How to Research and Purchase a Kauai Short Sale Property
In the current buyer’s market on Kauai some of the best deals on Kauai property are found with short sales. Here is everything you need to know about Kauai short sales including what to look for as well as what to avoid.
What is a short sale?
A short sale involves the selling of real estate for significantly less than the balance owed on the property’s home mortgage loan. A short sale stops the foreclosure process and allows the homeowner to protect their credit record. Because the home will likely be sold for less than is owed, the lender must agree.
While short sales are less common during a seller’s market, in today’s buyer’s market a short sale can provide a great opportunity for someone wishing to purchase a Kauai home.
When do short sales occur?
Typically a short sale will occur when a borrower is unable to make their payments on their home mortgage loan and the lender chooses to sell the property for a moderate loss rather than trying to continue to press the borrower for payment or foreclosing on the home.
The primary difference between a short sale and a foreclosure is that a foreclosure is forced upon a homeowner by a lender, while a short sale is done my mutual agreement between the lender and homeowner.
Who decides when a short sale will occur?
Both the homeowner and the lender consent to the short sale in order to avoid foreclosure, a process that can be costly for both parties.
In foreclosure the banks may have to pay large fees. The homeowner being foreclosed upon suffers damage to their credit report and is still obligated to pay the deficiency (remaining balance) on the home mortgage loan.
For these reasons both the lender and the homeowner have an incentive to agree to do a short sale to resolve the default status of the home mortgage loan.
What happens during a short sale?
The mortgage lender (e.g., bank), consents to discounting the mortgage loan balance (money owed) as a result of the borrower’s financial hardship. This allows the homeowner to sell the property for less than was owed, with the proceeds of the sale going to the lender.
Who benefits from a short sale?
A short sale is not an ideal situation for the lender or the homeowner, though it is sometimes the most economical solution to solve a mortgage loan deficiency problem.
The homeowner can gain some control over their debt and may mitigate the damage to their credit, while the bank will lose less than if the property went into foreclosure.
What happens with the remaining balance on the home mortgage loan?
The loan’s remaining balance, after the proceeds of the short sale are provided to the lender, is still owed by the borrower unless a settlement is agreed upon with the lender.
The lender may include a condition of the short sale requiring the homeowner/borrower to sign a promissory note for some or all of the debt still owed after the proceeds of the short sale are applied to the loan.
A deficiency judgment against the homeowner/borrower may be pursued by the lender in both short sales and foreclosures, though in some short sales the lender will waive the right to a deficiency judgment in approval terms and conditions of the short sale.
Even if a lender forgives the mortgage loan’s remain balance there may be other lien holders that will not forgive the debt.
If the lender/bank agrees to cancel some or all of the debt owed by the borrower, is it considered taxable income?
The IRS considers any debt that is forgiven to be taxable income and requires the lender to report the amount of canceled debt on a Form 1099-C, Cancellation of Debt.
However, the Mortgage Debt Relief Act of 2007 (in effect until 2012) allows taxpayers to exclude income from the forgiveness of a debt on the principal of their home mortgage loan if the home is their principal residence. This is also true for debt that is reduced due to a restructuring of the mortgage or in connection with a foreclosure.
The Mortgage Debt Relief Act allows up to $2 million of the forgiven debt to be excluded, or $1 million if you are married and filing separately. The reason for the forgiveness of the debt must be directly related to the taxpayer’s financial duress or a decline in the value of the home.
For example, if you borrow $100,000 and then default on the loan after repaying $30,000, and then lender cancels the remaining debt, the amount of debt forgiven is normally taxable income for the borrower unless the property is the borrower’s qualified principal residence under the guidelines of the Mortgage Debt Relief Act.
How do banks/lenders decide whether to allow a short sale?
Offers for short sale transactions may be evaluated by the lender’s loss mitigation specialists who consider specific criteria including the probable selling price as determined by an Appraisal or Broker Price Opinion (BPO) to determine the homeowner’s current equity (or lack of equity).
Who else besides the lender/bank has to approve the short sale?
The short sale must also be approved by any lien holders on the property, such as second mortgages and tax lien holders as well as mortgage insurers who might be asked to pay money to offset the loss the lender suffers in the short sale.
What happens if a short sale is delayed beyond the foreclosure date?
If a short sale is delayed and not completed before the foreclosure date then the foreclosure may occur, eliminating any possibility of a short sale. This is one of the reasons it is advisable to use a Realtor knowledgeable in short sales to help avoid unnecessary delays and ensure that the transaction closes in time to prevent the foreclosure, which is not the case in many short sales that are handled by those unfamiliar with the process.
A professional Realtor skilled in short sales can also help to protect the interests of the buyer of a short sale property to avoid losing money if the transaction is cancelled for reasons beyond the buyer’s control.
What should I know before becoming involved in a Kauai short sale real estate transaction?
Before entering into any short sale transaction a potential buyer should consult a Realtor knowledgeable in short sales and take all precautions necessary to protect their own best interests from investigating the property’s condition to researching the title and all aspects of the potential financial transaction.
Even when a bank approves a short sale there are various things that may complicate the transaction, and thus a Realtor’s experience is essential. For a potential home buyer, a Realtor with training in short sales also knows how to avoid risky situations while finding those opportunities that offer the buyer a great price on a Kauai home.
Home sellers who are contemplating a short sale will benefit from a Realtor knowledgeable in short sales whose skill at negotiating with the lending bank will help the homeowner to obtain an agreement that is in their best interest.
Bali Hai Realty Offers Full Range of Kauai Realty Services
If you have any questions about Kauai foreclosures, short sales, or Kauai REO properties (bank-owned properties), please feel free to call the Bali Hai staff as we have Realtors trained in these types of transactions with a strong knowledge of the current Kauai short sale market.
Affordable Kauai foreclosures, short sales and REO properties available in today’s market conditions provide a unique opportunity to own a piece of paradise. If you are interested in upcoming REO’s and foreclosures not yet on the market, please contact our REO Expert Scott Goddard Sieverts.
Also feel free to browse through our Foreclosure Galleries to see some premium Kauai properties available now for an excellent price.