Sale or Deed in Lieu and other "outside the box" solutions can avoid a homeowner in trouble from making a big mistake. Don't chop off the toe if you only need to cut the toenail!!!!
We provide Real Estate representation and advice for Buyers and Seller and Realtors regarding commercial and residential real estate. We also provide Business consulting and corporate representation for businesses including buying and selling of businesses and companies. We accept representation for litigation matters relating to real estate, including foreclosure, ejectment, and commercial eviction.
Caution: We provide frank counsel and "tell it like it is". We do not want our clients to waste their time nor ours on matters where we do not believe we can achieve our client's goals and expectations.
Recently, we successfully litigated a real estate breach of contract case against Mobil Land Development Corp and received a jury verdict having a value in excess of $20 million.
Our title company, Automated Land Title Company, has operated in the same location serving all of Florida for over 20 years. Here is a good link to explain the closing process for home closings.
BOARD CERTIFIED IN REAL ESTATE LAW BY THE FLORIDA BAR
Richard Zaretsky settled in West Palm Beach, Florida in 1975 after obtaining his law degree cum laude from Delaware Law School of Widener University. He is a graduate of Syracuse University, earning his BA in Economics. First working as an Assistant Attorney General for the State of Florida, he opened a private practice of law in 1978, and continues his practice today in the same West Palm Beach location. Although Mr. Zaretsky started his practice with the general practice of law, he strove to specialize in real estate matters. The result is that Mr. Zaretsky was Board Certified in Real Property Law in 1995 by the Florida Bar, and now practices in the areas of real estate law (both transactional and litigation) and commercial transactions. He is principal in the law firm of Richard P. Zaretsky, P.A., whose attorneys provide legal services in real estate and business transactions, state and federal taxation, estate planning and administration, family law, immigration, and civil litigation. Mr. Zaretsky is AV rated by Martindale-Hubbell, their highest rating for attorneys.
Mr. Zaretsky and his wife, Esther, have three children. Esther is a litigation and immigration attorney practicing in West Palm Beach.
For two decades Mr. Zaretsky has operated Automated Land Title Company, a Florida title insurance agency and real estate settlement company serving the entire state. Its office is located adjacent to his law offices in the Forum office complex. Automated Land Title Company handles transactions for acquisition, refinance and construction of homes, land and commercial properties.
In 2003, drawing on 28 years of experience representing financiers, Mr. Zaretsky and his oldest son, Max, created Zemaso Management Company, a private "bridge loan" lender. The company has offices in West Palm Beach.
Presently, Mr. Zaretsky's community involvement includes:
• Chairman of WPB-TV, West Palm Beach Government Television Channel Citizen Advisory Board.
• Serving on the Board of Directors of WXEL television and radio, the local PBS and NPR television and radio affiliate. He is also a lay leader representative to APTS, a Washington lobbying group representing the Public Television industry.
• Mr. Zaretsky is a Board of Director and former First Vice-President of The President Country Club, and serves on the By-Laws and Long Range Planning committees.
• Founder and President of the Community Broadcast Foundation of Palm Beach and the Treasure Coast, which is a public foundation charity that has successfully contracted to obtain ownership along with WNET of New York, of the WXEL radio and television public broadcasting stations and is awaiting FCC approval.
• Advisory Board Member for the City of West Palm Beach WPB-TV (appointed 2007) which is the city public access television station.
RICHARD P. ZARETSKY
Biographical Sketch
Richard is a great source of terrific information
Richard, This is an awesome article. There is so much incorrect information out there about promissory notes and "deeds in lieu of" that it's great to get the real scoop. Have you thought about writing a book? - Bryan in Florida
You've created THE SHORT SALE WIKI! I'll be back to keep reading. Thanks for taking the time and sharing. Great info!
A great read on Short Sales - Michael E in Washinton
It's like I was back in Real Estate School again. I will save this article for future referance. - Wayne in Oregon
You are what blogging is all about.!!!!
Fabulous compendium.
Richard, you're always a wealth of fabulous information. I so appreciate the time that you take to share your abundant knowledge. Lynda in Florida
It's also a good explanation of why agents should not negotiate short sales and leave the consulting on behalf of the client to an attorney. Tina in Virginia
from Lisa in New Jersey - Richard, this is the most thorough and detailed Active Rain post I have ever read - great job!
from Amber in Alabama - An excellent well written post that really gets to the heart of short sale transactions. Thanks for getting the information out to the AR community.
from Alan in California - Richard, this is by far the best material I have ever read on short sales, your post and your comments.
from Lisa in California - An excellent well written post that really gets to the heart of short sale transactions. Thanks for getting the information out to the AR community.
from Rick in Illinois - Richard, I am a private shortsale consultant for a small law firm in Chicago, IL. I perform shortsales for the law firm and their shortsale clients only. I Just want to say that by far your blog and your information has really impressed me. I appreciate the post about IRS form 982- Discharge of Indebtedness, and I especially like the post about the discounted deficiency judgements sold at about 5 or 10 cents on the dollar.
Richard, this is by far the best material I have ever read on short sales, your post and your comments. As a mortgage loan officer, I often talk with people who are upside down and only can recommend that they talk with a lawyer of a CPA with experience in short sales. I now have a much better sense in how I must approach them. These are trying times. There are so many people that need help. AJ
Should I have known this information two months ago, I would have been able to provide a better and firmer counter responce to a bank loss mitigator from GMAC that told me if I didn't accept her $11,800 net offer, on a $96,000 loan, she would get more money than what we were offering from a private investor at a discounted rate.
Well now, after I did some basic math I realized we were offering her $2,200.00 more on the shortsale for the 2nd note payoff than then the $9,600.00 GMAC would potentially receive at 10 cents on the dollar from an investor. Now, I can actually calculate and anticipate their responce on this specifically, thanks to your story.
Negotiating is an art not a science, but we definetely have to have key knowledge and information, be methodical and have some stradegy to negotiate with leverage on behalf of our clients. I look forward to the rest of your blog education.
.................................................
http://activerain.com/blogsview/237714/Foreclosure-Homes-Short-Sales
.................................................
Very informative post, thank you for sharing and the extra effort.
03/11/2008 12:56 PM by Matthew Heavener
Richard, Your posts are always enlightening. As a Realtor serving many short sale customers I appreciate your information and insights.
03/07/2008 05:45 AM by Bradenton Florida Real Estate - Dan Forbes REALTOR®
Thank for your invaluable insight Richard. I always learn something from your blogs.
................................................................
03/07/2008 10:10 AM by Klarque Garrison, "Mr. Short Sale"
That was a great breakdown. Thank you.
01/12/2008 09:52 PM by Mike Pahua
great job, very informative, we have got to get together soon. Call me.. Sharkey
01/12/2008 09:19 PM by Brian Sharkey South Florida Realtor
Awesome post Richard. Thanks so much.
01/01/2008 08:11 PM by LaNita Cates
Richard, Great Clear Cut Advice.
11/12/2007 05:51 AM by Matthew J Blum - MyFavoriteMortgage.net
ActiveRain Corp. is not responsible for the accuracy of the site's content (which is written by members of the ActiveRain Real Estate Network) and does not endorse the views of the real estate agents, mortgage brokers, and others listed here.
Powered by the ActiveRain Real Estate Network
© 2009 ActiveRain Corp. All Rights Reserved
