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Short Sales in Real Estate | Real Estate Exam - YouTube
Channel: The Real Estate Classroom
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hey everybody my name is paul vachesky
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and welcome to the real estate classroom
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youtube channel just a place that if
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you're trying to pass your real estate
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exam you can get videos that'll help you
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do that so in today's video we're going
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to discuss
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a transaction a real estate transaction
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called
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a short sale
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[Music]
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it's a type of transaction that
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we've seen a lot of back in 2009
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10 11 and 12 during the real estate
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crash we really don't see them
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anymore in today's market because now we
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are on the opposite end of what was
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going on back then
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and that is we're in a housing shortage
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so we're on the opposite
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side of the of the circle but there's
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always a chance it will come back around
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we're not going to get too much into
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detail as far as what they are i just
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want you to know the basics the 50 000
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foot view
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and know enough to not only be familiar
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with it but also to
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pass your real estate exam when you get
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all right so what is
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a short sale transaction well
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i got a definition on the screen it says
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a short sale occurs when the property
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owner or the borrower
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does not have enough equity to cover the
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balance of the mortgage
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and release the lien from the property
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therefore the owner requests that the
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lender
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accept a lesser amount that's owed and
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at the same time release the lien
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against the property so the property can
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be sold to another buyer
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and that buyer can receive free clear
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marketable title
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so let me give you an example a common
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example that we would see back
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in the you know 2010 time frame
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let's say in 2007 the property owner
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purchased the property for 200 000
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2010 the market imploded the value of
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that property is now
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thousand the amount that's still owed on
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the property is a hundred and ninety
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five
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in the meantime because the market
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crashed and the economy is blowing up
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that that person maybe lost their job or
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they were demoted to part-time
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they can no longer make this house
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payment so the logical thing is to sell
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the property
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the problem is the house is only valued
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at 150 so that's all they're going to
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get for the property
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but they owe 190.
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so how did how was that reconciled well
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what was happening is in the early onset
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of the market crashes the owners were
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just abandoning the property
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and you know lenders are going listen we
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don't want
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vacant properties on our inventory
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because we're not in the real estate
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business we're in the lending business
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and for a lender to absorb all of those
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properties those vacant properties
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that's that's a huge enormous extra cost
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so the idea of a short sale really took
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hold
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so what it allowed this borrower or this
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owner to do
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is to go to the lender and say listen i
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owe 190 the market value is 150.
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i want a short sale so i'm going to sell
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the property
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and and we're going to sell it at that
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150 market value
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i want you to forgive or
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uh forego that 40 000
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that we are upside down and
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release the liens so the buyer the buyer
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of the property can get free clear
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marketable title that is essentially
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what a short sale is
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it is asking the lender to agree to a
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lesser
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amount of debt that's owed and at the
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same time
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release the property free and clear
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so the new buyer can have free clear
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marketable title
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this benefits the borrower and the
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lender at the same time
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for the lender they have two options
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either agree to the short sale
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or what's going to happen is that owner
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is just going to abandon the property
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then that lender has a vacant property
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it's subject to vandalism and theft and
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everything else
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this way it allows the owner to stay in
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the property
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live there until the property is sold to
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somebody else
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uh the the um the lender is
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not having to get it winterized and all
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of that
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at the same time it benefits the
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borrower because the borrower gets to
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stay there
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and they get to get rid out from
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underneath that home loan
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penalty free many times we're going to
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talk about the penalties a little bit
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later in this video
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so it was actually a a win-win a benefit
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for both the lender
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and the borrower all right so uh and the
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biggest thing is it avoided foreclosure
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as well
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foreclosure processes are very expensive
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and
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and in some states it would take two or
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three years for a foreclosure to happen
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so that property literally could could
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stay vacant
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for three years before a foreclosure
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happened in the meantime
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you know what happens to property when
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it's vacant so
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foreclosures are the last it was
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you know it is the last that's when we
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do when we're desperate okay so it was
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short sales was very beneficial to both
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parties now
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short sales what if we have now remember
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we said
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that a short sale is a request for the
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lender to accept a
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lower amount and release the lien now
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one of the things that would commonly
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happen back then was there would be
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more than one lien against the property
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there could be a first mortgage there
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could be a second mortgage or a heloc
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there could be a mechanics liens or
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child support liens or irs liens those
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were common
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so the agent the listing agent had to
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navigate all of those
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different liens because all of those
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liens had to be
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waived and removed for the short sale to
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move forward
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so what would happen is the listing
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agent would put the property up for sale
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at a hundred and fifty thousand using
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our example
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uh contingent upon a short
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a short sale approval from the lender
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then the agent would
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work with the lender or the lenders
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to negotiate a win-win so they get an
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offer for 150
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000 they would go to the first mortgage
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company the the mortgage company that's
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in first place and say
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as it looks right now you're going to
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eat basically 40 000
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do you agree to that once the lender
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agreed then they could move forward with
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the sale and go on to closing but when
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there were more than one liens what
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would happen is
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the listing agent did a lot of
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negotiating because not only do you have
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to negotiate with the first
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lender to get them to release the lien
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then you have to go to the second lender
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and get them to release the lien then
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you have to go to the mechanics lien
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holder and negotiate something there uh
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maybe there's child support you had to
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go to the
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the state and get it waived and they
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were very complicated and
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a lot of times they took a long time to
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get closed
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ultimately in the end sometimes what
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would happen is it was just
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impossible to get all the parties to
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agree i was involved in one transaction
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where
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the first and the second lender the
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first lender said yes
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i'll i'll short it i'm fine the second
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lender
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said we will remove the lien and they
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got zero because they knew they were
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gonna get zero
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uh dollars back however the irs would
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not release a federal income tax lien
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um and so ultimately what ended up
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happening is that property did have to
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go into foreclosure because the irs
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refused to
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remove the lien i had another case where
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there were two lenders involved the
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first lender released the lien
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and they got i think if i remember
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correctly was like a 250
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000 transaction and it was
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like 300 000 was owed so there was a 50
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000
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short but there was a first and a second
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so the first mortgage company basically
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got all
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their money back but the second mortgage
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company there was no equity they lost
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everything but
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both released the lien but there was
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a mechanics lien against the the
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property for work that had been done and
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not paid
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and we had to go in and negotiate and
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the
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mechanics lien holder basically decided
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he would take 15
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on the dollar you know 15 cents for
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every dollar that was owed
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but we were able to negotiate it and it
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did go to closing
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so these are the things in a short sale
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that a real estate listing agent has to
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deal with
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on the other side of it the buyer and
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the buyer's agent they're at the mercy
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of all these parties making a decision
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there were times when it would take six
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eight ten months for a deal to close
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and as a buyer's agent you know they had
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to counsel their buyers appropriately
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and then ultimately sometimes the best
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thing for the client was to simply file
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bankruptcy and walk away from it
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that did happen at times as well so
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short sales were were well i'll tell you
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one thing if
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you're a real estate agent back then and
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you were doing short sales which just
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about every transaction was you earned
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your pay there was no doubt about
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it the next thing you have to know as a
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real estate professional about short
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sales
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is a lot of times the
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lender when part of their approval
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process
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remember the borrower is asking the
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lender to
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accept the lesser amount that's owed and
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release
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the lien against the property so what
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would happen is real estate agents would
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sign a listing contract with that seller
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for a seven percent commission seven
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percent of the purchase price
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but the lenders in the end almost always
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would dictate what that commission was
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going to be
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so the lender would come back and say we
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will accept this short sale however
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we're only gonna allow a four percent
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commission or a five percent commission
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five percent of the sale price
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and and that's just the way that it went
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down so the lender does have the
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discretion to dictate what the
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commission rate
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uh was and that's they commonly did that
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back in that time
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frame now there are some ramifications
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to the borrower that you have to know
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number one
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uh they didn't get away with this
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scot-free and that their credit history
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took a hit
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it wasn't as bad as a foreclosure
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but it's still reported on the credit
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report as a short sale
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the biggest difference between a
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foreclosure and a short sale is the time
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period before you qualify again to buy
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another house
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so during that time 2009 10 or 11 if
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somebody
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had a short sale transaction it was
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reported onto their credit report
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but literally within three or four years
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they could get another mortgage just
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like that
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unlike a foreclosure where it could be
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six or seven to ten years
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so when at that aspect it was a
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ramification
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in the negative but it was positive in
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that it wasn't as bad as a foreclosure
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now the other thing that happens with
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for uh short sales is what's called a
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default
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judgment against the borrower so in our
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scenario where
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uh the property's worth a hundred
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thousand but they
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are 150 000 but the but they owe 190 and
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the bank said okay we'll give the short
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sale well
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that bank lost 40 000 on that
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transaction
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the bank does have the right to place a
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default judgment against that borrower
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it's a lien against the borrower
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and they can garnish wages and things
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like that for that
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debt that's owed back in the day in 2010
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11 and that
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most lenders didn't do that there were
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some that did
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point is is there's always the option
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for the lender to do that
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place a default judgment against that
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that borrower
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and then the last thing is a tax penalty
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the irs in
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in every state that has tax income taxes
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considers the forgiveness of debt
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as a taxable event so here's a common
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thing that happened
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in our scenario the bank was going to uh
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basically release this lien for forty
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thousand dollars
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less uh you know basically forty
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thousand dollars less
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so one of the things one option so
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essentially the lender has two options
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they can
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they can go down the route of a default
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judgment and try to recover that money
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from that borrower
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which is expensive and you have to file
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lawsuits and whatnot
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or they could just forgive the debt and
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that's what almost all of them did they
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would just simply forgive the debt
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now forgiveness a debt is a taxable
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event
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and the irs wants their money and that
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means that the borrower owed
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taxes income tax federal and
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state and local if they if they lived in
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a local jurisdiction that has
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income tax and so they had to pay the
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full
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social security tax the medicare tax the
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the income tax
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so forty thousand dollars that person
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may owe ten or fifteen thousand dollars
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in taxes on that event alone
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now during that time period congress had
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passed
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some legislation that uh basically
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waived that tax penalty but that has
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long since
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been expired so in today's world if you
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do a short sale transaction one of the
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things you have to do
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as a listing agent is counsel your uh
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your client your your seller that hey
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there's a tax event that's going to
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happen if the bank's going to forgive
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the debt so you need to talk with a
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you know a certified public accountant
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or a tax attorney
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to find out what that penalty and
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ramification is
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so all right that's it for this video
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hey if you're going to continue studying
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check out this video right here
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it will help you and if you have not
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