SHORT SALES: FIVE COMMON MISSTEPS

SHORT SALES: FIVE COMMON MISSTEPS

BURNS LAW LLC

www.burnslaw.org

The recent increase of short sales has created an influx in the real estate market for an alternative to foreclosures.  While experienced real estate attorneys may find a larger portion of their practice shifting towards short sales, lesser experienced lawyers and even unrepresented sellers are now handling these transactions.  The short sale procedure can have many pitfalls, some more obvious than others, which should not be undertaken without proper insight. 

WHAT CAN MAKE THE SHORT SALE PROCESS COMPLICATED?

A common misconception amongst those unfamiliar with a short sale is the complexity involved in the transaction.  Realtors or agents who are not well versed in making short sale offer deals often follow steps better suited with purchases, which can adversely affect their clients and eventually could cost the entire deal.  The general idea that a lien holder will accept a prearranged offer for a short sale in due course clouds and inhibits the entire process.  By front loading the research, preparation and negotiation prior to an offer, under the idea that the sale will be carefully scrutinized, one can overcome the complex nature created by many common missteps. 

WHAT ARE THE MOST COMMON MISSTEPS IN A SHORT SALE?

The five most common missteps that can not only complicate and prolong a short sale, but ultimately negate an acceptance are outlined below.  To ensure a stronger likelihood of closing a deal, consider these five tips:

1. Qualify the Buyer, Qualify the Seller, Qualify the Lien Holder

Not every foreclosure or late payment situation will automatically allow for a seller to arrange a short sale.  A lien holder, if it chooses to even entertain a short sale offer, will require initial qualifications of both parties.  In regards to the seller, if a seller is asking for debt forgiveness, the lien holder may require a hardship letter that outlines specific reasons why the seller cannot afford to pay back the shortfall difference. Sellers who have available assets will be at a significant disadvantage if they opt for a short sale over a repayment plan with the lien holder.  Additionally, a monthly budget spreadsheet, asset and liability statement and a well written hardship letter can offer more convincing evidence that there are little or no assets and no disposable income.   In regards to a buyer, if a buyer who requires lending has less than favorable credit, a short job history, high debt to income ratios or other factors that would affect their likelihood in obtaining credit for a purchase, a lender may not qualify the buyer for the transaction.  A buyer should submit a loan prequalification letter or a preapproval letter in conjunction with the offer to increase the chances for qualification.   Finally, in regards to a lien holder, one should practice due diligence and ensure that the lien holder is in fact the holder of the note.  Sometimes, a lien holder has sold off its interest on the property or is simply servicing the loan and thus has no authority to approve a short sale.  By immediately hiring a title company to check the public records for an assignment of the deed of trust, and obtaining copies of the recorded paperwork that evidences who is the holder of the note,  the time and nature of future steps have been insured to be more effective.

2. Collect Money From the Buyer as Soon as Possible and Secure the Funds

Often a seller will not only neglect to collect money from a buyer before making the offer of sale to the lien holder, but in many cases, will not properly secure the necessary funds.  Make a Short Sale Offer with a strong earnest money deposit in an amount between 1% and 3% of the sales price.  A strong deposit lets the lien holder know you have a serious buyer.  Next, deposit the funds into a trust account.  Lien holders prefer that the funds are available, deposited in a neutral professional account and that there is a high commitment level to the deal.

3. Be Reasonable With an Offer Price

Another common mistake in a short sale is the misconception that a lien holder will have to accept any offer because there is a preference towards closing a sale versus foreclosing.  Lien holders will perform a cost benefit analysis like any other reasonable lender and conclude with the process and numbers that best serves their interest.  A seller should check the comparable sales in the area and determine whether some short sale listings are deliberately priced under fair market value to attract initial offers.  This strategy of under pricing seriously inhibits the process as it often skews numbers and catches the attention of less than serious or capable buyers.  Remember, the lien holder will make the final determination whether to accept or decline the offer. 

4. Give the Lien Holder a Reasonable Amount of Time for Approval

While it is possible to receive a short sale acceptance from the lien holder within a 30 day period, many approvals take 60 or more days.  If the contracting parties initially agree to wait 120 days and are prepared to immediately act if approval arrives prior to their deadline the deal will have a much stronger chance of closing.  A major pitfall is a buyer who wishes to close in 30 to 60 days and then walks if the deal is not accepted within the time frame.

5. Waive Repairs and Pay Fees

The more limitations that are attached to a short sale, the more likely the deal will not get done.  First, a buyer should not request a seller to pay for special reports or make repairs because this will ultimately lower the lien holder’s bottom line.  The home should be purchased “As Is” without limitations.  This however does not mean a buyer should waive inspections.  While the inspection period should be shortened versus a purchase, it should not be waived; but again, should not be passed off to the seller.  Second, a buyer should agree to pay a seller’s fees.  In a typical purchase, especially in a buyer’s market or in a first time buyer’s transaction, it is not uncommon for a buyer to request the seller to pay fees that are ordinarily the buyer’s responsibility.  However, in a short sale, those fees are passed off to the lien holder.  Thus, an offer to pay seller’s fees means a willingness to pay the lien holder more at closing than the actual offer price suggests. 

ARE THERE OTHER MISTAKES MADE DURING THE PROCESS?

There are a number of very common mistakes that inhibit a short sale from actually closing.  Experienced attorneys can implement specific strategies and fine tune the steps taken during the short sale process. 

Burns Law LLC handles short sales as a part of its real estate law practice. Should you be facing foreclosure, or are considering a short sale, or have questions about the short sale process, contact our office in Glenolden, in the heart of Delaware County Pennsylvania, for a consultation.

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SHORT SALES: A SHORT GUIDE

SHORT SALES: A SHORT GUIDE

BURNS LAW LLC

www.burnslaw.org

As market trends cycle, overlooked processes can again become a fashionable method for transactions. The short sale procedure has resurfaced in the real estate sales market as an alternative to foreclosure. While still an unfamiliar process to some, including realtors and attorneys in the industry, this simple explanation to short sales may assist as a brief overview as this approach to selling in today’s market grows in popularity.

WHAT IS A SHORT SALE?

In a real estate transaction, a short sale is the acceptance, by the lien holder of the mortgage note, of less than the full payoff of a loan, when the property is being sold to another party. Often the lien holder or lending party of the mortgage, rather than face a foreclosure, will entertain a short sale transaction. Consider this example to illustrate a short sale situation:

  • Steve purchased a home in January of 2009 for $150,000.00. The home had a present market value of $150,000.00
  • Steve financed his home with XYZ Mortgage Company, and signed a promissory note in the amount of $150,000.00
  • Steve encountered financial difficulties in August of 2010 and missed his mortgage payment that month. He again missed payments from September through January of 2011.
  • Steve, now six months behind on payments, faces foreclosure on his loan with XYZ Mortgage Company. Steve still owes XYZ $145,000.00 on his loan.
  • The home values in Steve’s neighborhood have declined and Steve’s home is now worth only $135,000.00
  • Steve finds an interested Buyer, Preston, who wishes to buy Steve’s home. Preston is willing to pay Steve $100,000.00 for his home.
  • If Steve accepts Preston’s offer, Steve will still owe XYZ $45,000.00 on his note.
  • XYZ, rather than going through a lengthy and expensive foreclosure process, and understanding the market value of the home being, decides to accept Preston and Steve’s arrangement and takes a $45,000.00 loss on the note.
  • Steve’s loan with XYZ is still considered to be satisfied upon acceptance of the short sale.

WHAT IS THE PROCESS INVOLVED IN A SHORT SALE?

A short sale process has many steps which often create a lengthy process. First, the seller of the home must have a hardship that is likely to lead or has lead to foreclosure, and / or the seller owes more on the mortgage than the present market value. Second, a seller must find a potential purchaser for the home. Third, a seller must disclose to the buyer the house is subject to a short sale with the lien holder. Fourth, the seller must enter into a contingent agreement with the buyer. Fifth, the seller must present the agreement with the buyer as an offer to the lien holder. Finally, the lien holder must accept the transaction between the buyer and seller as one that satisfies the seller’s original liability to the lien, and does not hold the future buyer subject to any future damages or liens based on the seller’s original mortgage agreement.

WHO SHOULD I CONTACT IF I AM CONSIDERING A SHORT SALE?

A short sale is a complex and sophisticated transaction that should be handled by professionals. If one is considering a short sale, it is imperative that a skilled and practiced individual is advising or handling the process. A seller should consult a real estate attorney or a short sale attorney for advice in the procedure and nuances involved in negotiating a short sale. A seller should also seek the input of a qualified accountant who can advise on the potential tax ramifications since the short sale is essentially, a sale where title is transferred. Sellers who have owned their residences for lengthy periods could realize gains, while those who have acquired their homes within several years prior to the short sale could experience losses.

Burns Law LLC handles short sales as a part of its real estate law practice. Should you be facing foreclosure, or are considering a short sale, or have questions about the short sale process, contact our office in Glenolden, in the heart of Delaware County Pennsylvania, for a consultation.

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BUSINESS STRUCTURES: CHOOSING THE RIGHT ENTITY

BUSINESS STRUCTURES: CHOOSING THE RIGHT ENTITY

BURNS LAW LLC

www.burnslaw.org

When an individual sets out to create their own business, there are a significant number of considerations.  One of the most important decisions a new business owner must consider is the entity under which one will classify their company.  
 

WHAT IS MEANT BY A BUSINESS ENTITY?

A business entity is the structure one chooses to organize under when first establishing a business.  Entities are broken into two classes: Ones that protect the business owner(s) from personal liability, and ones that do not.  The most common forms of entities that protect their owner from personal liability are Corporations, Limited Liability Partnerships (LLP’s), and Limited Liability Companies (LLC’s).  Examples of entities that do not shield their owner(s) from personal asset protection are Sole Proprietorships and General Partnerships. 

WHAT CONSIDERATIONS ARE THERE IN CHOOSING AN ENTITY?

When an individual is deciding which entity is right for their business, many factors should be weighed and ranked in order of importance and analyzed against the industry of operation.  In selecting the business entity that best suits one’s need, new entrepreneurs should first consider certain factors:

  • Cost:   The importance of cost is apparent in not only creating a business entity, but also maintaining it. Some entities such as LLC’s, LLP’s and Corporations carry annual fees one must pay to the state.  Other annual fees may also be required depending on state requirements or business types.
  • Maintenance:  One should not overlook how much work needs to go into maintaining the day to day and annual operation of the business. Some entities don’t require maintenance once they have been established. Others require serious record-keeping effort in order to comply with state regulations.
  • Tax Liability:  Some business entities allow a noticeable savings on federal income taxes by passing the income directly to the owner. Other entities may forego the tax liability in exchange for personal asset protection. 
  • Legal Liability: As previously mentioned, certain business entities protect their owners from personal liability and personal assets when a client or third party has a claim against the business.
  • Ownership: Different entities have varying rules for how many owners may have equitable interest. Ownership rights and interests are important when looking towards future growth and possibility of public ownership at a future point. 

ARE THERE ANY OTHER OUTSIDE FACTORS THAT MAY AFFECT AN ENTITY?

Aside from the list of personal considerations, the type of entity should also be weighed against outside factors as well.   First, consider which state you will be conducting your business.  Certain states have benefits in forming a business entity under their laws.  The owner should realize that one will need to be either be physically present in the state that is chosen, or hire a registered agent from that chosen jurisdiction. Second, seek consultation from both an accountant and attorney not only during formation, but throughout the life of your entity.  As your business grows or changes, professional advisors can assist in adapting the entity to the nature and advantages of the laws and market.

Burns Law LLC handles business law consultation as a key component to its practice.  Should you be interested in setting up a business, reforming your current structure, or simply have questions about your company, contact our office in Glenolden, in the heart of Delaware County Pennsylvania, for a consultation with an attorney.

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THE S CORPORATION: A BUSINESS MODEL WITH TAX SAVINGS

THE S CORPORATION: A BUSINESS MODEL WITH TAX SAVINGS

BURNS LAW LLC
www.burnslaw.org

If you are a single business operator, and you do not currently have an entity protecting your company, consider the S Corporation Model as a possible choice in asset protection.

WHAT IS AN S CORPORATION?
An S Corporation, or “S Corp” is a corporate model that makes a legal election to elect a tax status under Chapter 1 of the Internal Revenue Code. Under this election, the S Corp does not face double taxation like a C Corporation, where the entity and the shareholders are taxed. Rather, it elects single taxation status because the entity does not pay any federal income taxes. Instead, the corporation’s income or losses are divided among and passed through to its shareholders. The shareholders must then report the income or loss on their own individual income tax returns.

HOW CAN THE SINGLE TAX BENEFIT MY BUSINESS?
S Corps produce several tax benefits as compared to sole proprietorships, partnerships, limited liability companies and C corporations.
First, the most appealing benefit is the payroll tax savings. While one can elect different tax status, typically a person will pay federal income tax and state income tax on earnings. In addition a business owner also pays a self-employment tax on business profits roughly equal to Social Security and Medicare tax.
However, under a single shareholder S Corp model, the corporation can divide its earnings into two parts: wages and distributive share. Thus, the wages are the only area of earnings subject to the self employment tax. Simply put, one only pays taxes on the salary that is drawn.
Second, when an S Corp has losses, particularly in startup years, such losses can be used as tax deductions on the shareholders personal income tax returns.
Third, as previously mentioned, since the S Corp isn’t taxed on entity profits, it does not pay taxes to the federal government.

IS AN S CORP RIGHT FOR MY BUSINESS?
While the S Corp provides attractive benefits in the areas of tax, it may not be the best model for your particular business. Depending on your area of practice or trade, an S Corp, under recent revisions by Congress in 2011, may not be the most suitable model as an entity.

Burns Law LLC handles business law consultation as a key component to its practice. Should you be interested in setting up a business, reforming your current structure, or simply have questions about your company, contact our office in Glenolden, in the heart of Delaware County Pennsylvania, for a consultation with an attorney.

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