Michael G. Louis, Esquire

Don't despair! Just because you owe more on your real estate than it is worth does not mean that there is nothing you can do. Right now, I am involved in many cases where the property owner is trying to sell a property for which the mortgages or other liens on the property exceed the current market value. With the recent changes in the economy, this is not at all uncommon.

What you need to do is stay calm. Hire a real estate professional to help you sell the property. You will need a good appraiser to determine the value of the property. And you may also need an attorney to negotiate a short sale with the lender.

What is a short sale? A short sale occurs when a homeowner successfully negotiates with the lender to accept an offer that is less than the face value of the outstanding debt. Why would a lender do this? The proceedings involved with a foreclosure and property acquisition are lengthy and costly. Accepting an offer of a short sale that is close to the face value of the outstanding debt is more attractive to a lender than the arduous task of evicting property owners and the expensive task of legal negotiations over the 7-10 months it takes to complete a foreclosure (and an ample amount of time for a property owner to wreak havoc on the property).

Most lenders are sophisticated enough to understand that by allowing a short sale to take place they:

If the property owner does not want to leave even after a sheriff's sale, it can take many months or even up to a year to evict the property owner from the property. Finally, if the liens on the property really do exceed the value of the property, the lender who owns the second or third lien is not likely to bid at the sheriff's sale and pay off a first and possibly a second mortgage, just to own a property that cannot be resold for enough to recoup the debt owed them plus something toward their junior lien.

An important negotiating point in conducting a short sale is to remember that unless there is a problem with the loan documents, the lender has to send out a 1099 (c) forgiveness of debt notice, which will cause the property owner to have to pay the IRS taxes on any monies written off by the lender. If the property owner is insolvent at the time of the transaction or the debt is a disputed debt, then the property owner does not have to pay taxes on the forgiveness of debt income and the lender does not have to send a 1099 notice.

If the property owner has other assets or a high income, then the lender will probably require some other collateral or an unsecured note in order to allow the sale to take place. If the property owner has no other assets and does not have a high income, the lender will often just accept the net proceeds from the sale of the property and minimize its losses.

Properties in foreclosure can sometimes be attractive to investors because they may be able to acquire the property for less than fair market value, put a little money into fixing it up, and then sell it at a nice profit.

The important thing for the property owner is to not despair, keep in communication with your lender, and hire good professionals to help you through a difficult situation.

MacElree Harvey
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West Chester, PA 19381–0660
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